In July 2013, the IRS granted large employers an extra year before applying potential penalties under the employer shared responsibility provisions of the Affordable Care Act (ACA)—but there is still plenty to do right now to prepare for the 2015 season.
Large employers are required to offer health care coverage to all full-time employees or possibly face fines. Identifying which employees are full-time (those working 30 hours or more per week) is essential for all large employers – whether or not they want to play ball with the ACA rules by offering a health plan.
Penalty amounts for employers with no health plans are based on the number of full-time employees, so employers that choose to pay can’t just watch the game from the stands; they will need to engage in measuring employee hours to determine the penalty amount. And employers that plan to avoid penalties by offering health plans may still face fines if some full-time employees buy coverage on the public exchange with the assistance of premium tax credits.
The process of determining the number of full-time staff requires a measurement period followed by administrative and stability periods. Employers need to know exactly how employee work hours will be counted under the health care reform mandate and must not forget to include breaks in employment, such as unpaid leave.
Know the rulebook
When employer penalties become real in 2015, fines—or excise taxes—will come in two flavors. The “A” penalty applies if an employer chooses to “pay” rather than “play,” while the “B” penalty may apply even when the employer agrees to “play.” The “A” penalty (from section 4980(a) of the ACA) is based on the total number of full-time employees, minus 30, and the fine is $2,000 per employee per year. The “B” penalty (from 4980(b) of the ACA) is $3,000 per employee but only applies to full-time employees who receive premium tax credits in the public exchange. With the B penalty being higher per employee than the A penalty, the total penalty is capped at that of the A penalty.
To avoid the “A” penalty, employers must offer minimum essential coverage to at least 95% of full-time employees. The employer is held harmless on the “B” penalty as long as the employer’s plan meets minimum value requirements and safe harbor guidelines of “affordability” for the plan, the simplest of which compares the self-only employee deduction amount of the least expensive plan to 9.5% of the employee’s wages (as listed in box 1 of the W2). A key to mitigating risk for either penalty is to understand which and how many employees are classified as full-time.
Create a playbook
Employers need to establish a measurement period to determine each ongoing employee’s average hours per week. This measurement period cannot be less than three months or more than 12 months. An administrative period of no more than 90 days can come between the measurement and stability periods, to give the employer time to figure out who is in and who is out for coverage during the upcoming stability period, and to get those employees enrolled or notified of upcoming disenrollment.
A coverage season called the stability period follows the administrative period and must be as long as the measurement period but no less than six months. During the stability period, the IRS assesses penalties based on the “A” or “B” penalty, but in both cases, the status of a worker as full-time or part-time must be determined to calculate possible penalties.
Employers are under a tight time frame to find technology and administrative solutions to track hours for these employees. Employers planning to use a 12-month measurement and 12-month stability period for testing employee eligibility effective January 1, 2015, needed to have begun tracking hours in the fall of 2013. To comply with the rules, employers that haven’t been tracking employee hours will have to look back at prior payroll records to populate a compliance system or tool retroactively, and those tools will need to be fully operational by fall of 2014. Moreover, this process will occur every year, so employers must have a system in place that is accurate and efficient.
Keep score on paid and unpaid hours
Quantifying hours to determine a full-time vs. part-time employee may not be as simple as just looking at the number of hours worked. Measurement must include the hours employees are paid and not working, such as vacation or during a layoff, to determine coverage eligibility.
Unpaid leave hours can vary. If the employer is subject to the Family and Medical Leave Act (FMLA), the employer must either credit the employee with unpaid FMLA leave hours, or exclude the leave period when averaging the employee’s hours over the measurement period. Similar rules apply if an employee takes an unpaid leave for jury duty or military service. However, these special crediting rules do not apply if an employee takes another type of leave of absence.
Other breaks in employment are not as clear-cut. Basically, if the unpaid break in employment is less than four weeks, then employers must treat the worker as an ongoing employee, but they do not have to count those leave hours during the measurement period.
If the employee is off work for at least 26 consecutive weeks, then the employer may treat the employee as a new hire upon return. There is another optional “rule of parity” for employees with no credited hours over a period of at least four weeks but less than 26 weeks. Under the rule of parity, if the time of absence is at least four weeks and is longer than the employee’s previous period of service, then the employer can treat the employee as a new hire upon return.
Other mandates still on schedule
Employers have many other obligations to implement changes under the Affordable Care Act, some of which will depend on future guidance and final regulations from federal agencies related to topics like the employer mandate and IRS reporting under ACA sections 6055 and 6056. Regulations affecting the issues described in this article are set to be finalized soon and may require “calling an audible” to adjust the employer’s game plan accordingly. In the meantime, by implementing identification and reporting systems to carefully measure and analyze eligible employee hours, employers can be assured that they will be running an offense to avoid shared responsibility penalties under the ACA when they become effective in 2015.