DETERMINING FULL-TIME EMPLOYEE STATUS Employer Shared Responsibility Under the Affordable Care Act (ACA)

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1 DETERMINING FULL-TIME EMPLOYEE STATUS Employer Shared Responsibility Under the Affordable Care Act (ACA) What employers need to know to make informed decisions about ACA compliance This document is intended to be used solely for illustrative purposes and provides simplified information and examples of a general nature. It is not intended as legal or tax advice, or as an opinion on specific facts, and should not be construed as such. For specific information regarding the application of these rules to your facts, or other compliance issues under applicable law, please consult the advice of your legal and tax advisors. Wellmark is your expert resource for health care reform Wellmark appreciates that as an employer, not only do you want to understand each of the provisions of the ACA, but you are also asking yourself, What does this mean to my business and what do I do next about employees health benefits? That s why we are here to provide: Information about each of the ACA requirements Tools that will assist with your decision making Health plans that meet the ACA mandates Guidance to develop the health plan(s) best suited for your organization Employer Shared Responsibility Under the Employer Shared Responsibility provisions of the Affordable Care Act (ACA), employers with 50 (100, in 2015) or more full-time and full-time equivalent employees may be subject to penalties if any full-time employee receives a premium tax credit or cost-sharing reduction when purchasing health coverage on the Marketplace. To avoid potential penalties, employers will need to: Offer health coverage to full-time employee and their dependents (children up to age 26), in order to avoid a No Coverage penalty. Offer health coverage that meets the minimum value (MV) requirement of 60 percent, in order to avoid an Inadequate Coverage penalty. Offer health coverage that is affordable relative to an employee s household income, in order to avoid an Inadequate Coverage penalty. THE DEFINITION OF A FULL-TIME EMPLOYEE The ACA defines a full-time employee as one who averages at least 30 hours of service per week or 130 hours of service per calendar month. This is significant because, under Employer Shared Responsibility (ESR), an employer must offer health coverage to its full-time employees and their dependents or face potential penalties. For variable hour employees, determining full-time status may not be as straightforward as it is for regular full-time employees. Realizing it was administratively difficult for employers to measure employees hours in real time with the prospect of having to add and drop coverage as frequently as potentially monthly, regulators created an optional look-back measurement method, that may be used in connection with certain employees. The look-back method generally allows an employer to measure certain employees hours of service retrospectively for a period of up to 12 months. The outcome determines these employees coverage eligibility on a prospective basis for a period of up to 12 months. 1

2 COMMON LAW EMPLOYEES The most fundamental concept is the definition of an employee. For this, the expectation is that employers rely on IRS guidance using the common-law standard. The common law standard generally focuses on whether a company has the right to control what an individual will do and how it will be done. The employer is generally required to report and pay employment taxes, withhold income taxes and furnish an IRS Form W-2 for these individuals. Also, because there is no specific exclusion, the common law standard may include temporary employees hired directly by an employer, seasonal employees, interns and other employees who may not have traditionally been offered coverage because they do not have a permanent or long-term relationship with the employer. Notably, employers will want to track hours of H-2A (seasonal farm workers) and H-2B (temporary non-agricultural workers) visa-holders, as these workers are not exempt from the definition of an employee. Independent Contractors For employers to determine whether a specific individual is an independent contractor or an employee, employers can file with the IRS Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. Individuals who are not considered employees include: leased employees, certain temporary employees invoiced through an agency, independent contractors, sole proprietors, partners in a partnership, 2% S corporation shareholders, and real estate agents and direct sellers (under section 3508 of the Internal Revenue Code). With the shared responsibility rules, employers are urged to make use of IRS online resources to help ensure compliance, which features a 20 factor test on common law employee status. Don t falsely believe that just because a worker signed a contract agreeing to independent contractor status that it means they would be viewed by the IRS as such if the actual working relationship is indicated otherwise. To be sure, you can file a form with the IRS to determine if an individual is an independent contractor or an employee. Interestingly, an example in the final regulations demonstrates just how far the regulators intend to apply the concept of common law employee. The regulators suggest that a home health care patient may actually be considered the employer of a home care worker, rather than the home health care agency, under the common law standard. In the example provided, the home health care patient has the right to choose the home health care provider, select the services to be performed and set the hours of the home health care provider. In such a case, the regulators contend that the service recipient (the patient) rather than service provider (the home care agency) may be considered the employer under the common law standard. And since the patient is unlikely to employ 50 or more employees, the patient presumably would not be subject to employer shared responsibility. 2

3 The Treasury Department and the IRS are concerned about temporary staffing firm arrangements for which employers may try and evade shared responsibility. Two such arrangements specifically mentioned in the final regulations that regulators will be watching for are: 1 Situations in which an employee works directly for an employer for some hours and under a temporary staffing agency for remaining hours in the week; and 2 Situations for which there s only one employee and one employer, but the employee s weekly hours are split between two different temporary staffing agencies. TEMPORARY STAFFING FIRMS There has been a great deal of confusion and uncertainty with respect to the treatment of temporary workers. The final regulations confirm that employees hired through a temporary staffing agency are generally considered common law employees of the client employer (that s you). This is because the client employer typically retains the right to direct and control the activities of these employees such as what work to perform and how to perform it, the hours to keep and when to take breaks, etc. If, however, the temporary staffing agency offers the employee sufficiently affordable and valuable coverage, regulations suggest that you (the client employer) will not be subject to the No Coverage penalty as long as a higher fee is billed to you by the staffing agency for any employees who enroll in the coverage (presumably to cover the cost of coverage). You will also want to ensure the coverage offered meets minimum value and affordability requirements to avoid the Inadequate Coverage penalty. You may want to consider adding a clause to your contract with the temporary staffing agency to address matters such as who is providing coverage, confirmation that the coverage provides minimum value and meets affordability standards, and to clarify which party is ultimately liable for a penalty should one be assessed. For the party that offers coverage, it s important to know that the final regulations do not presume that new employees of a temporary staffing agency are variable hour employees rather than full-time employees for purposes of the look-back measurement method. The regulations indicate that the determination is made on the basis of the temporary staffing firm s reasonable expectations at the start date, and that the employee can be classified as variable, if appropriate based on those reasonable expectations, even if the employee in fact averages 30 or more hours of service per week over the initial measurement period. To determine when an employee has separated from service, temporary staffing firms should consider all available facts and circumstances and by using a reasonable method that is consistent with the employer s general practices for other purposes, such as the qualified plan rules, COBRA, and applicable State law. Additionally, the final regulations refer to the same rehire rules in place for any other employer. For more details, see page 7. 3

4 FULL-TIME EMPLOYEES Once an employer s pool of employees is established, the next thing that is important to understand is how the ACA defines a full-time employee. A full-time employee is one who averages at least 30 hours of service per week, or 130 hours of service per month. (130 hours is the average equivalent of 52 weeks in a year times 30 hours, or 1,560 hours divided by 12.) On a related note, there is a tendency to assume that seasonal employees are not considered full-time employees, even though seasonal employees may average at least 30 hours of service per week during a month. In fact, seasonal employees are not excluded from the definition of full-time employee for any purpose under employer shared responsibility, including the penalty assessments. That is, you may have to offer coverage to a seasonal employee under certain circumstances if you want to avoid penalties. As such, the first step in identifying full-time employee status is mastering the hours of service rules prescribed in the proposed regulations and adopted in the final regulations. Full-time employee status depends on the employer s measurement method and the employee s hours of service over the course of the measurement period. HOURS OF SERVICE INCLUDED IN HOURS OF SERVICE How do you know what counts towards an employee s hours of service? Isn t it just the hours worked? Well, it s that, and more. An employee s hours of service includes each hour for which an employee is paid, or entitled to payment, for the performance of duties for the employer; and each hour for which an employee is paid, or entitled to payment by the employer on account of a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. For purposes of identifying full-time employees, all hours of service for each employee must be taken into account. For employers that are part of a controlled or affiliated service group, an employee s hours of service attributable to another member entity must be considered when making a determination of whether an employee was full-time during a month (or during a measurement period, if using the look-back measurement method). This could cause recordkeeping issues for applicable large employers who do not share recordkeeping data (and even for some who do). For more details, see Employer Aggregation Rules in Wellmark Information Brief Determining Applicable Large Employee Status. EXCLUDED FROM HOURS OF SERVICE The final rules provide additional guidance on what to exclude from hours of service: Volunteers. You are not required to count hours contributed by certain unpaid volunteers, bona fide (and generally unpaid) volunteers of a government or tax-exempt entity, such as volunteer firefighters and emergency responders. Students. Hours of service also do not include work performed by students in positions subsidized through the federal work study program or a substantially similar state or local program. (However, the final regulations do say to count the hours of service for student employees and interns who receive or are entitled to compensation from an employer.) Religious Orders. For purposes of determining full-time employee status, an employer does not need to count service hours for someone subject to a vow of poverty when the work performed is usually required of an active member of the order. (Unlike the other two categories above, the final regulations only permit exclusion of these hours when determining full-time employee status, and not for determining applicable large employer status.) Foreign-source income. An hour of service generally is not counted when the compensation constitutes foreign source income. Therefore in many cases, hours of service do not include hours worked outside the United States. Notably, hours of service rules apply to transportation employees such as employees of cruise ships, unless the hours of service constitute income from sources outside the United States. (It should also be noted that there are technical changes in the final regulations with regard to Code references, so if income source distinctions matter to your organization, you ll want to look at this closer.) 4

5 DETERMINING HOURS OF SERVICE An employer determines employees hours of service from records of hours worked and hours for which payment is made or due for vacation, holiday, illness, etc. This should be relatively easy for employees paid on an hourly basis. But what about non-hourly employees, such as salaried employees? For them, an employer can use one of three methods, including two equivalency methods, to determine hours of service: 1 Actual hours of service per month (which may not be available for salaried employees), 2 Each day in which at least one hour is worked equals eight hours of service, or 3 Each week in which in at least one hour is worked equals 40 hours of service. An employer can use different equivalency methods for different classifications of non-hourly employees, provided the classifications are reasonable and consistently applied. Employers are allowed to change the method each calendar year. An employer cannot use the equivalency methods if the result would be to understate employees hours and cause them to be classified as non-full-time employees. For example, an employer may not use a days-worked equivalency in the case of an employee who generally works three 10-hour days per week, because this would substantially understate the employee s hours of service as 24 rather than 30. EMPLOYEES WHOSE HOURS ARE DIFFICULT TO IDENTIFY OR TRACK For employees whose hours of service are particularly challenging to identify or track or for whom the general rules above may present special difficulties, such as commissioned salespeople, employers are required to use a reasonable method of crediting hours of service that is consistent with employer shared responsibility. A method of crediting hours is not reasonable if it takes into account only a portion of an employee s hours of service with the effect of re-characterizing an otherwise full-time employee as a non-full-time employee. For example, it is not reasonable to fail to take into account travel time for a traveling salesperson compensated on a commission basis. The final rules provide specific guidance on determining hours of service for the following: Adjunct faculty. To provide a bright line approach suggested in a number of the comments, the final regulations expressly allow as one method of crediting adjunct faculty: 2¼ hours (representing class time, prep, and grading) per week for each hour of teaching or classroom time; and separately an hour of service per week for each additional hour outside the classroom performing required duties (such at office hours or faculty meetings). Layover Hours. With respect to layover hours (e.g., for airline industry employees), it is considered reasonable to credit a layover hour: If the employee receives compensation for the layover hour beyond what the employee otherwise would have received, or If the layover hour is counted towards the required hours of service for earning regular compensation. For layover hours for which an employee does not receive additional compensation and that are not counted by the employer towards required hours of service, credit 8 hours for overnight stays (i.e., 8 hours each day, or 16 hours total, for the two days encompassing the overnight stay). An employer must use actual hours if crediting 8 hours substantially understates the employee s actual hours of service (including compensated layover hours or those counted by the employer towards the required hours of service). On-Call Hours. Until further guidance is issued, the preamble to the final rules states that it is not reasonable for an employer to fail to credit an employee with an hour of service for any on-call hour for which payment is made or due, for which the employee is required to remain on-call on the employer s premises or for which the employee s activities while on-call are subject to substantial restrictions that prevent the employee from using the time effectively for the employee s own purposes. The examples of reasonable methods described above are not intended to constitute the only reasonable methods of crediting hours of service. Whether another method of crediting hours of service in these situations is reasonable is based on the relevant facts and circumstances. 5

6 CHOOSING A MEASUREMENT METHOD Depending on which of two penalties applies (i.e., the No Coverage or Inadequate Coverage penalty), an employer s shared responsibility amount is either determined based on the number of full-time employees or the number of full-time employees receiving subsidized Marketplace coverage for a given month. Under a monthly measurement calculation, each employees full-time status would be determined on a monthly basis. It has been recognized that such a method may cause practical difficulties for employers, including uncertainty and inability to predict which employees are considered full-time and, consequently, an inability to forecast or avoid potential tax penalties. This issue is particularly acute when employees hours vary from month-to-month or when employees are employed for only short durations. If coverage were limited to employees who satisfied the definition of full-time during a month, employees might move in and out of coverage as frequently as monthly, which would be undesirable for both the employee and employer, and could also create administrative challenges for the Marketplace. The Treasury and the IRS anticipate that a significant majority of employers will use some form of the optional look-back measurement method to identify full-time employees. But, keep in mind that the look-back method is simply an alternative to a month-to-month determination. So, how do you determine which method is right for you? Here are some basic considerations. Are you an employer with a relatively stable, consistent workforce and you only employ and hire full-time employees? If so, you may find that the month-to-month determination works just fine for you. In this case, you could simply make it a standard practice to offer coverage upon employment and apply a waiting period of no more than 90 days. On the other hand, employers with high employee turnover, a variable hour workforce, or seasonal employees for whom the employer cannot reasonably determine their full-time or non full-time status may find the look-back measurement method more appealing. Permitted Employee Categories for which to Vary Measurement Periods and Methods An employer is permitted to apply different measurement, administrative, and stability periods that vary in length or their starting and ending dates for the following categories of employees: 1 Each group of collectively bargained employees covered by a separate collective bargaining agreement, 2 Collectively bargained and non-collectively bargained employees, 3 Salaried employees and hourly employees, and 4 Employees whose primary places of employment are in different states. The employer may change its standard measurement period and stability period for subsequent years, but is unable to change these periods once the standard measurement period has begun. The final rules also confirm that employers may use either the monthly measurement method or look-back measurement method for each of these categories of employees. The IRS also rejected requests to shorten the minimum length of the stability period, and the final rules do not include special accommodations for short-term and high-turnover positions. 6

7 MEASUREMENT METHOD COMPARISON The final regulations prescribe two minimum standard methods for determining full-time employee status the monthly measurement method and the look-back measurement method. With the additional details in the final rules describing the monthly measurement method, it s now easier to compare it against the look-back measurement method as shown in the chart below. Two permitted measurement methods Approach for determining full-time status When to offer affordable, MV coverage to new full-time employees to avoid ESR penalties Break in service (e.g., rehiring a former employee or when an employee returns from a period of unpaid leave) Special unpaid leave (FMLA, USERRA military leave, and jury duty) Employment break of four or more consecutive weeks for employees of educational organizations MONTHLY Based on hours of service for each calendar month By the first of the month following three (3) full calendar months of employment 1 Treated as new employee if 13 or more weeks with Treated 2, 3, 4 no hours of service N/A N/A LOOK-BACK Based on hours of service during a look-back period of three (3) to 12 months By the first of the month following three (3) full calendar months of employment 1 as new employee if 13 or more weeks with 2, 3, 4 no hours of service Ignore period of leave when averaging hours or calculate at same average weekly rate not part of leave Ignore period of break when averaging hours or calculate at same average weekly rate as active period (up to 501) hours, not counting any special unpaid leave) 1 Rule applies once per period of employment 2 Employees of educational organizations must have a break with no hours of service for 26 or more weeks before treated as new 3 Rule of parity applies (may treat as new if no hours of service during a period that is at least four consecutive weeks and longer than the employee s preceding period of employment, but shorter than 13 weeks (or 26 weeks for employees of educational organizations). Example: An employee works for three weeks, terminates, and is rehired ten weeks later. Such an employee can be treated as new because the 10-week break is more than four and less than 13 weeks, and is longer than the original three week period of employment. 4 When treated as a new employee, the employer could restart the initial measurement period or apply a new 90-day waiting period for full-time employees. The look-back measurement method for identifying full-time employees is available only for the purpose of determining and computing liability under ESR, and not for the purpose of determining applicable large employer status. Applicable to both measurement methods, 130 hours of service is treated as the monthly equivalent to 30 hours of service per week, provided that it is applied on a reasonable and consistent basis. If the period between termination and rehire or an unpaid leave is less than 13 weeks (26 weeks for an employee of an educational institution), an employee is treated as continuing and the following conditions apply: The employee retains the same full-time or part-time status for the remainder of the applicable stability period as before the break in service; and Coverage availability for full-time employees must be the first day the employee is credited with an hour of service. The final rules contemplate that employers will track hours of service for all employees, even part-time and full-time. 7

8 SPECIAL UNPAID LEAVE AND EMPLOYMENT BREAKS TREATMENT OF SPECIAL UNPAID LEAVE DURING THE MEASUREMENT PERIOD An employer is required to treat periods of special unpaid leave for FMLA, military leave under USERRA, and jury duty in one of two ways when averaging hours during a measurement period: 1 Exclude: Exclude such period of unpaid leave from the measurement period when averaging hours; or 2 Impute: Credit hours of service for the unpaid leave period at a rate equal to the average weekly rate during the measurement period that was not part of the special unpaid leave. (This option helps to increase the average hours for those employees who incur one of these leaves during a measurement period.) Also noteworthy, paid leaves of absence during which employees are allocated hours of service include periods during which the compensation is paid by a third party, such as a disability insurer. TREATMENT OF EDUCATIONAL ORGANIZATION EMPLOYMENT BREAKS DURING THE MEASUREMENT PERIOD The final rules also require educational institutions that use a look-back measurement period to follow an averaging method for employment break periods. For employees of educational organizations, a 12-month measurement period is permitted but a special rule applies that says for employment break periods (e.g. summer break) of four or more consecutive weeks, you must either: 1 Exclude: Exclude the employment break period (up to 501 hours of service not counting any special unpaid leave) from the measurement period when averaging 2 Impute: Impute: Credit hours of service for the employment break period at a rate equal to the average weekly rate during the active period (up to 501 hours of service, not counting any special unpaid leave). The rules governing employment break periods for educational organizations apply only to an employee treated as a continuing employee upon the resumption of services, and not to an employee treated as terminated and rehired. An educational organization cannot treat its employees who work during the active portions of the academic year as seasonal employees. Full-time Definition Matters Now For employers using the look-back measurement method, the ACA definition of a full-time employee (30 or more hours of service per week, or 130 hours per month) is in play in 2014 since it involves lookingback to determine which employees will be eligible for coverage in The effective date of when the full-time definition applies for purposes of determining full-time employee status depends on the start dates and lengths of the employer s measurement and administrative period(s). Of course, the full-time definition is also in play in 2014 to determine applicable large employer status, since the determination for 2015 will be based on the number of full-time and full-time equivalent employees during the prior calendar year. 8

9 Employee Definitions Ongoing: Employed for at least one complete standard measurement period New: Employed for less than one complete standard measurement period Full-time: Reasonably expected to be full-time as of start date (not seasonal) Variable hour: Cannot, as of start date, determine whether employee is reasonably expected to be full-time Part-time: Reasonably expected, as of start date, not to be full-time (not variable hour or seasonal) Seasonal: In a position for which the customary annual employment is six (6) months or less THE LOOK-BACK MEASUREMENT METHOD While more practical for use by many employers, the look-back measurement method is significantly more complex than the monthly measurement method and therefore the regulations contain extensive guidance with respect to how it works. Fundamentally, the look-back measurement method separates employees into two major categories: 1 Ongoing Employees those who have been employed by the employer for at least one complete standard measurement period (full-time or part-time). 2 New Employees those who have not been employed by the employer for at least one complete standard measurement period. There are also two sub-categories of new employees: a. Those reasonably expected to be full-time and not seasonal. In this case, employers reasonably expect that these employees, as of their start date, will average 30 or more hours of service per week, generally without regard to the duration of how long the employee is expected to work. b. And, variable hour, part-time and seasonal employees defined accordingly: i. Variable hour employees are those for which the employer cannot, as of their start date, determine whether the employees are reasonably expected to average at least 30 hours of service per week. This also includes employees who are initially expected to average at least 30 hours of service per week but the period at that number of hours is expected to be of limited duration and it cannot reasonably be determined whether they ll be full-time over the initial measurement period. ii. Part-time employees are those for which it is reasonably expected, as of their start date, not to be full-time (and not variable hour or seasonal). The measurement period rules applicable to new variable hour employees can also apply to new part-time employees. iii. Seasonal employees, for purposes of the look-back measurement method, are defined as those in a position for which the customary annual employment is six (6) months or less. Employers are also permitted to use the same measurement period rules to determine the full-time status of seasonal employees. These employees could be classified as either full-time or non-full-time, depending on their hours of service in relation to the measurement period. REASONABLE EXPECTATIONS FOR NEW EMPLOYEE STATUS The application of the look-back measurement period to a new employee depends on the employer s reasonable expectations of the status of the employee at the start date. Reasonable is based on the facts and circumstances. An employer s reasonable expectations are only applied during the initial measurement period and not during subsequent standard measurement periods where the determination of full-time is strictly made by hours of service in the prior measurement period. (This takes out subjectivity.) Factors to consider include, but are not limited to: Whether the employee is replacing an employee who was or was not full-time; The extent to which employees in the same or comparable positions are or are not full-time; and Whether the job was advertised, communicated, or otherwise documented as requiring 30 or more hours of service per week or not (such as through a contract or job description). 9

10 Despite commenters requests, the regulators did not change the administrative period in the final rules to three (3) full calendar months. It was kept at 90 days to coordinate with the 90-day waiting period rules. HOW THE LOOK-BACK MEASUREMENT METHOD WORKS The look-back measurement method has three periods: Measurement Period Employees who average at least 30 hours of service per week during a defined measurement period lasting between three (3)-12 months... Administrative Period...after an optional administrative period of up to 90 days following the measurement period... Stability Period...must be treated as full-time employees and offered coverage during a stability period that is at least as long as the measurement period and is no shorter than six (6) months. The employer must pick a measurement period of between three (3) and 12 months. An employee is credited with all hours worked and all hours for which they are entitled to pay for vacation, sick time, etc. For new variable hour and seasonal employees, the measurement can start on the first of the month following hire. Employees who have an average of 30 hours of service per week during measurement period must be treated as full time (this equals 1,560 hours, if using a 12 month measurement period). The administrative period follows the measurement period. While optional, most employers are expected to adopt an administrative period, as this is the time the employer calculates hours credited during the measurement period, provides enrollment materials to any employees who fall into full-time status, and administers the employees enrollment elections. It also includes any period between an employee s start date and the beginning of his or her initial measurement period. The total measurement period cannot be any longer than 90 days. For new variable hour and seasonal employees, the measurement period, administrative period, and waiting period combined cannot extend beyond the last day of the first calendar month beginning on or after the one-year anniversary of the employee s start date (totaling, at most, 13 and a fraction months). The stability period follows the administrative period or occurs during the administrative period. Any employee who was determined to be full-time based on hours during the measurement period must be treated as full-time during the stability period. The stability period for employees determined to be full-time must be at least six (6) months and no shorter than the measurement period. Simply put: The measurement period is when employers track and measure employees to determine if full-time and otherwise eligible for coverage. The administrative period is when employers tabulate the results from the measurement period and offer coverage to those who qualify (as well as any period between an employee s start date and the beginning of the initial measurement period). The stability period is when coverage is provided to full-time employees who qualified during the measurement period and elected coverage during the administrative period. 10

11 THE LOOK-BACK MEASUREMENT METHOD FOR ONGOING EMPLOYEES An employer must determine the duration of the organization s standard measurement period, optional administrative period and stability period as well as the dates each period begins and ends. The purpose of using the look-back measurement method in this case is to confirm the status of existing employees. It is anticipated that many employers will align the stability period with their plan year, and few employers are likely to find it advantageous to set measurement periods shorter than 12 months. For instance, using a three (3) month measurement period would mean measuring existing employee hours of service every three (3) months and offering coverage for at least six (6) months for employees qualifying as full-time. For ongoing employees, full-time status is determined by looking back at the standard measurement period a defined period of three (3) to 12 months, as chosen by the employer. The employer can determine the months that the period starts and ends, as long as it is uniform and consistent for all employees in the same category. An ongoing employee s status as full-time or non-full-time is effectively locked in during the stability period, regardless of the number of hours worked during the stability period. Employees who are determined to be full-time must be offered coverage for the stability period that immediately follows the standard measurement period (and any applicable administrative period), the duration of which would be at least the greater of six (6) months or the length of the standard measurement period. If the employee is not determined to be full-time during the standard measurement period, the employer isn t required to offer the employee coverage during the stability period that follows. The ACA doesn t require employers to cover part-time workers, and offering them coverage may disqualify them from subsidies in the new public Marketplace. Because employers may need time between the measurement and stability periods to determine which employees are eligible for coverage, and to notify and enroll employees, an employer may make time for these steps by establishing an administrative period. The administrative period may neither reduce nor lengthen the measurement or stability periods and may last up to 90 days. To prevent the administrative period from creating any potential gaps in coverage, it will overlap with the prior stability period. And because the administrative period overlaps with the start of the next standard measurement period, an ongoing employee subject to a 12-month standard measurement period will continuously be in a measurement period. Here s a graphical representation of how this works. Transition Rule 1 SMP: Standard Measurement Period AP: Administrative Period SP: Stability Period ONGOING EMPLOYEES J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D SMPI AP1 SP1 SMP2 AP2 SP2 SMP3 AP3 SP3 In this example for ongoing employees, the employer has chosen to use a 12-month standard measurement period that always begins Nov. 1 and ends Oct. 31 the following year. This is when the employer is measuring to confirm employee status as either full-time or not full-time. The administrative period is 61 days during the last two months of the year. (Note that the regulations only allow up to 90 days and not three (3) calendar months, so the entire fourth quarter cannot be used.) This is the time when tabulations and the offer of coverage is made. This is followed by the stability period, when coverage is in effect for those determined to be full-time during the measurement period and who elect coverage during the administrative period. In this case, the stability period matches the employer s plan year, which is the calendar year Jan. 1 Dec Transition Rule: the final regulations grant employers transition relief with respect to the measurement period leading into the 2015 plan year. Even if an employer adopts a 12 month measurement period, it can use as short as a six (6) month measurement period in 2014 to determine full-time employee status for The measurement period though has to begin prior to July 1, 2014 and end no earlier than 90 days before the 2015 plan year begins (90 days being the maximum permissible administrative period). For those hired after the transition measurement period begins, the general rules for new employees under the look-back measurement method apply. Two permissible examples include (1) for a calendar year plan, a measurement period of April 15 - Oct. 14, 2014 (six months) followed by an administrative period ending Dec. 31, 2014; and (2) for a April 1 plan year, a measurement period of Jul. 1 - Dec. 31, 2014 (six months) followed by an administrative period ending Mar. 31, 2015, provided that certain special rules for 2015 are satisfied, relating to non-calendar-year plans. 11

12 THE LOOK-BACK MEASUREMENT METHOD FOR NEW EMPLOYEES REASONABLY EXPECTED TO BE FULL-TIME For a new employee reasonably expected at his or her start date to work full-time, the measurement method does not apply and an employer must offer coverage to the employee at or before the conclusion of the employee s initial three (3) calendar months of employment to avoid an employer shared responsibility penalty by reason of its failure to offer coverage. (This dovetails with the 90-day waiting period rules.) With regard to these new employees, they will become ongoing employees only after completing one full standard measurement period therefore these employees will generally be locked in for coverage until that time. For more details, see the Wellmark Information Brief Penalties. THE LOOK-BACK MEASUREMENT METHOD FOR NEW VARIABLE HOUR, PART-TIME, AND SEASONAL EMPLOYEES For newly hired variable hour and seasonal employees, the employer may use the optional look-back measurement method if unable to reasonably determine whether the employees will be considered full-time (which is particularly prevalent in the hospitality and retail industries). This permits the employer to exclude the new employee from coverage for up to 12 months (plus the permitted administrative period) without incurring an employer shared responsibility penalty. The employer can also use the look-back measurement method to confirm the status of a new employee who is reasonably expected to be part-time as of his or her start date. The initial measurement period, administrative period, and waiting period combined, however, may not extend beyond the last day of the first calendar month beginning on or after the one-year anniversary of the employee s start date (totaling, at most, 13 and a fraction months). The final regulations provide that the initial measurement period for these employees may begin on the employee s start date or any date after that up to and including the first day of the first calendar month following the employee s start date (or, if later, as of the first day of the first payroll period beginning on or after the employee s start date). Effectively, this allows employers to group new hires into 12 groups throughout the year for purposes of establishing the initial measurement period. The employer tracks these employees during the measurement period and determines whether they completed at least an average of 30 hours of service per week, or 130 hours per month. If so, the stability period must be the same length as the stability period for ongoing employees as in the case of a standard measurement period. If an employee is determined to be full-time during the initial measurement period, the stability period must be at least six (6) consecutive calendar months and no shorter than the initial measurement period. If not full-time, the employer is permitted to treat the employee as such during the stability period that follows, which must be no more than one (1) month longer than the initial measurement period, and must not extend beyond the remainder of the employee s first (overlapping) standard measurement period. It s important to note that an employee may be eligible for subsidized Marketplace coverage during the measurement and administrative periods, and assuming the look-back measurement method is applied correctly, the employer is not liable for an employer shared responsibility penalty during any such periods. Seasonal Employees For the purpose of determining full-time employee status, regulators define a seasonal employee as one in a position for which the customary annual employment is six (6) months or less. For seasonal employees, customary means that, by the nature of the position, an employee in this position typically works for a period of six (6) months or less; and that period should begin each calendar year in approximately the same part of the year (such as summer or winter). Interestingly, the regulators anticipate that most employers will use some form of the look-back measurement method; and, under this approach, the maximum measurement period an employer is allowed to designate is 12 months. So, if a seasonal employee averages 30 or more hours of service during a period of six (6) months or less under the look-back measurement method when the measurement period is 12 months, the employee would not be considered full-time and the employer would not need to offer coverage to the seasonal employee. On the other hand, if the seasonal employee works longer than six (6) months or if the employer designates a shorter measurement period, it could be that the seasonal employee may meet the full-time employee threshold and the employer would need to offer coverage. 12

13 NEW EMPLOYEES TRANSITIONING TO ONGOING EMPLOYEES Once a new employee has been employed for an entire standard measurement period, the employee must be tested for full-time status beginning with the first full standard measurement period at the same time and under the same conditions as other ongoing employees. Assumptions for the following examples: TYPE OF EMPLOYEE MEASUREMENT PERIOD ADMINISTRATIVE PERIOD (AP) STABILITY PERIOD New variable hour, part-time, and seasonal Length Initial Measurement Period (IMP) 12 months, beginning the first of the month following the employee s start date Dates Sep. 1, Aug. 31, 2015 Sep. 1 - Sep. 30, 2015; plus, Aug. 4 - Aug. 31, 2014 Ongoing Length Standard Measurement Period (SMP) 12 months 1 month (the first of the month following the end of the IMP through the end of that same month); plus a fraction (the period between the employee s start date and the beginning of the IMP) Initial Stability Period (ISP) 12 months, beginning the first day after the end of the administrative period Oct. 1, Sep. 30, days Stability Period (SP) 12 months Dates Nov. 1 Oct. 31 Nov. 1 Dec. 31 Jan. 1 Dec. 31 Here are graphical representations of how this works for a new, variable hour employee who was determined to be: 1 Full-time during the IMP, and subsequent SMPs. Start Date: Aug. 4, 2014 Coverage effective as of Oct. 1, 2015 (due to IMP) and continuous (due to SMP1 and SMP2) New Variable Hour Employee Qualifies as FT during IMP, SMP1, SMP J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D NEW AP IMP AP ISP ONGOING SMP1 AP SP1 ONGOING SMP2 AP SP2 2 Full-time during the IMP, and then not full-time during subsequent SMPs. Start Date: Aug. 4, 2014 Coverage effective Oct. 1, 2015 Sept. 30, 2016 (due to IMP) No coverage as of Oct. 1, 2016 (due to SMP1 and SMP2) New Variable Hour Employee Qualifies as FT during IMP, but not during SMP1 or SMP J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D NEW AP IMP AP ISP ONGOING SMP1 AP SP1 ONGOING SMP2 AP SP2 3 Full-time during the IMP, not full-time during the first full SMP, and then full-time again during the second full SMP. Start Date: Aug. 4, 2014 Coverage effective Oct. 1, 2015 Sept. 30, 2016 (due to IMP) No coverage Oct. 1, 2016 Dec. 31, 2016 (due to SMP1) Coverage restarts Jan. 1, 2017 (due to SMP2) New Variable Hour Employee Qualifies as FT during IMP, but not during SMP1, and then again as FT during SMP J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D NEW AP IMP AP ISP ONGOING SMP1 AP SP1 ONGOING SMP2 AP SP2 4 Not full-time during the IMP, and then full-time during subsequent SMPs. (In this case, an employer must offer coverage immediately following the end of the first full SMP, plus any associated AP.) Start Date: Aug. 4, 2014 No coverage Oct. 1, 2015 Dec. 31, 2015 (due to IMP) Coverage starts as of Jan. 1, 2016 (due to SMP1) and continues on (due to SMP2) New Variable Hour Employee Does not qualify as FT during IMP, but qualifies as FT during SMP1 and SMP J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D NEW AP IMP AP ISP ONGOING SMP1 AP SP1 ONGOING SMP2 AP SP2 13

14 WHEN THE STABILITY PERIOD IS LONGER THAN THE MEASUREMENT PERIOD The rules allow for the minimum length of a measurement period to be three (3) months and the minimum length of a stability period to be six (6) months. The final regulations clarify that the stability period refers to the period immediately following the measurement period and any associated administrative period. So, in the case that an employer s stability period is longer than the measurement period (such as depicted in the graphic below), employers will need to move the next measurement period over (on the back end of each oval), delaying the start of the next measurement period. This will prevent overlapping stability periods which would have occurred if the employer had started the next measurement period after the conclusion of the administrative period (on the front end of each oval). 3 month measurement period 6 month stability period Ongoing Employees Year 1 Year 2 J F M A M J J A S O N D J F M A M J J A S O N D SMP1 AP SP1 SMP2 AP SP2 SMP3 AP SP3 WHEN THERE IS A GAP BETWEEN STABILITY PERIODS For a new variable hour or seasonal employee who averages at least 30 hours of service during the initial measurement period, the rules require an employer to offer coverage within 13 months of the employee s start date (and a fraction, if not hired on the first of the month) to account for the initial measurement period, the administrative period, and the waiting period. In the example below, coverage for such a full-time employee must then be offered by Dec. 1, 2016 to avoid penalty. Consequently, the employee is eligible to continue coverage based on the status earned during the initial measurement period until the end of the initial stability period, or Nov. 30, To determine continued eligibility (where the employee transitions from new to ongoing), what should an employer do when the employee isn t employed for the entire first full standard measurement period (SMP1) and thus, in the example below, measurement did not occur for the period of Oct Nov. 1, 2015? Employers are to instead rely on the second full standard measurement period (SMP2). But, what if by doing so it turns out that there is a gap between the end of the initial stability period (ISP) and the beginning of the second stability period (SP2) -- the month of Dec. 2017, in the example below? The final rules clarify that the employee is treated as full-time (or not full-time, if applicable) until the beginning of the stability period associated with the first full standard measurement period for which the employee was employed (SMP2, in this example). Thus, in the example below, the employee would be eligible for coverage during the gap in stability periods for the month of Dec Start Date: Oct.25, 2015 New Variable Hour Employee Qualifies as FT during IMP and SMP2 (not employed during entire SMP1) J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D NEW IMP AP ISP ONGOING NA SMP1 AP SP1 ONGOING SMP2 AP SP2 Measurement Gap Stability Period Gap 14