02.11.13 |
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Affordable Care Act (ACA) Update: Full-Time Status Determination Rules

This article was originally featured in our ADP Eye on Washington update.

On December 28, 2012, the Internal Revenue Service (IRS) issued a proposed regulation1 regarding the Affordable Care Act (ACA) Shared Responsibility provisions, which affect large employers (generally those with at least 50 full-time equivalent employees).  As announced in a recent Eye on Washington, several key elements of these rules will be highlighted in a special series concerning new employer responsibilities.

Among the many administrative and recordkeeping requirements contained in the Employer Shared Responsibility provisions of the ACA is periodic determination of full-time employee status.  Beginning in 2014, new IRS Shared Responsibility assessments will apply to large employers that do not offer qualifying health coverage to all full-time employees, beginning in 2014, and their dependents, beginning in 2015.  These IRS assessments will be based in part on the number of employees who qualify as full-time under the ACA.

Prior IRS Notices2 introduced an option for employers to analyze hours of service in a past “measurement” period of three to 12 months to establish the full-time status of employees for a prospective “stability period.”  The proposed regulation expands on prior Notices and confirms that employers can rely on the proposed regulations; i.e., any more restrictive provisions adopted in final regulations will not be effective retroactively. Although the use of measurement periods and stability periods is optional, large employers will need to make full-time status determinations, regardless of whether they offer health coverage, and report the results for each full-time employee to the IRS annually.

Ability to Use Payroll Periods 
Perhaps most significantly, the proposed regulation permits employers to use weekly, biweekly, or semi-monthly payroll periods rather than months as measurement periods, which may facilitate compliance for many employers.

For example, an employer using a 12-month measurement period that generally coincides with the calendar year could include as the first pay period of a year some dates in December of the prior year, or exclude the first few days in January.  For example, a biweekly employer could begin a 12-month measurement period on Monday, January 7, 2013, through the payroll period that ends on Sunday, January 5, 2014.

Which New Employees May Be Considered Variable Hour or Seasonal? 
Generally, newly hired employees who are reasonably expected to work at least 30 hours per week, on average, during their initial measurement period should be considered full-time as of the date of hire; and, if the employer offers health coverage, is offered such coverage within 90 days.

Newly hired employees — for whom, based on the facts and circumstances at the start date, it cannot be determined whether they are reasonably expected to work, on average, at least 30 hours per week during the initial measurement period — may be considered “variable hour” employees. Employers may apply a 12-month measurement period and a limited administrative period to assess the hours of service for such employees to determine whether they are full-time. (See the Notice for general rules and restrictions.) A Shared Responsibility assessment would not apply for failure to offer health coverage during this period.

The proposed regulation clarifies who may be considered a “variable hour” employee.

•   For 2014, an individual’s status as a variable hour employee cannot be based on employer expectations regarding aggregate turnover. There must be objective facts and circumstances specific to the newly hired employee at the start date demonstrating that the individual’s employment is reasonably expected to be of a limited duration within the initial measurement period.
•   Effective January 1, 2015, except with respect to seasonal employees, the employer must assume that the employee will continue to be employed for the entire initial measurement period and therefore cannot take into account the likelihood that the employee’s employment will terminate before the end of the initial measurement period.

The proposed regulation reserves the definition of “seasonal employee” for purposes of determining full-time status. Until the IRS issues further guidance, employers may use a reasonable, good-faith interpretation of “seasonal employee.”

160-Hour Limitation Removed
Under prior guidance, for any single continuous period during which the employee was paid or entitled to payment but performed no duties, no more than 160 hours of service would be counted as hours of service.  The new proposed regulation removes this 160-hour limit on paid leave, so that all periods of paid leave must be taken into account.  This addressed concerns related to employees who are on longer paid leaves, such as maternity or paternity leave.

Unpaid Leave Under FMLA, USERRA, or Jury Duty
For unpaid leave under the Family and Medical Leave Act (FMLA), Uniformed Services Employment and Reemployment Rights Act (USERRA), or for jury duty (referred to in the proposed regulations as “special unpaid leave”), the proposed regulation requires an employer to determine hours of service by either:

•   Determining the average hours of service per week for the employee during the measurement period, excluding the special unpaid leave period, and using that average for the employee for the entire measurement period; or
•   Crediting the employee with hours of service for special unpaid leave at a rate equal to the average weekly rate at which the employee was credited during the other weeks in the measurement period.

These methods apply only to employees who are treated as continuing employees for shared responsibility purposes upon their return, but not to employees who are treated as terminated and rehired, as described under “Rehiring After Termination or Resuming Service After Other Absence,” below.

Teachers and Other Employees of Educational Organizations
Similarly, for employees of educational organizations who work on an academic year basis, the proposed regulation provides an averaging method for employment break periods that generally would result in an employee who works full-time during the academic year being treated as a full-time employee for shared responsibility. For employment breaks of four or more consecutive weeks (other than leave for FMLA, USERRA, or for jury duty as noted above), the employer must “credit” hours of service as follows:

•   Determining the average hours of service per week for the employee during the measurement period, excluding the employment break period, and using that average for the employee for the entire measurement period; or
•   Crediting the employee with hours of service for the employment break period at a rate equal to the average weekly rate at which the employee was credited during the other weeks in the measurement period.

Educational organizations are not required to credit employees with more than 501 hours of service for any employment break period in a calendar year. These 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.

Employees Compensated on a Commission Basis, Adjunct Faculty, Transportation Employees and Analogous Employment Positions
Many employees are compensated on a basis other than hours of service (e.g., salespeople compensated on a commission basis; airline pilots). Educational organizations often compensate adjunct faculty on the basis of credit hours taught. Until further guidance is issued, employers of employees in positions that raise similar issues with respect to the crediting of hours of service must use a reasonable method for crediting hours of service that is consistent with the purposes of shared responsibility.

A method of crediting hours would not be reasonable if it took into account only some of an employee’s hours of service with the effect of characterizing as non-full time, an employee that traditionally involves more than 30 hours of service per week. It would not be reasonable to exclude travel time for travelling salespeople who are compensated on a commission basis. It would not be reasonable, in the case of instructors such as adjunct faculty, to take into account only classroom time but not other hours necessary to perform their duties such as class preparation time.

Rehiring After Termination or Resuming Service After Other Absence
The proposed regulation provides the following rules regarding rehired employees or those returning from a leave of absence:

•   If an individual has no hours of service for at least 26 consecutive weeks and later returns to work, the employer can treat the individual as a new employee.
•   If the break in service is less than 26 weeks, the employer can still treat the individual as a new employee if the break in service is at least 4 weeks, and is longer than the preceding period of employment.
     o For example, this optional “rule of parity” could apply if an employee works three weeks for an employer, terminates employment, and is rehired by that employer ten weeks after terminating employment. In this case, the individual may be treated as a new employee.

For an employee who is treated as a continuing employee (as opposed to an employee who is treated as terminated and rehired), the measurement and stability period that would have applied to the employee had the employee not discontinued employment would continue to apply upon the employee’s resumption of service.

•   For example, if the continuing employee returns during a stability period in which the employee was being treated as a full-time employee, the employee is treated as a full-time employee upon return and through the end of that stability period.
•   For this purpose, a continuing employee treated as a full-time employee will be treated as offered coverage upon resumption of services if the employee is offered coverage as of the first day that employee is credited with an hour of service, or as soon as administratively practicable.

Change in Full-Time Status During an Initial Measurement Period
For new variable hour or new seasonal employees, material changes in employment status, such as a promotion to a full-time position, must be recognized for the purpose of full-time employee determination within a short time of the event.  The status change would generally be such that, had the employee begun employment in the new status, he/she would have been reasonably expected to average 30+ hours of service per week.

If this occurs during an initial measurement period, the employer must treat the employee as full-time no later than the first day of the fourth month after the change in status or, if earlier, by the first day of the first month following the end of the initial measurement period (including any administrative period), if the employee averaged more than 30 hours of service during the initial measurement period.
Example: Employer A hires Employee Z on May 10, 2015. Employer A’s initial measurement period runs from May 10, 2015 through May 9, 2016, with the optional administrative period ending June 30, 2016. At Employee Z’s May 10, 2015 start date, Employee Z is a variable hour employee. On September 15, 2015 Employer A promotes Employee Z to a position that can reasonably be expected to average at least 30 hours of service per week.
Employee Z must be treated as a full-time employee as of January 1, 2016, because that date is the earlier of the first day of the fourth calendar month following the change in position (January 1, 2016) or the first day of the calendar month after the end of the initial measurement period plus the optional administrative period (July 1, 2016).

Future Eye on Washington editions will summarize other key elements of revised Full-Time Status determination rules and other key Shared Responsibility provisions, which take effect in 2014.

1 Notice of Proposed Rulemaking [REG–138006–12], “Shared Responsibility for Employers Regarding Health Coverage,” December 28, 2012
2 Notice 2011-36 (2011-21 IRB 792), Notice 2011-73 (2011-40 IRB 474), Notice 2012-17 (2012-9 IRB 430), and Notice 2012-58 (2012-41 IRB 436).

Learn more about ADP solutions to help employers stabilize their approach to ACA compliance.

2 comments on “Affordable Care Act (ACA) Update: Full-Time Status Determination Rules”

  1. Stephanie says:

    How does this situation apply to temporary employees who are hired to perform duties for a specific project that are not expected to continue beyond one year (as defined here: http://www.dol.gov/oasam/doljobs/tempemployees.htm)? Must the employer offer benefits to these employees after the waiting period? It appears the Government does not so are their any guidelines that say the employer is or is not required to do so for temporary employment?

    1. Alison says:

      Stephanie, Did you ever get your response?
      I have the same question.

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