The Affordable Care Act’s Employer Mandate: Part 2

September 18, 2019

Compliance

Determining Full-Time Employees

This article is Part 2 in a series intended to provide an overview of the Employer Shared Responsibility provisions (also known as the “employer mandate”) under the Affordable Care Act (ACA). The employer mandate generally requires employers known as applicable large employers (ALEs) to offer medical coverage to full-time employees and certain dependents in order to avoid potential penalties.

We covered how to determine whether an employer is an ALE in Part 1. This Part 2 will address how to determine who is an ACA-defined full-time employee (FTE). This article assumes an employer has already determined it is an ALE, and we will be using the terms ALE and employer interchangeably throughout.

Full-Time Employee Status Matters

Although ALE status is determined using both full-time employees and full-time equivalent employees (described in Part 1), the employer mandate penalties only take full-time employees into account. This is why it is so important to be able to identify the full-time employees. This article does not attempt to address all of the nuances that apply under the ACA’s measurement rules.

What’s in a Name?

Continuing from Part 1, the employer mandate is filled with many defined terms, including:

  • Full-time employee (FTE) – An employee who is reasonably expected to work at least 30 hours per week on average and/or who does average at least 30 hours of service per week over the course of a measurement period.
  • Part-time employee (PTE) – An employee who is not reasonably expected to work at least 30 hours of service per week on average and/or who averages less than 30 hours of service over the course of a measurement period.
  • Variable-hour employee – A new employee with a flexible or uncertain work schedule preventing the employer from determining whether the employee will reasonably average more or less than 30 hours of service per week. Factors the employer should consider when classifying an employee as a variable-hour employee include:
    1. Whether the individual is replacing an employee who averaged 30 or more hours of service per week;
    2. Whether employees in the same or comparable position typically average 30 or more hours of service per week; and
    3. How the position was advertised (i.e., as a full-time or part-time position).

Please do not confuse a short-term or high turnover position with the definition of variable hour employee. If we know the employee will average 30 or more hours per week, the employee is not a “variable-hour employee” (but he or she might be a “seasonal employee”).

Note: The term “variable-hour employee” only applies to the look-back measurement method (describe later in this article). Technically, an employee is only a variable-hour employee when initially hired. The variable-hour employee will subsequently measure and be classified as an FTE or PTE thereafter.

  • Seasonal Employee – An employee hired into a position customarily needed for six months or less and related to staffing needs that recur around the same time each year. These are not the same as temporary employees who are hired as needs arise throughout a year. A seasonal employee can be subject to measurement even if reasonably expected to average at least 30 hours of service per week, and the idea is the seasonal employee will be gone before having to be treated as an FTE for ACA purposes.

Note: The term “seasonal employee” only applies to the look-back measurement method.

  • Hour of service – Each hour for which an employee is paid for duties performed or entitled to payment for periods during which no duties are performed (i.e., vacation, holiday, illness, incapacity, disability,[1] layoff, jury duty, military duty, or leave of absence).
  • Break in service – A period of consecutive weeks in which the employee is not credited with an hour of service.
  • Limited Non-Assessment Period (LNAP) – A period during which an ALE will not owe an employer mandate penalty without regard to whether an FTE was offered coverage. LNAPs include:
    • January through March of the first calendar year in which an employer is considered an ALE, but only for employees not offered coverage during the prior year.
    • A waiting period before coverage is effective.[2]
    • An employee’s first calendar month of employment if hired after the 1st of the month.
    • An employee’s initial measurement period and initial administrative period under the look-back measurement method (described later in this article).
    • If an employee in an initial measurement period transitions to a known FTE position, the three full calendar months following the transition qualify as an LNAP. In the real world, many employers will transition the employee to FTE status faster than the rules require.

Different Strokes for Different Folks Possible
Employers may use different measurement methods for the following categories – or combination of categories – of employees:

  1. Salaried employees and hourly employees;
  2. Employees located in different states (but not within the same state);
  3. Collectively bargained employees and non-collectively bargained employees; and
  4. Employees subject to different collectively bargained agreements.

In other words, an employer can use a different measurement method for salaried, non-collectively bargained employees than it uses for hourly, collectively bargained employees. This rule also permits an employer to use measurement periods that differ in length and/or their beginning and end dates for different categories of employees when using the look-back measurement method.

Monthly Measurement Method (MMM)

Under the MMM, an employer measures an employee’s actual hours of service at the end of each calendar month. If an employee averages 30 or more hours of service per week (130/month) for a calendar month, the employee was an FTE for that month. Since coverage cannot be offered retroactively, an employer may be exposed for failing to offer coverage to an employee determined to be an FTE after-the-fact unless an LNAP applies. If an employer does not select a measurement method, the ACA rules default the employer to the MMM.

Weekly Rule: The MMM rules also permit employers to measure hours of service using a “weekly rule” method. Under this method, the employer can use the number of work weeks used for payroll purposes during a calendar month. This can result in some months having 4 weeks and others having 5 for measurement purposes.

  • 4-week months ->TE = 120+ hours
  • 5-week months ->TE = 150+ hours

Look-Back Measurement Method (LBMM)

Under the LBMM, an employer can make certain employees[3] wait until the end of a measurement period to determine if they were FTEs after-the-fact. The employee’s FTE or PTE status is then locked in for a corresponding stability period. Unlike the MMM, an employer can avoid potential penalties by prospectively offering coverage during an FTE’s corresponding stability period.

An employee who is locked in as an FTE during a corresponding stability period cannot lose that status during the stability period while employed by the employer, even if the employee’s hours are reduced.[4]

Remember: An employee’s FTE status is protected prospectively during a stability period because the employee retroactively measured as an FTE. Also, an employee who is reasonably expected to average 30 or more hours of service per week is a known FTE and should not be made to wait for measurement to determine FTE status.

Under the LBMM, there are separate measurement rules for new employees and ongoing employees.

New Employee
An employee who has been employed for less than one complete standard measurement period (defined below).

Ongoing Employee
An employee who has been employed for at least one complete standard measurement period or who was present when the first standard measurement period was implemented.

New Employees

Initial Measurement Period (IMP)

  • The employer may determine the months in which the IMP begins and ends
  • The IMP can be 3 – 12 months in length (but the minimum ISP is 6 months)
  • IMP used to determine whether new employees measure as FTEs or PTEs

The IMP may begin on the date of hire or the first of the following month

The IMP may also begin on the first payroll date that occurs between the date of hire and first of the following month

Initial Stability Period (ISP)

  • The ISP can be 6 – 12 months, but it cannot be shorter than the employer’s IMP
  • During the ISP, the employee is treated as either:
    • An FTE for employer mandate purposes, or
    • A PTE and no coverage must be offered to avoid penalties

For new variable hour and seasonal employees, the ISP must begin immediately after the IAP

For those who are determined to be FTEs, The ISP must be the same length as the SP for ongoing employees

Initial Administrative Period (IAP)
The period of time during which the employer finishes measurement, determines whether coverage should be offered, and conducts enrollment.

  • The employer is permitted to select an IAP of up to 90 days.
  • The IAP may include a period beginning before and after the IMP. This allows an employer to begin the IMP on the first of the following month or next payroll period instead of the date of hire. The remaining IAP may be used after the IMP and before the ISP begins.
  • The IMP and the IAP combined may not exceed 13 months and a fractional month from the date of hire. In other words, the ISP cannot begin later than the 1st day of the 14th month after the date of hire.

Ongoing Employees

Standard Measurement Period (SMP)

  • The employer may determine the months in which the SMP begins and ends
  • The SMP can be 3 – 12 months in length (but the minimum SP is 6 months)
  • An employer can administer the SMP to coincide with a calendar year, a non-calendar plan year, or a different 12-month period (i.e. an annual enrollment event)
Standard Stability Period (SP)

  • The SP can be 6 – 12 months, but it cannot be shorter than the employer’s SMP
  • During the SP, the employee is treated as either:
    • An FTE for employer mandate purposes, or
    • A PTE and no coverage must be offered to avoid penalties

The SP must begin immediately after the AP.

Standard Administrative Period (AP)

The period of time during which the employer finishes measurement, determines whether coverage should be offered, and conducts enrollment.

  • The employer is permitted to select an AP of up to 90 days.
  • The AP begins immediately after the SMP ends.

NOTE: The AP cannot exceed 90 days, and nearly all 3-month time frames will exceed the maximum period allowed for an AP in any given year (e.g. using all of October, November, and December results in an AP of 92 days).

Putting it Together – The LBMM and When a New Employee Becomes an Ongoing Employee

Click here to view the graphic

A Quick Side-by-Side of Some Remaining Items

Monthly Measurement Method Look-Back Measurement Method
Easy for an employer whose workforce is made up entirely or almost entirely of known FTEs and PTEs Better suited for employers with a more flexible workforce and/or a workforce with a less certain FTE/PTE status
Less record keeping Generally best to hire a vendor and/or use specific software for measurement
Employer can adjust quickly for changes from FTE to PTE status Employee is “locked in” as an FTE (or PTE)[1] for the corresponding stability period
Handling a break in service is straightforward.

  • If an FTE has a break in service less than 13 weeks (26 for educational institutions), the employee is considered a continuing FTE and cannot be subject to a new waiting period upon returning to work. Coverage must be reinstated by the first of the month following the return.
  • If the break in service is 13 weeks or more (or 26 for educational institutions), the returning employee can be treated as a new employee and subjected to another waiting period.
Breaks in service are modified by special rules

  • If an FTE has a break in service less than 13 weeks (26 for educational institutions), the employee resumes their prior stability period. Coverage must be reinstated by the first of the month following the return.The employee generally earns 0 hours of service during the break in service for measurement purposes.
  • If the break in service is due to FMLA, USERRA, or jury duty, the employee does not have a break in service, and the employer must account for this leave period in the measurement period by either:
    • revising the measurement period to exclude this leave; or
    • using the employee’s weekly average hours of service during the rest of the measurement period for this leave period

Note: If the FMLA, USERRA, or jury duty is concurrent with other paid leave, the employee is already accruing hours of service.

Full-time determination is at the end of the month, leaving exposure without a remedy Rules vary depending on whether the employee is hired as full-time or non-full-time. The MMM is running in the background during the first measurement period

About the Authors:

Jennifer Stanley is a Compliance Consultant in the Employee Health & Benefits Compliance Center of Excellence for Marsh & McLennan.

Christopher Beinecke is the Employee Health & Benefits National Compliance Leader for Marsh & McLennan Agency.

[1] Again, in the real world, many employers will transition the employee to FTE status faster than the rules require.

[1] Paid disability leave generally counts toward hours of service unless solely paid for after-tax by the employee or provided through a workers’ compensation program.

[2] The waiting period rules vary between the monthly measurement and look-back measurement methods.

[3] These are variable hour, seasonal, and part-time employees.

[4] Similarly, PTE status cannot generally be affected either. In the real world, many employers will transition the employee to FTE status faster than the rules require.

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About Chris Beinecke

Christopher Beinecke, J.D., LL.M. has joined MMA in the newly created position of EH&B National Compliance Leader to oversee this effort. Chris is a highly skilled legal practitioner with deep knowledge and years of experience in the areas of compliance and administrative best practices for health and welfare benefit programs. Chris’s legal experience is vast and diverse. Most recently, with the employee benefits practice at international corporate law firm Haynes and Boone, LLP. Prior to that, Chris was a senior compliance consultant for 10 years at Towers Watson and played a major role in the development of the firm’s U.S. health and welfare compliance practice. Chris also worked as an employee benefits lawyer in private practice before entering consulting. Chris received his J.D. from Ohio State University Moritz College of Law, and an LL.M. in taxation from Washington University in St. Louis School of Law. He also holds a B.S. in finance from Miami University Ohio. Chris is licensed to practice in both Texas and Missouri, and is admitted to the U.S. Tax Court.

View all posts by Chris Beinecke

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