Beginning in 2014, many employers will be required to expand their current health insurance coverage to more employees or face stiff penalties resulting from the Patient Protection and Affordable Care Act. This is because, for purposes of the "shared responsibility" (aka "pay or play") requirements, full-time employees include any employee who works, on average, at least 30 hours per week (or 130 hours per month). This definition is a significant departure for those employers who have traditionally looked to the 40-hour work week as the threshold for full-time employee status.
Under Section 4980H of the ACA, failure of "applicable large employers" to provide "substantially all" of their full-time employees and their child dependents with "minimum essential coverage" that is both "affordable" and provides "minimum value" will trigger an employer penalty if at least one full-time employee receives premium tax credits or a cost-sharing reduction for health insurance coverage through a federal or state exchange.
The shift to the 30-hour work week for health care eligibility will have a significant cost impact on employers, particularly those in the hospitality and retail industries, where there is a high volume of hourly and high-turnover positions. Not surprisingly, major players in these industries have recently been in the headlines for lobbying for the definition of full-time employee status to be increased to 40 or more hours per week, or have, alternatively, announced their intention to slash employee hours to keep employee schedules below the 30-hour threshold.
In addition, beyond the cost impact of the ACA’s definition of full-time employees is the daunting task for employers to identify all full-time employees to ensure that no such employee slips through the cracks for coverage eligibility, etc. This is particularly an issue for hourly employees who work in a variable or seasonal capacity. To address this issue, the agencies responsible for implementing health care reform have issued comprehensive regulations, which provide employers with the option of using a safe-harbor approach to measuring hours.
Employers must act now and plan their strategy to address the new health care reform requirements relating to full-time employees, which are generally effective on January 1, 2014. The following are key considerations:
Do the requirements relating to full-time employees apply to my company?
It depends. The provisions apply only to those employers who employed, on average, at least 50 full-time employees in the prior year. To make this determination, the employer must count the actual hours of service of all employees in the prior year, taking into account full-time and full-time equivalent employees. To determine the total number of full-time and full-time equivalent employees for a particular month, the employer must add together (a) the total number of full-time employees for the month (using the 30-hour-per-week threshold), and (b) a number that is equal to the total number of hours worked in a month by part-time employees, divided by 120. The number of employees is determined on a "controlled" group basis.
How does an employer determine which of its employees are full-time?
At least through the end of 2014, employers may, but are not required to, rely on the use of a safe-harbor method for determining full-time employees, which uses a look-back "measurement period" for counting hours of service, a "stability period" during which coverage may have to be provided (depending on full-time employee status during measurement period), and an "administrative period" that allows time for communication to enroll or end coverage, as applicable.
• Standard measurement period: the look-back period for calculating the hours of service of ongoing employees. The period cannot be less than three months or more than 12 months.
• Standard stability period: the period during which an employer must treat an employee as full-time, if he or she averages at least 30 hours a week during the standard measurement period, regardless of the employee’s number of hours of service during the stability period.
• Administrative period: the optional period that an employer may use after the end of the standard measurement period and immediately before the standard stability period. The administrative period cannot exceed 90 days.
• Initial measurement period: the look-back period for calculating the hours of service for new employees. An employer may use an initial measurement period (between three and 12 months) that begins on any date between the employee’s start date and the first day of the first calendar month following the employee’s start date to determine whether a new variable-hour or seasonal employee was employed an average of 30 hours of service per week or more during the period.
• Initial stability period: the stability period for new employees, which must be the same length as the stability period for ongoing employees.
• Initial administrative period: an optional administrative period that may be used before or after initial measurement period.
Under the safe-harbor method, an employer selects the length of time for each such period, within the required parameters, and may change the standard measurement or standard stability period from year to year, but cannot change either period once the standard measurement period has begun. The safe-harbor requirements differ based on whether employees are "new" employees or "ongoing" employees, and, in the case of new employees, whether the employees are expected to work full-time or are "variable" or "seasonal" employees:
• Ongoing employees: employees who have been employed by the employer for at least one complete standard measurement period.
• New full-time employees: new employees who are reasonably expected to work at least 30 hours per week (or 130 hours per month). Employers who otherwise provide coverage will not be subject to a penalty for failing to offer coverage to employees for the initial three months of employment.
• Variable employees: new employees for whom it cannot be determined that the employee is reasonably expected to work on average at least 30 hours per week.
• Seasonal employees: the term seasonal employee is not defined in the proposed regulations, and employers may use a reasonable, good-faith interpretation pending future guidance.
What is the penalty for failing to provide coverage to full-time employees?
If an employer does not offer "minimum essential coverage," the penalty is $2,000 for each full-time employee, after subtracting 30 full-time employees, and is calculated on a monthly basis. If an employer offers minimum essential coverage to its full-time employees and their child dependents, but that coverage does not provide "minimum value" or is not "affordable," then the penalty is the lesser of a $3,000 annual excise tax penalty for each full-time employee receiving the credit (calculated on a monthly basis) or $2,000 per employee for each full-time employee (after subtracting 30).
For purposes of the penalty, minimum essential coverage includes employer-sponsored group health plan coverage that meets the requirements of the ACA. A plan provides minimum value if the plan’s share of the total allowed cost of benefits provided under the plan is at least 60 percent of those costs. Coverage is generally "affordable" if an employee’s required contribution toward the cost of self-only coverage does not exceed 9.5 percent of the employee’s household income, determined by using one of the three safe-harbor methods available under the current rules.
The IRS will enforce the penalty but will not become aware of who is using a tax credit or cost-sharing reduction on a federal or state exchange until that individual files a tax return. Therefore, there may be a significant delay between the month(s) to which the penalty relates and the time of the penalty assessment. It will be too late at that point for an employer to rectify the situation with respect to its full-time employees.
Does my company need to do anything now to prepare for the ACA requirements relating to full-time employees beginning in 2014?
Yes. In order to determine which employees are full-time, required to be covered in 2014 or with respect to whom a penalty may be assessed, employers using the safe-harbor look-back approach need to measure hours in 2013. For stability periods beginning in 2014 only, an employer may adopt a transition measurement period that is shorter than 12 months but not less than six months, beginning no later than July 1 and ending no earlier than 90 days before the first day of the plan year beginning on or after January 1, 2014. Employers may wish to alter work schedules accordingly. In addition, employers need to review their health plan documents to determine whether the eligibility requirements need to be amended to comply with health care reform requirements.
With careful consideration in 2013, employers can either avoid or budget for penalties resulting from the ACA’s shared responsibility requirements beginning in 2014. The key to this preparedness is understanding the impact of a 30-hour work week and full-time employee status. Employers should consult with their compliance and legal teams, insurers and consultants and start planning now. •
Kari Knight Stevens concentrates her practice in employee benefits and executive compensation. She frequently lectures, provides trainings and authors articles relating to health care reform.