Question: What is the maximum period under the ACA that an employer can delay offering medical coverage to a new full-time hire without potential §4980H employer mandate penalty liability?

Short Answer: Under the ACA employer mandate, the employer can delay that offer of coverage until the first day of the fourth full calendar month of employment.

General Rule: ACA Employer Mandate Measurement Methods

The ACA employer mandate offers employers the option to choose between two alternative measurement methods to determine which employees are treated as full time (i.e., averaging at least 30 hours of service per week) for §4980H purposes:

• The Monthly Measurement Method (MMM)

• The Look-Back Measurement Method (LBMM)

For full details:

• Key Decision Points in ACA Reporting Vendor Setup Questionnaires—The Measurement Method

• Newfront ACA Employer Mandate Pay or Play and ACA Reporting Guide

• IRS ACA Identifying Full-Time Employees Summary

In general, employers with primarily full-time eligible workforces are best suited for the monthly measurement method.  Employers with employees whose hours fluctuate above and below 30 hours of service per week will typically rely on the look-back measurement method because it provides greater predictability and stability for those workforces.

Limited Non-Assessment Period: To the First Day of the Fourth Full Calendar Month of Employment for New Full-Time Hires

The ACA employer mandate rules provide that employees are not counted for potential penalty liability during their “limited non-assessment period.”  For new full-time hires, this limited non-assessment period is designed to provide the employer with sufficient time to offer coverage to a new hire without incurring potential penalties while the employee satisfies the plan’s eligibility and waiting period.

The technical approach of these limited non-assessment periods differs depending on which measurement method the employer utilizes to determine employees’ full-time status. However, the ultimate practical result for both is that employers can delay the offer of coverage for a new full-time hire until the first day of the fourth full calendar month of employment.

1. The Monthly Measurement Method

The limited non-assessment period for a new full-time hire under the monthly measurement method applies during the period of three full calendar months beginning with the first full calendar month in which the employee is otherwise eligible to be offered coverage under the employer’s medical plan. An employee is “otherwise eligible to be offered coverage” for a calendar month if the employee meets all conditions to be offered coverage other than completion of the waiting period.

The separate ACA 90-day waiting period rules permit employers to impose an orientation period of up to one month as the plan’s eligibility condition, followed by a waiting period of up to 90 days.  During an orientation period that the new hire must first satisfy to become eligible, the employee is not yet “otherwise eligible to be offered coverage” for purposes of the limited non-assessment period. Upon satisfying that orientation period to become eligible, the subsequent three full calendar months constitute the remainder of the employee’s limited non-assessment period.

The result is that the employer must offer coverage that is effective no later than the first day of the fourth full calendar month of employment to avoid potential ACA employer mandate penalties.

2. The Look-Back Measurement Method

The limited non-assessment period for a new full-time hire under the look-back measurement method applies during the period of three full calendar months of employment. Employers must therefore offer coverage to new full-time employees that is effective no later than the first day of the fourth full calendar month of employment to avoid potential ACA employer mandate penalties.

Additional Notes:

• Many employers take advantage of this limited non-assessment period to delay the offer of coverage to new full-time temps, interns, or other contingent workforce. For more details, see previous posts How the ACA Applies to Contingent Workers and Common Summer Intern Approaches Under the ACA.

• The limited non-assessment period is available (beyond the first partial month of employment, if a mid-month hire) only if the employer offers coverage that is effective no later than the first day of the fourth full calendar month of employment. Where the employer fails to offer coverage to a new full-time hire by the first day of the fourth full calendar month of employment, potential ACA employer mandate penalties apply beginning with the first full calendar month of employment until the first day of the first full calendar month in which the employer has offered the employee an effective opportunity to enroll.  For more details, see: Potential ACA Employer Mandate Penalties for Late Offer of Coverage to New Full-Time Hire.

• Under the look-back measurement method, new variable, seasonal, and part-time employees can be placed in a longer limited non-assessment period comprised of an initial measurement period and an initial administrative period of up to 13 months (plus a partial month for a mid-month hire).  New full-time hires do not have an initial measurement period. For full details, see: Key Decision Points in ACA Reporting Vendor Setup Questionnaires—The Measurement, Administrative, and Stability Periods

• A new variable, seasonal, or part-time hire placed into an initial measurement period under the look-back measurement method must be offered coverage by the first day of the fourth full calendar month following a change in employment status to full-time (or, if sooner, the first day of the stability period in which the employee is treated as full-time). For full details, see: Change in Employment Status During the Initial Measurement Period.

• For more details on determining employees’ full-time status in the gap period between being a new full-time hire and reaching a stability period as part-time or full-time under the look-back measurement method, see our prior post: ACA Status for New Full-Time Hires in the Gap Period.

• The IRS Forms 1094-C and 1095-C Instructions include a succinct and useful bullet-point summary overview of the various forms of limited-non assessment periods—referring to the concepts above as the “waiting period under the monthly measurement method,” and the “waiting period under the look-back measurement method,” respectively—in the Definitions section here.

Example 1:

• Employer utilizes the monthly measurement or look-back measurement method to determine employees’ full-time status.

• Employer’s health plan provides that a new full-time employee’s hire date triggers a one-month eligibility condition (the orientation period).

• Employer wants to delay the offer of coverage for new full-time hires to the first day of the fourth full calendar month of employment.

• After the one-month orientation period to become eligible, the plan imposes a waiting period of two months plus the remaining days in the calendar month in which that two-month period ends.

• Employer brings on a new full-time hire on March 1.

Result 1:

• The new hire’s eligibility orientation period runs through the end of March.

• The plan’s waiting period subsequently runs through the end of May.

• The employer must offer coverage that is effective no later than June 1 (the first day of the fourth full calendar month of employment) to avoid potential ACA employer mandate penalties.

Example 2:

• Same as Example 1, except the full-time employee is hired mid-March (any day other than the 1).

Result 2:

• The new hire satisfies the eligibility orientation period mid-April.

• The plan’s waiting period subsequently runs through the end of June.

• The employer must offer coverage that is effective no later than July 1 (the first day of the fourth full calendar month of employment) to avoid potential ACA employer mandate penalties.

• Note that the ACA 90-day waiting period limitation described below prohibits extending the waiting period until the end of July, which otherwise would appear permissible under the monthly measurement method’s limited non-assessment period definition.

Limited Non-Assessment Period: Interaction With 90-Day Waiting Period Rules

The ACA includes two distinct sets of rules that govern when an employer must offer coverage to a new full-time hire:

• The ACA employer mandate rules; and

• The ACA 90-day waiting period rules.

The 90-day waiting period rules permit employers to impose a one-month eligibility period (referred to as the orientation period) before starting the 90-day waiting period clock.  The ACA employer mandate rules also restrict how long employers can delay an offer of coverage without exposure to potential §4980H penalty liability.  As described in detail above, those rules generally permit employers to delay offering coverage to a new full-time hire until the first day of the fourth full calendar month of employment.

As a result, simply offering coverage 90 days after the one-month eligibility period generally is not a viable option for an ALE.  That approach would result in offers made later than the first day of the fourth full calendar month of employment, thereby triggering potential employer mandate penalties to the employer.

One approach to reconcile both rules and delay the offer of coverage to the maximum extent permitted under both ACA legal structures is to rely upon a combination of the one-month orientation period plus a waiting period of two months plus the remaining days in the calendar month in which that two-month period ends.  As described in the examples above, this structure has the practical effect of ensuring the employer makes the offer of coverage as of the first day of the fourth full calendar month of employment.

For more details, see:

• Bona Fide Orientation Periods

• Potential ACA Employer Mandate Penalties for Late Offer of Coverage to New Full-Time Hire

Newfront ACA Employer Mandate Pay or Play and ACA Reporting Guide

Regulations

Treas. Reg. §54.4980H-3(c)(2):

(c) Monthly measurement method.

…

(2) Employee first otherwise eligible for an offer of coverage. The rule in this paragraph (c)(2) applies with respect to an employee who, in a calendar month, first becomes otherwise eligible to be offered coverage under a group health plan of an employer using the monthly measurement method with respect to that employee. For purposes of this paragraph (c)(2), an employee is otherwise eligible to be offered coverage under a group health plan for a calendar month if, pursuant to the terms of the plan as in effect for that calendar month, the employee meets all conditions to be offered coverage under the plan for that calendar month, other than the completion of a waiting period, within the meaning of §54.9801-2, and an employee is first otherwise eligible if the employee has not previously been eligible or otherwise eligible for an offer of coverage under a group health plan of the employer during the employee’s period of employment. An employer is not subject to an assessable payment under section 4980H(a) with respect to an employee for each calendar month during the period of three full calendar months beginning with the first full calendar month in which the employee is otherwise eligible for an offer of coverage under a group health plan of the employer, provided that the employee is offered coverage no later than the first day of the first calendar month immediately following the three-month period if the employee is still employed on that day. If the coverage for which the employee is otherwise eligible during the three-month period, and which the employee actually is offered on the day following that three-month period if still employed, provides minimum value, the employer also will not be subject to an assessable payment under section 4980H(b) with respect to that employee for the three-month period. This rule cannot apply more than once per period of employment of an employee. If an employee terminates employment and returns under circumstances that would constitute a rehire as set forth in paragraph (c)(4) of this section, the rule in this paragraph (c)(2) may apply again.

Treas. Reg. §54.4980H-3(d)(2)(iii):

(d) Look-back measurement method.

…

(2) New non-variable hour, new non-seasonal and new non-part-time employees.

…

(iii) Application of section 4980H to initial full three calendar months of employment. Notwithstanding paragraph (d)(2)(i) of this section, with respect to an employee who is reasonably expected at his or her start date to be a full-time employee (and is not a seasonal employee), the employer will not be subject to an assessable payment under section 4980H(a) for any calendar month of the three-month period beginning with the first day of the first full calendar month of employment if, for the calendar month, the employee is otherwise eligible for an offer of coverage under a group health plan of the employer, provided that the employee is offered coverage by the employer no later than the first day of the fourth full calendar month of employment if the employee is still employed on that day. If the offer of coverage for which the employee is otherwise eligible during the first three full calendar months of employment, and which the employee actually is offered by the first day of the fourth month if still employed, provides minimum value, the employer also will not be subject to an assessable payment under section 4980H(b) with respect to that employee for the first three full calendar months of employment. For purposes of this paragraph (d)(2)(iii), an employee is otherwise eligible to be offered coverage under a group health plan for a calendar month if, pursuant to the terms of the plan as in effect for that calendar month, the employee meets all conditions to be offered coverage under the plan for that calendar month, other than the completion of a waiting period, within the meaning of §54.9801-2.

29 CFR §2590.715-2708(c)(3)(iii):

(iii)   Limitation on orientation periods. To ensure that an orientation period is not used as a subterfuge for the passage of time, or designed to avoid compliance with the 90-day waiting period limitation, an orientation period is permitted only if it does not exceed one month. For this purpose, one month is determined by adding one calendar month and subtracting one calendar day, measured from an employee’s start date in a position that is otherwise eligible for coverage. For example, if an employee’s start date in an otherwise eligible position is May 3, the last permitted day of the orientation period is June 2. Similarly, if an employee’s start date in an otherwise eligible position is October 1, the last permitted day of the orientation period is October 31. If there is not a corresponding date in the next calendar month upon adding a calendar month, the last permitted day of the orientation period is the last day of the next calendar month. For example, if the employee’s start date is January 30, the last permitted day of the orientation period is February 28 (or February 29 in a leap year). Similarly, if the employee’s start date is August 31, the last permitted day of the orientation period is September 30.

…

Example (11)

(i) Facts. Employee H begins working full time for Employer Z on October 16. Z sponsors a group health plan, under which full time employees are eligible for coverage after they have successfully completed a bona fide one-month orientation period. H completes the orientation period on November 15.

(ii) Conclusion. In this Example 11, the orientation period is not considered a subterfuge for the passage of time and is not considered to be designed to avoid compliance with the 90-day waiting period limitation. Accordingly, plan coverage for H must begin no later than February 14, which is the 91st day after H completes the orientation period. (If the orientation period was longer than one month, it would be considered to be a subterfuge for the passage of time and designed to avoid compliance with the 90-day waiting period limitation. Accordingly it would violate the rules of this section.)