Question: When does an ALE need to offer coverage to a part-time employee who start working full-time hours to avoid potential pay or play penalties?  The ALE utilizes the look-back measurement method for determining full-time employee status. 

Compliance Team Response:

Reminder: Very Different Approach Depending on Measurement Method

There are two different approaches for an applicable large employer (ALE) subject to the ACA employer mandate pay or play rules to determine employees’ full-time status:

1. The monthly measurement method; or

2. The look-back measurement method.

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 generally rely on the look-back measurement method because it provides greater predictability/stability for those workforces.

The measurement, administrative, and stability periods are relevant only to the look-back measurement method. They do not apply to the monthly measurement method.

We have a much longer summary of the pros and cons of each measurement method available here: https://theabdteam.com/blog/the-dark-side-of-the-aca-health-information-reporting-industry/

Look-Back Measurement Method: Standard Measurement Period Rules for Ongoing Employees

Ongoing employees are those employees who have completed at least one full standard measurement period.

An employee’s change in employment status to working full-time during the standard measurement period will have no effect from a pay or play perspective for the remainder of the current stability period.  There is no need to offer coverage upon the change.

At the end of the standard measurement period in which the change occurs, the company will review all ongoing employees’ hours of service to determine whether they averaged at least 30 hours of service over the entire measurement period.  Even though certain employees may have increased their hours to full-time, the total average over the full measurement period may still result in part-time status for the next plan year (stability period), depending on how many hours of service were completed and how late in the standard measurement period the boost to hours occurred.

Employees who average at least 30 hours of service over the measurement period (i.e., reach 1,560 hours of service in the 12-month standard measurement period) will need to be offered coverage at open enrollment (the administrative period) for the entire next plan year (the stability period) to avoid potential pay or play penalties. 

Look-Back Measurement Method: Initial Measurement Period Rules for New Variable, Seasonal, and Part-Time Employees

If a new variable/seasonal/part-time employee is in the initial measurement period, a change in status to full-time during the initial measurement period does affect the employee’s full-time status.  In that scenario, the employee’s status must be converted to full-time by the first day of the fourth full calendar month following the change (or, if sooner, the first day of the stability period in which the employee is treated as full-time).

As a reminder, only variable hour, seasonal, and part-time employees can be placed into an initial measurement period upon hire to determine full-time status.  For these new hires, the employer may apply an initial measurement period and initial administrative period before offering coverage in an initial stability period (if the variable hour employee tests as full-time during the initial measurement period).  The limit on the combined length of the initial measurement period and initial administrative period is 13 months (plus a partial month for a mid-month hire).

There are four classifications for new hires:

1)New Full-Time Employees: No Initial Measurement Period

A new hire who is reasonably expected at the employee’s start date to be a full-time employee (i.e., average 30 hours of service per week), and is not a seasonal employee, is considered a new full-time employee.  Factors include whether the prior person in the position averaged 30 hours of service per week, and whether the job was advertised/communicated as requiring 30 hours of service per week.

For new full-time employees, employers must offer coverage to be effective no later than the first day of the fourth full calendar month of employment to avoid potential pay or play penalties.  There is no initial measurement period.  Employees will need to be offered an “effective opportunity to elect to enroll” in coverage sufficiently in advance of that effective date for the offer of coverage to be valid.

2) New Variable Hour Employees: Initial Measurement Period

A new hire for whom the employer cannot determine whether the employee is reasonably expected to be employed on average at least 30 hours of service per week during the initial measurement period is a variable hour employee.  Caution: The employer may not take into account the likelihood that the employee may terminate employment before the end of the initial measurement period.

3) New Seasonal Employees: Initial Measurement Period

An employee who is hired into a position for which a) the customary annual employment is six months, and b) the period of employment begins each calendar year in approximately the same part of the year (such as summer or winter) is a seasonal employee.

4) New Part-Time Employees: Initial Measurement Period

An employee who is reasonably expected to average less than 30 hours of service per week during the initial measurement period is a part-time employee who can also be placed into the initial measurement period.

New variable, seasonal, or part-time employees who experience a change in employment status to full-time work during the initial measurement period will need to be offered coverage by the first day of the fourth full calendar month following the change (or, if sooner, the first day of the stability period in which the employee is treated as full-time) to avoid potential pay or play penalties. 

Employer Can Be More Generous

The pay or play rules described above are all designed with one focus: Which employees are considered full-time employees for pay or play purposes—and therefore can potentially trigger penalties.  The company is free to design eligibility for health benefits however it sees fit.  Eligibility structures that do not meet the minimum pay or play rules’ full-time standards described above will subject the company to potential pay or play penalties.  But eligibility structures that are more generous than the pay or play rules’ full-time standards are perfectly fine.

If the employer wants to offer coverage upon an ongoing employee’s change in designation to full-time (instead of waiting until the end of the measurement period and determining whether the employee averaged at least 30 hours of service), that is fine.  Those eligibility provisions that do not match the ACA standards should be clearly specified in all applicable plan materials and applied consistently.

Regulations:

Treas. Reg. §54.4980H-3(d)(1)(vii):

(vii) Change in employment status. Except as provided in paragraph (f)(2) of this section, if an ongoing employee experiences a change in employment status before the end of a stability period, the change will not affect the application of the classification of the employee as a full-time employee (or not a full-time employee) for the remaining portion of the stability period. For example, if an ongoing employee in a certain position of employment is not treated as a full-time employee during a stability period because the employee’s hours of service during the prior measurement period were insufficient for full-time-employee treatment, and the employee experiences a change in employment status that involves an increased level of hours of service, the treatment of the employee as a non-full-time employee during the remainder of the stability period is unaffected. Similarly, if an ongoing employee in a certain position of employment is treated as a full-time employee during a stability period because the employee’s hours of service during the prior measurement period were sufficient for full-time-employee treatment, and the employee experiences a change in employment status that involves a lower level of hours of service, the treatment of the employee as a full-time employee during the remainder of the stability period is unaffected.

Treas. Reg. §54.4980H-3(d)(2)(vii):

(vii) Change in employment status during the initial measurement period—(A) In general. If a new variable hour employee, new seasonal employee, or new part-time employee experiences a change in employment status before the end of the initial measurement period such that, if the employee had begun employment in the new position or status, the employee would have reasonably been expected to be employed on average at least 30 hours of service per week (or, if applicable, would not have been a seasonal employee and would have been expected to be employed on average at least 30 hours of service per week), the rules set forth in the remainder of this paragraph (d)(3)(vii) apply. With respect to an employee described in this paragraph (d)(3)(vii) and subject to the rules in the next sentence, the employer will not be subject to an assessable payment under section 4980H for the period before the first day of the fourth full calendar month following the change in employment status (or, if earlier and the employee averages 30 or more hours of service per week during the initial measurement period, the first day of the first month following the end of the initial measurement period (including any optional administrative period associated with the initial measurement period)). An employer will not be subject to an assessable payment under section 4980H(a) with respect to an employee described in this paragraph (d)(3)(vii) for any calendar month during the period described in the prior sentence 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 end of the period described in the prior sentence if the employee is still employed on that date; if the offer of coverage for which the employee is otherwise eligible during the period described in the prior sentence, and which the employee is actually offered by the first day after the end of that 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 during that period. For purposes of this paragraph (d)(3)(vii), 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.