Question: What is the look-back measurement method for determining employees’ full-time status under the ACA employer mandate?

Short Answer: The look-back measurement method is one of two alternative approaches permitted under the ACA for Applicable Large Employers (ALEs) to determine employees’ ACA full-time status. Unlike the relatively simple monthly measurement method, the look-back measurement method adopts a more complex web of measurement, administrative, and stability periods. Despite the added complexity, this look-back measurement method approach provides significant administrative advantages for ALEs with employee populations whose hours tend to fluctuate.

General Rule: The ACA Employer Mandate

The ACA employer mandate rules apply to employers that are “Applicable Large Employers,” or “ALEs.” In general, an employer is an ALE if it (along with any members in its controlled group) employed an average of at least 50 full-time employees, including full-time equivalent employees, on business days during the preceding calendar year.

For more details:

• Newfront ACA Employer Mandate & ACA Reporting Guide

• Becoming an ALE Subject to the ACA Employer Mandate

Determining Employees’ Full-Time Status: The Measurement Method

The ACA itself refers to full-time employees as those who are “employed on average at least 30 hours of service per week” in IRC §4980H. The IRS employer mandate regulations offer 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 (employer mandate) purposes:

1. The Monthly Measurement Method (MMM); or

2. The Look-Back Measurement Method (LBMM)

The IRS provides a useful short summary of these two options here: https://www.irs.gov/affordable-care-act/employers/identifying-full-time-employees

See our prior post for a detailed overview of the MMM: The ACA Monthly Measurement Method

• Note: Employers cannot choose to use some other approach to determining employees’ full-time status for ACA employer mandate purposes. The MMM and LBMM are the exclusive means by which employers can determine which employees are full-time for avoiding potential §4980H penalty liability. Employers unfamiliar with these rules sometimes make the potentially costly error of designing a full-time status determination scheme that does not conform to this structure.

Employers Generally Must Apply the Same Measurement Method Approach to All Employees

Employers are permitted to choose separate measurement methods for the following limited classes of employees:

• Hourly vs. salaried employees

• Employees in different states

• Union vs. non-union employees

• Employees in different union groups

Outside of these four limited class distinctions, employers must apply the same measurement method across all employees. This limitation can be the cause of some consternation for ALEs that would prefer the simpler MMM approach for classes of employees where the LBMM’s measurement and stability periods would provide little or no utility, and the more robust LBMM approach for classes where the additional complexity trade-off is worth it to garner a level of predictability for the class’s full-time status. For example, employers cannot cherry pick a class of variable hour employees for application of the LBMM, while applying the MMM for those employees who are consistently working a routine full-time schedule.

How the Look-Back Measurement Method Determines Employees’ Full-Time Status

The LBMM is best thought of as the more complex alternative ACA measurement method for determining employees’ full-time status. For many employers, the burdens imposed by the additional complexity are outweighed by the additional predictability for ongoing employees and leeway for certain new hires.

Although the LBMM in its most granular details is almost obscenely difficult for employers to follow, the basic idea, purpose, and concept framework for the LBMM is quite straightforward and intuitive: Employees’ status as full-time or part time is generally kept stable for the current stability period (typically the 12-month plan year) based on the prior-year measurement period.

There are three main components to the LBMM structure:

1. The Measurement Period: The period that determines whether employees work full-time—average at least 30 hours of service per week—over an extended timeframe (typically 12 months).

2. The Administrative Period: The period (typically coinciding with open enrollment) used to a) review the results of the measurement period, and b) make an offer of coverage effective as of the start of the subsequent stability period to employees who reached full-time status.

3. The Stability Period: The period (typically coinciding with the 12-month plan year) during which employees’ full-time or part-time status is kept “stable” for an extended timeframe based exclusively on the hours of service averaged in the prior associated measurement period.

The key design feature of the LBMM is that ongoing employees’ current average hours of service are not relevant in determining whether they are full-time during the current stability period (typically the plan year). Only an employee’s average hours of service over the prior-year measurement period will determine whether they are full-time for the present stability period.

This aspect of the LBMM is crucial because for employees with variable hour workloads, their status as full-time or part-time will remain consistent for the duration of the plan year (stability period) regardless of their hours during the contemporaneous weeks and months in that year. Employers therefore have predictability for their ongoing employees for the full plan year (stability period) as to whether they are full-time and must receive an offer of coverage to avoid potential ACA employer mandate penalty liability.

• Bottom Line: The LBMM ensures that employers will not have to move ongoing employees in and out of active coverage during the plan year because their status as full-time or part-time will remain consistent based on the prior-year measurement period results.

The IRS treats 130 hours of service per month as the threshold that applies to determine whether the employee averaged 30 hours per week. Most employers have a 12-month standard measurement period. Therefore, in most cases employees must complete at least 1,560 hours of service (130 x 12) in the measurement period to reach full-time status for the associated subsequent stability period.

The LBMM is structured such that any change in hours of service can affect the employee’s full-time status only for the subsequent stability period—and even then, only of it causes the employee’s average hours of service to change above or below 30 during the full course of the current measurement period.

Ongoing Employees: Establishing the Measurement, Administrative, and Stability Periods

Under the LBMM, an employee’s status as full-time or part-time is determined by reference to the measurement, administrative, and stability periods. The standard measurement, administrative, and stability periods apply to determine the full-time status of ongoing employees, which are employees who have completed at least one full standard measurement period.

There are many rules and permitted variations in the establishment of these periods, but for practical purposes most employers utilizing the LBMM follow this common-sense approach:

Standard Measurement Period: 12 months, ending with a two-month gap before the start of the stability period.

• Calendar Plan Year Standard Approach: November 1 – October 31

Standard Administrative Period: 2 months, comprising the period between the end of the standard measurement period and the start of the stability period.

• Calendar Plan Year Standard Approach: November 1 – December 31

Standard Stability Period: 12 months, tracking the employer’s plan year.

• Calendar Plan Year Standard Approach: January 1 – December 31

This basic structure for the LBMM generally provides the most useful framework with the least administrative friction because it relies on the foundation of the plan year as the basis for determining full-time status, offering coverage, and preserving employees’ full-time or part-time status (and therefore offer or non-offer of coverage) until open enrollment for the subsequent plan year.

• Note: The maximum duration of the administrative period is 90 days, which must begin immediately after the end of the measurement period and end immediately before the start of the associated stability period. This 90-day limit prohibits a measurement period running from 10/1 (which would exceed the 90-day limit by one day). Some employers prefer to use 10/15 as the start of the measurement period to better align with open enrollment practices, but generally the complexity of running calculations on a mid-month basis makes the 11/1 start date preferable.

New Hires: The Limited Non-Assessment Period Before Potential ACA Penalties Apply

The ACA employer mandate rules permit a “limited non-assessment period” as a sort of grace period before which employers will be penalized for failure to offer coverage to a new hire. For new full-time hires, the duration of this period is relatively short (the first three full calendar months of employment).

• For more details: The ACA First Day of the Fourth Full Calendar Month Rule

However, new hires who can be classified as variable, seasonal, or part-time can first be placed into an initial measurement period to determine their full-time status, resulting in a limited non-assessment period of up to 13 months (plus a partial month for a mid-month hire). This 13+ month extended limited-non-assessment period that applies to the combined initial measurement and initial administrative periods is one of the key benefits made available to employers utilizing the LBMM.

There are four classifications that apply for new hires under the LBMM:

1. New Full-Time Employees—First Day of the Fourth Full Calendar Month: A new hire who is reasonably expected at the employee’s start date to be a full-time employee (i.e., average at least 30 hours of service per week), and is not a seasonal employee, is considered a new full-time employee. The determination is based on all the facts and circumstances, including the average hours for other employees in the same or a comparable position 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 ACA employer mandate penalties.
   
   Note: Only new variable, seasonal, and part-time employees can be placed into an initial measurement period. The initial measurement period is not available for new full-time hires.

2. New Variable Hour Employees—Initial Measurement/Administrative Period: A new hire for whom the employe 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 considered a variable hour employee.
   
   For new hires who fit the definition of a variable hour employee, the employer can impose a combined initial measurement period and initial administrative period of up to 13 months, plus a partial month for a mid-month hire, before offering coverage if the employee measures full-time.
   
   Note: The employer may not consider the likelihood that the employee may terminate employment before the end of the initial measurement period for these purposes.

3. New Seasonal Employees—Initial Measurement/Administrative Period: An employee who is hired into a position for which a) the customary annual employment is six months or less, and b) the period of employment begins each calendar year in approximately the same part of the year (e.g., summer or winter) is considered a seasonal employee regardless of hours.
   
   For new hires who fit the definition of a seasonal employee, the employer can impose a combined initial measurement period and initial administrative period of up to 13 months, plus a partial month for a mid-month hire, before offering coverage if the employee measures full-time.
   
   Note: Employers generally do not have to offer coverage to seasonal employees because, by definition, they customarily will not remain employed to the end of the 13+ month initial measurement/administrative period.

4. New Part-Time Employees—Initial Measurement/Administrative Period: A new hire who is reasonably expected to average less than 30 hours of service per week during the initial measurement period is considered a part-time employee. The determination is based on all the facts and circumstances, including the average hours for other employees in the same or a comparable position and whether the job was advertised/communicated as requiring 30 hours of service per week.
   
   For new hires who fit the definition of a part-time employee, the employer can impose a combined initial measurement period and initial administrative period of up to 13 months, plus a partial month for a mid-month hire, before offering coverage if the employee measures full-time.
   
   Note: The employer may not consider the likelihood that the employee may terminate employment before the end of the initial measurement period for these purposes.

Establishing the Initial Measurement, Administrative, and Stability Periods for New Hires

The initial measurement period is available for new variable, seasonal, and part-time hires. (There is no initial measurement period for new full-time hires.)

As with the standard periods, there are many rules and permitted variations in the establishment of the initial periods. For practical purposes, most employers utilizing the LBMM follow this common-sense approach for new non-full-time hires:

Initial Measurement Period: 12 months, beginning the first of the month following the date of hire.

• March 15, 2024 Hire Date Example: Runs from April 1, 2024 through March 31, 2025.

Initial Administrative Period: 1 month, beginning after the end of the initial measurement period (and technically also including the first partial month, if any, of employment).

• March 15, 2024 Hire Date Example: Runs from March 15, 2024 through March 31, 2024 (front-end of split administrative period), and then from April 1, 2025 through April 30, 2025 (back-end of split administrative period).

Initial Stability Period: 12 months, beginning after the end of the initial administrative period (i.e., begins 13 months—plus a partial month for a mid-month hire—after date of hire).

• March 15, 2024 Hire Date Example: Runs from May 1, 2025 through April 30, 2026.

Note: A special rule permits employers to have an 11-month initial measurement period (one month shorter than the stability period), which allows for a two-month back-end administrative period approach. Some employers choose to take advantage of this option for the added time to review hours and offer coverage, but generally the added complexity running a different length initial and standard measurement period makes the 12-month initial measurement period preferable.

Why Full-Time Status Matters: Potential ACA Employer Mandate Penalties

The employer mandate creates two potential forms of tax penalty liability under §4980H for ALEs that do not offer coverage to full-time employees meeting certain requirements:

1. IRC §4980H(a)—The “A Penalty”
   The first is the §4980H(a) penalty—frequently referred to as the “A Penalty” or the “Sledge Hammer Penalty.” This penalty applies where the ALE fails to offer minimum essential coverage to at least 95% of its full-time employees in any given calendar month.
   
   The 2024 A Penalty is $247.50/month ($2,970 annualized) multiplied by all full-time employees (reduced by the first 30). It is triggered by at least one full-time employee who was not offered minimum essential coverage enrolling in subsidized coverage on the Exchange.

2. IRC §4980H(b)—The “B Penalty”
   The second is the §4980H(b) penalty—frequently referred to as the “B Penalty or the “Tack Hammer Penalty.” This penalty applies where the ALE is not subject to the A Penalty (i.e., the ALE offers coverage to at least 95% of full-time employees).
   
   The B Penalty applies for each full-time employee who was:

• not offered minimum essential coverage,

• offered unaffordable coverage, or

• offered coverage that did not provide minimum value.

Only those full-time employees who enroll in subsidized coverage on the Exchange will trigger the B Penalty. Unlike the A Penalty, the B Penalty is not multiplied by all full-time employees.

The 2024 B Penalty is $371.67/month ($4,460 annualized) per full-time employee receiving subsidized coverage on the Exchange.

• For more details: The Ultra Low 2024 ACA Affordability Percentage.

Origin of the Look-Back Measurement Method: The Alternative ACA Approach

The ACA originally did not contain an LBMM. Instead, it required ALEs to look at employees’ full-time status each month to determine whether the employee averaged at least 30 hours of service per week.

IRC §4980H, the 2010 statutory basis for the ACA employer mandate, defines full-time status as follows: “The term ‘full-time employee’ means, with respect to any month, an employee who is employed on average at least 30 hours of service per week.” (emphasis added). The IRS now refers to that default ACA full-time status determination as the MMM.

Recognizing that MMM approach clearly would be problematic for certain employee populations—particularly those workforces with a significant number of variable hour employees—the IRS indicated in its initial guidance (prior to even proposing regulations in this area) that it would make the LBMM alternative available:

“A determination of full-time employee status on a monthly basis for purposes of calculating an employer’s potential § 4980H liability may cause practical difficulties for employers, employees, and the State Exchanges. These difficulties include uncertainty and inability to predictably identify which employees are considered full-time and, consequently, inability to forecast or avoid potential § 4980H liability. This issue is particularly acute in circumstances in which employees have varying hours or employment schedules (e.g., employees whose hours vary from month to month or who are employed for a limited period)…One possible alternative would permit applicable large employers, at their option, to use a look-back/stability period safe harbor that would provide certainty as to which employees would be considered full-time for a particular coverage period.”

• Bottom Line: The IRS gave birth to the LBMM as an optional alternative to the default MMM approach particularly to address concerns for employers with largely variable hour workforces.

Summary: Pros/Cons of the Look-Back Measurement Method

As the famous quote from economics goes, there are no solutions; there are only trade-offs. Unfortunately, the ACA reporting industry (that largely drives the employer direction in this area) rarely discusses the relevant trade-offs in this context. The decision-making process of carefully considering and adopting the appropriate employer mandate measurement method for an employer’s specific population and circumstances has become something of a lost art.

Accordingly, the following is a high-level summary of the main considerations for employers when determining whether to utilize the LBMM:

Advantages of the LBMM

• Predictability for ongoing employees’ full-time status for the entire plan year (the stability period)

• Ability to place variable hour, seasonal, and part-time new hires in an initial measurement period and initial administrative period (up to 13 months, plus a partial month for a mid-month hire) prior to offering coverage (extended limited non-assessment period)

• Standard stability period is generally established to track the traditional plan year to minimize administrative disruption

Disadvantages of the LBMM

• Administratively complex and demanding to track hours, particularly for new variable, seasonal, and part-time hire in the initial measurement periods (generally too complex to manage in-house)

• May require paying the ACA reporting vendor an additional fee to perform hours tracking and administer the LBMM’s measurement, administrative, and stability periods

• To avoid potential ACA employer mandate penalties, the LBMM requires offering coverage to previously full-time employees currently working under 30 hours of service per week for the duration of the stability period (e.g., employees who move to part-time status or on leave)

Employers that Should Consider the LBMM

• Employers with a significant number of employees whose hours fluctuate above and below 30 hours of service per week (to avoid moving employees in and out of active coverage mid-year)

• Employers with a significant population of new variable, seasonal, and part-time hires (to take advantage of the 13+ month extended limited non-assessment period before offering coverage)

More Details on LBMM Issues

• Newfront ACA Employer Mandate & ACA Reporting Guide

• When to Consider the MMM as an Alternative to the LBMM

• Establishing the LBMM Measurement, Administrative, and Stability Periods

• When a Move to Part-Time Work Causes Loss of Health Plan Eligibility

• When to Offer Coverage Under the LBMM Upon a Move from Part-Time to Full-Time

• Effect of Furloughs on Health Plan Eligibility Under the LBMM

• Addressing a Change in Employments Status During the Initial Measurement Period

• Determining Full-Time Status for New Hires Prior to Reaching a Stability Period

• Non-Protected Leave Full-Time Status Determinations Under the LBMM

• How the LBMM Applies to Rehires or Upon Return from Leave

• Health Coverage for Temps and Interns Under the LBMM

Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship. Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).