January 25, 2013

IRS Proposed Rule Addresses How Employers Will Calculate Employees’ Full-Time Status Under the Affordable Care Act

The Treasury Department and Internal Revenue Service (IRS) have published a proposed rule implementing the Affordable Care Act’s1 employer shared responsibility penalty.2 In addition to addressing how the penalty will be applied, the proposed rule includes safe-harbor methods that employers may use to determine whether an employee is a full-time employee for purposes of the employer penalty.

This Capital Checkup summarizes the portions of the proposed rule that address determining employee’s full-time status. Determining which employees are full-time employees under the Affordable Care Act is important because the employer shared responsibility penalty will be imposed on large employers with at least 50 full-time equivalent employees under certain conditions. (The portions of the proposed rule that focus on the employer penalty are discussed in another Capital Checkup, “IRS Proposes Rule on Employer Penalty Under the Affordable Care Act.”)

Comments on the proposal must be filed by March 18, 2013. A public hearing on the proposed rule will be held on April 23, 2013.

Identifying Full-Time Employees

Employees are considered full-time employees for purposes of the employer penalty if they have at least 30 hours of service per week or 130 hours of service per month. Hours of service include both hours paid based on performance of duties as well as paid time for vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. Special rules apply to unpaid leave subject to the Family and Medical Leave Act of 1993 (FMLA), and the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA). The proposed rule requires that this special unpaid leave either be counted toward hours worked, or that the averaging method exclude it from calculation so that the employee is not disadvantaged by taking these leaves. However, these special rules only apply to employees who are in continuing service, not to those who are terminated and then rehired.

For employees not paid on an hourly basis, employers may use one of three methods to calculate hours of service: (1) counting actual hours of service; (2) using a days-worked equivalency, which credits the employee with eight hours of service for each day; or (3) using a weeks-worked equivalency of 40 hours of service per week. However, the days- or weeks-worked equivalency methods may not be used if the result would be to substantially understate an employee’s hours of service.

Safe Harbors for Determining Full-Time Status

The proposed rule sets forth safe harbors for determining whether an employee is a full-time employee for purposes of calculating the penalty. Use of any of the safe-harbor methods is voluntary. Employers with workforces with regular hours and schedules will not need to avail themselves of the safe harbors. In addition, employers may be more generous than the law requires, and may treat more employees as eligible than required.

As a general rule, employers do not need to rely on safe harbors for new employees who are reasonably expected to work full time as of their start date. Rather, to avoid triggering the employer responsibility penalty, these employees will need to be offered coverage on or before the conclusion of their initial three months of employment. However, safe harbors are available to determine whether employees are full-time employees when they are not expected to work full time at the time of hire. It is these types of employees — variable-hour employees and seasonal employees — for whom the safe harbors were designed. The proposed rule establishes several safe harbors that employers may use to determine whether an ongoing employee is a full-time employee. Those safe harbors are discussed in a supplement to this Capital Checkup, “Proposed Safe Harbors for Determining Whether an Employee Is a Full-Time Employee for Purposes of the Affordable Care Act.”

Implications for Employers

Employers should closely review the portions of the proposed rule that address determining employee’s full-time status in the context of their particular work environment to determine whether the safe harbors will make it easier to determine which employees are full-time employees. Those wanting to take advantage of the safe harbors will need to define the various measurement and stability periods3 for ongoing and new employees.

Employers should closely review the proposed rule in the context of their particular work environment and determine a strategy to assure that the employer shared responsibility penalty is either minimized or eliminated. Strategies could include expansion of coverage opportunities to employees and their children or using safe harbors to effectively determine whether employees are or are not full-time employees. Those wanting to take advantage of the safe harbors will need to define the various measurement and stability periods for ongoing and new employees.

Employers will need to review their existing workforce and determine who is and is not currently offered coverage. In addition, the value of the coverage, as well as the cost, needs to be evaluated to determine if coverage meets the minimum value standard and if coverage is affordable. Large employers with multiple entities will want to assure that a clear policy is established as to which entity employs particular employees to assure that the penalty, if any, is assessed against the proper entity.

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As with all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their legal counsel for authoritative advice on the interpretation and application of the Affordable Care Act and related guidance, including the new guidance summarized in this Capital Checkup. The Segal Company can be retained to work with employers and their attorneys on compliance issues.

1
The Affordable Care Act is the shorthand name for the Patient Protection and Affordable Care Act (PPACA), Public Law No. 111-48, as modified by the subsequently enacted Health Care and Education Reconciliation Act (HCERA), Public Law No. 111-152. (Return to the Capital Checkup.)
2
The proposed rule was published in the January 3, 2013 Federal Register. (Return to the Capital Checkup.)
3
For information about stability periods, see “Proposed Safe Harbors for Determining Whether an Employee Is a Full-Time Employee for Purposes of the Affordable Care Act,” a supplement to this Capital Checkup. (Return to the Capital Checkup.)

Capital Checkup is The Segal Company’s periodic electronic newsletter summarizing activity in Washington with respect to health care and related subjects. Capital Checkup is for informational purposes only and should not be construed as legal advice. It is not intended to provide guidance on current laws or pending legislation. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for legal advice.

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