We address recent questions we have received about the employer shared responsibility provisions and final regulations.
Do the final regulations include look-back rules for employers to use in determining their full-time employees?
Yes. The final regulations retain the optional look-back measurement method from the proposed regulations. The final regulations do not fundamentally change or simplify the look-back measurement method but do make changes to certain requirements. For example, the final regulations retain the look-back rules that apply to “ongoing employees” and the look-back rules that apply to new “variable hour” or “seasonal employees.” The final regulations also create a new category of employee – “part-time” – for a new employee who is reasonably expected at his/her start date to not be a full-time employee and is not a variable hour or seasonal employee. The look-back rules that apply to new variable hour and seasonal employees also apply to new part-time employees.
What is the definition of seasonal employee for purposes of applying the new employee look-back rules?
The final regulations define the term seasonal employee as an employee in a position for which the customary annual employment is six months or less. The preamble notes that the period of employment should generally begin in the same part of the year each year, like summer or winter, and an employee can still be considered seasonal if the employment period extends beyond its customary duration – like ski instructors during a long snow season.
What alternative measurement methods are available to an employer that chooses not to use the look-back method?The proposed regulations included optional look-back rules but did not specify how an employer is to determine full-time employee status if it decided not to use the look-back method. The preamble to the final regulation states that, pursuant to the statute, employees for whom a look-back method is not being used must be identified based on actual hours of service for each calendar month. The final regulations call this method the “monthly measurement method” and provide some rules on this determination. In general, this method requires an employer to count an employee’s hours during a particular month to see if the employee was full-time (i.e., had an average of at least 30 hours of service per week) for that month. It is unclear how this method would apply in practice for employers that have employees who work full-time hours one month and non-full-time hours the next month. It seems likely that the IRS intended for the monthly measurement period to be used more as an “after the fact” method to calculate excise tax liability rather than as a plan design method.
May an employer use the look-back measurement method for temporary and variable hour employees and the monthly measurement method for employees with more predictable hours of service?
No. The preamble to the final regulations explicitly states that an employer may not use the look-back measurement method for variable hour and seasonal employees and the monthly measurement method for employees with more predictable hours of service. The final regulations indicate that there are only two methods to determine full-time employee status – the monthly measurement method and the look-back measurement method – and that an employer must use the same method for all employees in the same category. The permitted categories are (1) salaried employees and hourly employees, (2) employees whose primary places of employment are in different states, (3) collectively bargained employees and non-collectively bargained employees, and (4) each group of collectively bargained employees covered by a separate collective bargaining agreement. These same permitted categories apply for purposes of using different measurement and stability periods for different categories of employees.
What rules apply under the look-back rules for employees who terminate employment but then are rehired within a short period of time?
The final regulations retain the rehire and break in services rules that were in the proposed regulations for purposes of determining whether an employer must treat a returning employee as an ongoing employee or can treat the rehired employee as a new employee. The final regulations do, however, change the definition of a break in service (for purposes of determining whether an employer must treat a returning employee as an ongoing employee) from 26 weeks to 13 weeks (except the 26-week threshold still applies for educational organizations). The final regulations also retain the optional rule of parity rules under which, for "no service" periods of less than 13 weeks (26 weeks for an educational organization employee), the employer may apply an optional rule of parity and treat the employee as a new employee if the "no service" period is at least 4 but less than 13 weeks long, and is longer than the period of employment. For example, if the employee works 5 weeks, terminates for 10 weeks, and is rehired, the employee may be treated as new.
Do the final regulations provide temporary transition relief from the employer mandate penalties?
Yes, the final regulations extend much of the transition relief and interim guidance in the proposed regulations and also provide important new transition relief for 2015. Among other things, the final regulations provide that there are no shared responsibility penalties for all of 2015 (plus, for non-calendar year plans, the portion of the plan year that falls in 2016) for employers with fewer than 100 full-time and full-time equivalent employees in 2014.
For employers with 100 or more full-time employees, the final regulations also include helpful transition relief for 2015 that makes it easier for employers to satisfy the requirements and reduces potential penalty amounts, as follows:
- The proposed and final rules provide that an employer is not subject to a 4980H(a) penalty if it offers coverage to 95% of its full-time employees (and their dependents). However, new 2015 transition relief provides that for each calendar month in 2015 (plus, for non-calendar year plans, the portion of the plan year that falls in 2016), the 95% requirement is reduced to 70%.
- Generally, the 4980H(a) penalty is based on the number of full-time and full-time equivalent employees minus the first 30. The transition relief provides that for 2015 (plus, for non-calendar year plans, the portion of the plan year that falls in 2016), the penalty will be calculated by reducing the number of full-time employees by 80 rather than 30.
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Christy Tinnes is a Principal in the Health & Welfare Group of Groom Law Group in Washington, D.C. She is involved in all aspects of health and welfare plans, including ERISA, HIPAA portability, HIPAA privacy, COBRA, and Medicare. She represents employers designing health plans as well as insurers designing new products. Most recently, she has been extensively involved in the insurance market reform and employer mandate provisions of the health-care reform legislation.
Brigen Winters is a Principal at Groom Law Group, Chartered, where he co-chairs the firm's Policy and Legislation group. He counsels plan sponsors, insurers, and other financial institutions regarding health and welfare, executive compensation, and tax-qualified arrangements, and advises clients on legislative and regulatory matters, with a particular focus on the recently enacted health-reform legislation.
PLEASE NOTE: This feature is intended to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.