Employee Benefits & Pensions
In Notice 2014-49, the IRS provided employers with helpful guidance regarding situations where an employer changes the measurement period or method it uses for determining if a variable-hour or part-time employee has become a full-time employee. In addition, the IRS asked for comments about whether the methods outlined in the notice should be applied to merger-and-acquisition (M&A) situations.
Under Sec. 4980H(a), an applicable large employer potentially will be liable for an employer shared-responsibility payment if (1) the employer does not offer health coverage to substantially all of its full-time employees and the dependents of those employees, and (2) at least one of the full-time employees receives a premium tax credit or cost-sharing reduction. In addition, if an employer offers health coverage to substantially all of its full-time employees, but at least one full-time employee receives a premium tax credit or cost-sharing reduction because the employer did not offer coverage to that employee or offered coverage to that employee that was unaffordable or did not provide minimum value, an assessable payment under Sec. 4980H(b) will apply.
Identification of Full-Time Employees
To comply with the employer shared-responsibility rules of Sec. 4980H and the related health insurance coverage reporting requirements of Sec. 6056, as enacted by the Patient Protection and Affordable Care Act (PPACA), P.L. 111-148, an employer must be able to identify its full-time employees. For these purposes, Sec. 4980H(c)(4) provides an employee is a full-time employee for a calendar month if he or she averages at least 30 hours of service per week. Alternatively, under Regs. Sec. 54.4980H-1(a)(21)(ii), an employer may use 130 hours of service in a calendar month as the monthly equivalent of 30 hours of service per week. For many employers, this process is fairly straightforward; however, for employers that employ a large number of non-full-time, variable-hour, or seasonal employees, determining full-time employees presents a challenge.
Regulations
In February 2014, the IRS issued final regulations (T.D. 9655) on the Sec. 4980H employer shared-responsibility requirements. The regulations provide two methods for determining whether an employee has sufficient weekly or monthly hours of service to be considered a full-time employee. The first method is the monthly measurement method, which requires an employer to determine each employee's status as a full-time employee for a month by counting the employee's hours of service for the particular month.
The second method is the lookback measurement method, under which an employer may determine the status of an employee as a full-time employee during a future period (referred to as the stability period) based on the employee's hours of service in a prior period (referred to as the measurement period). The IRS created the lookback method as an acknowledgment that the statutorily provided monthly measurement period was, for certain employees, impractical because, by the time the employer could determine whether an employee was full-time, it would be too late to offer the employee coverage for that month.
Lookback Method
The lookback method requires an understanding of several concepts, including the "standard measurement period," the "stability period," and an "administrative period." Different rules apply for ongoing employees than to new part-time, variable-hour, or seasonal employees.
Ongoing employees: The following definitions apply for ongoing employees:
A "standard measurement period" is a period of at least three but not more than 12 consecutive months that an employer uses in determining whether an ongoing employee is a full-time employee.
The "stability period" follows the standard measurement period (immediately after unless there is an intervening administrative period). If an employee was determined to be a full-time employee during the standard measurement period, the stability period is the length of time that an employer must consider the employee as a full-time employee, regardless of the hours the employee actually works in the stability period. The stability period must be at least six consecutive calendar months but no shorter than the standard measurement period.
An "administrative period" is an employer-selected optional period of no longer than 90 days that begins immediately following the end of a standard measurement period and ends immediately before the start of the associated stability period. Employers use the administrative period to calculate hours worked during the standard measurement period and to provide enrollment forms to employees eligible for coverage.
New part-time, variable-hour, and seasonal employees: New part-time, variable-hour, and seasonal employees present special challenges. An employee is part-time if he or she is hired to work less than 30 hours per week. A variable-hour employee is one for whom, at the hire date, it is not possible to determine whether he or she will average more than 30 hours per week. A seasonal employee is one who is hired into a position for which the customary annual employment is six months or less. In lieu of analyzing the status of these employees each month, employers may elect a measurement period, stability period, or administrative period approach to determine whether they are full-time employees.
In this case, the following definitions apply:
- An employer selects an "initial measurement period" of between three and 12 months that begins on any date between the employee's start date and the first day of the first calendar month following the employee's start date. The employer uses this period to determine whether the employee was employed, on average, for at least 30 hours of service per week.
- With limited exception, an employer must use a "stability period" (discussed above) for new variable-hour and seasonal employees of the same length as the one used for ongoing employees.
- The optional "administrative period" may start before or after the initial measurement period and cannot exceed 90 days. When combined, the initial measurement period and administrative period cannot extend beyond the last day of the first calendar month beginning on or after the first anniversary of the employee's start date.
As an example of the lookback method, an employer using the lookback method looks at the hours of service credited to its ongoing variable-hour or non-full-time employees for the prior 12 months (the measurement period) on a certain date each year (e.g., Oct. 15) to determine which employees are full-time employees to whom it will offer health coverage for the plan year beginning the following Jan. 1 (the stability period). In this case, the intervening period of Oct. 16 through Dec. 31 is considered the administrative period.
Once the stability period for an employee is determined, his or her status as a full-time employee or a non-full-time employee generally remains the same until the next stability period regardless of whether he or she experiences an increase or decrease in working hours. Therefore, if an employee elects health care coverage, he or she (with limited exception) may keep that coverage for the full stability period. Conversely, if a non-full-time employee's hours of service increase during a stability period, the employer is not required to offer coverage during the stability period.
Multiple Measurement Periods
Under the Sec. 4980H regulations, an employer can apply different methods (i.e., monthly or lookback measurement) to different categories of employees. For example, an employer can use different methods for employees subject to a collective bargaining agreement (CBA) and employees not subject to a CBA, salaried employees and hourly employees, or employees in different states. Further, when using the lookback method, an employer can apply different measurement periods (starting dates and/or lengths) for different categories of employees, subject to the maximum and minimum periods discussed above.
Notice 2014-49
While comprehensive, the regulations under Sec. 4980H indicated future guidance would be provided on (1) situations where an employee transfers from a position to which one lookback measurement method applies to a position to which another lookback measurement method applies; (2) whether an employer that elected to use a measurement method for a category of employees may subsequently change that measurement method for that employee category; and (3) issues related to predecessor and successor employers in an M&A situation. In Notice 2014-49, the IRS addresses the first and second issues and asks for comments on the third issue.
Employee Transfers
Notice 2014-49 addresses how the lookback measurement method applies when an employee in a position to which one measurement period applies transfers to a position to which a different measurement period applies. For an employee transfer situation, lookback measurement periods are different if they are of different durations or if they start on different dates (or both). The notice takes different approaches to determining the employee's status as full-time depending on whether the transferring employee is in a stability or administrative period.
Employees in a stability period or an administrative period: When an employee transfers from one position (referred to as the first position) to a second position while in a stability period applicable to the first position, the employee's status as a full-time or non-full-time employee remains in effect until the end of that stability period. At the end of that stability period during which the transfer occurs (or, if the employee was in an administrative period at the date of transfer, the end of the immediately following stability period), the employee assumes the full-time or non-full-time employee status that the employee would have under the lookback measurement method applicable to the second position, but including hours of service in the first position when applying that measurement method.
Example 1. Transfer by an ongoing employee: Measurement periods used: For Position 1, the employer uses 12-month standard measurement and stability periods beginning Jan. 1. For Position 2, which qualifies as a different employee category, the employer uses 12-month standard measurement and stability periods beginning July 1. The employer has elected not to use an optional administrative period.
S is a longtime employee in Position 1. She continues working in Position 1 and averages less than 30 hours of service per week during the period from Jan. 1 through Dec. 31, 2015; however, she averages 30 or more hours of service per week during the period from July 1, 2015, through June 30, 2016.
On Aug. 15, 2016, S transfers from Position 1 to Position 2. On the transfer date, she is in a stability period under Position 1, under which she is considered a non-full-time employee because she averaged less than 30 hours of service per week during the measurement period applicable to Position 1 (Jan. 1 through Dec. 31, 2015). Thus, from the transfer date through Dec. 31, 2016 (the end of the stability period for Position 1 during which the transfer occurs), S retains her status as a non-full-time employee, even though she had been a full-time employee according to the measurement period of Position 2, which ended before Dec. 31, 2016.
As of Jan. 1, 2017 (the date immediately following the end of the stability period for Position 1), S's status is determined under the lookback measurement method applicable to Position 2. S is a full-time employee starting Jan. 1, 2017, because she averaged 30 or more hours of service per week in the measurement period for Position 2 (July 1, 2015, through June 30, 2016). She will remain a full-time employee through June 30, 2017 (the end of the Position 2 stability period). After June 30, 2017, her status continues to be determined using the applicable measurement period for Position 2.
Essentially, the IRS's approach allows the employer to determine whether an individual is a full-time employee for the entire Position 1 stability period, but at the end of that stability period to switch to the Position 2 measurement and stability periods taking into account all Position 1 hours of service.
Example 2. Transfer during a new employee's initial measurement period: Measurement periods used: For Position 1, the employer uses 12-month standard measurement and stability periods beginning Jan. 1, and a 12-month initial measurement period beginning on each employee's start date. For Position 2, the employer uses six-month standard measurement and stability periods beginning Jan. 1 and July 1, and a six-month initial measurement period beginning on an employee's start date. The employer has elected not to use an optional administrative period.
The employer hires J into Position 1 as a new variable-hour employee on Jan. 1, 2015. She averages 30 or more hours of service per week during the period from Jan. 1 through June 30, 2015. On Oct. 1, 2015, she transfers from Position 1 to Position 2. J is a full-time employee from the date of transfer (Oct. 1, 2015) through the end of the applicable stability period for Position 2 (Dec. 31, 2015) because she averaged 30 or more hours of service per week during the applicable measurement period for Position 2 ending June 30, 2015. After Dec. 31, 2015, J's status continues to be determined each Jan. 1 and July 1 (the applicable measurement periods for Position 2).
In this case, J's status as a full-time or non-full-time employee is immediately determined under the measurement method applicable to Position 2, taking into account her hours of service in Position 1, because she was not in the stability period for Position 1 (Jan. 1 through Dec. 31, 2016) at the time of her transfer.
Employer-Initiated Changes in Measurement Methods
In addition to addressing these employee transfers, Notice 2014-49 provides guidance for employers that wish to change the measurement method for a given employee category. These changes may include switching from the monthly to the lookback method, or vice versa, or changing the duration or start date of a measurement period under the lookback method. Specifically, an employer may change the measurement method applicable to a category of employees provided that, for a transition period following the date of any such change, the status of each employee in that category is determined using the same rules described above that apply to a change in an employee's employment status. Therefore, if an employee is in a stability period before the employer's change of method for that employee category, his or her status remains unchanged through the end of that stability period and is reassessed for the following stability period according to the new measurement method the employer chooses.
Example 3. Employees not subject to a CBA: Measurement periods used: The employer determines the full-time-employee status of its employees covered by a CBA using six-month measurement and stability periods starting April 1 and Oct. 1, and determines the status of employees not covered by the CBA using 12-month measurement and stability periods starting Jan. 1. Change to measurement period: On April 1, 2017, the employer changes the lookback measurement method for employees not covered by the CBA to be the same as that used for employees covered by the CBA.
In this case, a non-CBA employee who was not in a stability period on April 1, 2017, when the employer switched the method for non-CBA employees, will have his or her full-time status determined as of April 1, 2017, in accordance with the six-month measurement method to which the employer switched. Any non-CBA employee that was in a stability period will retain his or her full-time- or non-full-time-employee status for the remainder of the 12-month stability period and will not switch to the six-month period until the stability period ends.
Mergers and Acquisitions
For M&As, Notice 2014-49 invites interested parties to comment as to whether the approach used for an employee transferring among positions with different measurement periods should apply to M&A situations where the involved employers were, before the transaction, using different measurement period approaches. Secondarily, it allows employers involved in a corporate transaction in which the employers use different measurement methods to rely on the approach described in the notice in determining an employee's status as a full-time employee for purposes of Sec. 4980H until the IRS issues further guidance (and, in any case, through the end of calendar year 2016).
Conclusion
Considering that, effective Jan. 1, 2015, applicable large employers became subject to both the reporting requirements of Sec. 6056 and the potential for an employer shared-responsibility payment under Sec. 4980H, this notice provides needed additional guidance about topics that the final regulations under Sec. 4980H did not fully address.
EditorNotes
Mindy Tyson Weber is a senior director, Washington National Tax for McGladrey LLP.
For additional information about these items, contact Ms. Weber at 404-373-9605 or mindy.weber@mcgladrey.com.
Unless otherwise noted, contributors are members of or associated with McGladrey LLP.
