In temporary guidance that will apply through 2014, the IRS has outlined several “safe harbor” methods for identifying “full-time employees” who must be offered group health coverage under employer “shared responsibility” or “pay or play” provisions, and has coordinated these methods with the maximum 90-day eligibility waiting period applicable, also in 2014, under group health plans and insurance policies. The safe harbor guidance – which employers may but are not required to follow – is found in IRS Notices 2012-58 (on determining full-time employees) and 2012-59 (on the waiting period), both issued on August 31, 2012. (Notice 2012-59 jointly was issued by the IRS, the Department of Health and Human Services and the Department of Labor.) Any future, more restrictive guidance will apply prospectively beginning on or after January 1, 2015.
The guidance on determining full-time employees is primarily of importance to “applicable large employers” with significant cohorts of seasonal employees (such as in the retail and agricultural sectors), and employees who fluctuate between full- and part-time working schedules (called “variable hour employees” in the new guidance). It will allow such employers to use all or part of calendar year 2013 as a “measuring period” to identify full-time employees for purposes of a “stability period” covering all or part of 2014, and thereby approximate their costs, in 2014, were they to “pay” excise taxes or “play” by offering those full-time employees group health coverage that is both “adequate” or “affordable” as defined under the ACA.
(Note: the shared responsibility provisions – set forth in Internal Revenue Code (“Code”) § 4980H – go into effect on January 1, 2014 for “applicable large employers,” while the 90-day maximum waiting period provisions apply, also beginning in 2014, to all group health plans (including grandfathered plans) and to group and individual insurance policies. “Applicable large employer” for these purposes means an employer with, on average, 50 or more full-time employees, including full-time equivalents, on business days during the preceding calendar year.)
A brief summary of the guidance, in FAQ format, follows. Employers who anticipate using the safe harbors will want to study the numerous factual examples set forth in the Notices for additional detail.
Notice 2012-58: Determining Full-Time Employee Status under Employer Shared Responsibility Rules
Q.1: When must an applicable large employer offer group health coverage to an employee who it can classify as full-time upon hire?
A.1: Notice 2012-58 confirms prior guidance, in Notice 2012-17, that if a newly-hired employee is reasonably expected to work full-time on an annual basis and does work full-time during the first three months of employment, the employee must be offered coverage under the employer’s group health plan as of the end of that initial three-month period. This period coincides with the maximum 90-day waiting period addressed in Notice 2012-59.
Q.2: What is a “full-time employee” for these purposes?
A.2: A full-time employee is someone working, on average, at least 30 hours per week. Regulations likely will expand this definition to include employees working at least 130 hours per calendar month.
Q.3: What safe harbor methods may be used to classify newly hired “variable hour” and “seasonal employees” as full-time, or not full-time, for coverage purposes?
A.3: These employees may be evaluated over a look-back “measurement period” of between three and 12 months, and their resulting classification as full-time (or not full-time) may be “locked in” for a subsequent “stability period,” regardless of their actual working schedule during the stability period. No coverage need be offered to any such employees during the chosen measurement period, and, during the stability period, only to employees who average 30 hours a week or more during the measurement period. This approach is consistent with the approach earlier outlined for “ongoing” (rather than newly hired) employees in IRS Notice 2011-36. It differs from the three to six-month measurement period earlier proposed for newly hired, variable hour or seasonal employees in Notice 2012-17.
Q.4: How is the stability period measured for newly hired, variable hour or seasonal employees?
A.4: If the employee qualifies as full-time over the measurement period, coverage must be offered during a stability period that is at least six consecutive calendar months long, but no shorter than the initial measurement period. If the employee fails to qualify as full-time, the stability period (during which coverage need not be offered) generally may last one month longer than the initial measurement period. There is no minimum stability period in such instances. The reason for this additional one-month period is described further in Q&A 6, below.
Q.5: May employees who do not qualify for coverage during measurement and stability periods apply for and receive premium subsidies on the exchanges?
A.5: Yes. Notice 2012-58 makes clear that employees who do not meet the definition of full-time employee may apply for and receive premium assistance on a state exchange during any period when coverage is not offered under their employer’s plan, including applicable “measurement periods” or “administrative periods” – described below — occurring before coverage takes effect.
Q.6: What is an administrative period?
A.6: An administrative period is an interval, not to exceed 90 days, between the end of a measurement period and the beginning of a stability period. Employers may use this time to identify full-time employees, notify them of eligibility, and enroll them in coverage. The administrative period may not add to or subtract from measurement or stability periods (thus may be required to run concurrently with stability periods). Nor may an initial measurement period and administrative period, combined, extend beyond the last day of the first calendar month beginning on or after the one-year anniversary of the employee’s date of hire. This 13+ partial month period is meant to allow employers to combine a 12-month initial stability period for variable hour and seasonal employees, with a 1 + partial month an administrative period (or, for instance, an 11-month initial stability period with a two-month administrative period).
Q.7: Must employers use the same measurement and stability periods for all employees, company-wide?
A.7: Notice 2012-58 permits some variations. Specifically, employers may use measurement periods and stability periods that differ either in length, or in their starting and ending dates, for the following categories of employees: (1) collectively bargained employees and non-collectively bargained employees; (2) hourly and salaried employees; (3) employees of different entities (presumably within the same “controlled group” or “common control” group of affiliated entities); and (4) employees located in different States.
Q.8: What is the safe harbor method for classifying ongoing, variable hour or seasonal employees (as opposed to new hires)?
A.8: Notice 2012-58 describes methods that are consistent with those first outlined in IRS Notice 2011-36, including a “look-back” measurement period of between three and 12 months, a stability period for those classified as full-time employees that lasts at least six months but “not less than” the measurement period, and a stability period for non-full-time employees of no minimum period, but “not to exceed” the measurement period. Notice 2012-58 adds to this earlier guidance by explaining how employers may transition variable hour or seasonal employees from initial (new hire) measurement periods to standard measurement periods applicable to ongoing employees.
Q.9: How should an employer transition a variable hour or seasonal employee from initial to standard measurement periods?
A.9: Specifically, once a new, variable hour or seasonal employee who has been employed for an initial measurement period has also remained employed for an entire standard measurement period, the employer must re-test the employee for full-time status, beginning with that standard measurement period, at the same time and under the same conditions as other ongoing employees. So, for example, an employer whose standard measurement period is the calendar year, and who uses a one-year initial measurement period beginning on the date of hire, would evaluate a new variable hour employee hired February 12, 2013 over the 12-month initial measurement period ending February 11, 2014, and again based on the calendar year standard measurement period running from January 1 – December 31, 2014. The length of the stability period depends upon whether the employee is determined to be full-time based on the initial or standard measurement period; Notice 2012-59 goes into significant detail on this point.
Q.10: What does Notice 2012-58 say about the “affordability” safe harbor?
A.10: Notice 2012-58 affirms prior guidance, in Notice 2011-73, that employers may assess the affordability of the coverage they offer to employees based on employees’ Form W-2 wages (as opposed to their total household income). “Affordable” for these purposes means that the employee’s portion of premiums does not exceed 9.5% of the employee’s Form W-2 wages. Unfortunately, the Notice does not specify whether “affordability” will be based on the employee’s share of individual premiums, or premiums for dependent coverage. This issue will be addressed in future proposed regulations.
Q.11: On what related topics does the IRS seek public comments?
A.11 Public comment, due September 30, 2012, is sought on the following points: (1) whether, and what types of safe harbor methods should apply to short-term assignment employees, temporary staffing employees, employees hired into high-turnover positions, and other “special issue” categories of employees; (2) whether further means should be developed to assist in classifying new employees as full-time or not-full-time, including further definition of variable hour employees; (3) rules for coordinating differing measurement and stability periods following a business merger or acquisition; and (4) how “seasonal worker” should be defined under shared responsibility rules (employers are permitted to use a “good faith” definition under the temporary guidance).
Notice 2012-59: Application of the Maximum 90-Day Eligibility Waiting Period
Q.12: How is “waiting period” defined for purposes of the maximum 90-day limit?
A.12: The definition that is most consistent with the new guidance is that found under a 2004 regulation from the IRS and DOL, as follows: “the period that must pass before coverage for an employee or dependent who is otherwise eligible to enroll under the terms of a group health plan can become effective.”
Q.13: Can an employer still impose eligibility requirements that require a period of service longer than 90 days, such as attainment of full-time status or minimum periods of service?
A:13: Yes, on two conditions: first, the eligibility requirement may not be designed to avoid compliance with the 90-day rule. Second, the employee must be allowed to enter the plan by the 91st day after satisfying the eligibility requirement. An example in the Notice describes a plan that extends coverage to part-time employees who have worked a cumulative 1,200 hours of service, and states that coverage for an employee who meets that requirement must begin no later than the 91st day after the employee works 1,200 hours. The Notice specifically states that an eligibility service requirement exceeding 1,200 hours would be viewed as designed to avoid compliance with the 90-day rule.
Q.14: If a plan requires a minimum period of service to participate, how should an employer apply the 90-day maximum to a “variable hour” employee?
A.14: Under the new guidance, the an employer may take “a reasonable period of time” over which to determine whether the employee meets the plan’s eligibility conditions, which may include a measurement period consistent with the guidance under Notice 2012-58. However, coverage must be made effective (for employees determined to be full-time) no later than 13 months from the employee’s start date, plus, if the start date is not the first day of a calendar month, the period of time remaining until the first day of the next calendar month. See Q&A 6, above.
Q.15: May employers that are not subject to shared responsibility requirements still use the maximum evaluation period for variable employees?
A.15: Yes, Notice 2012-59 specifically states that this evaluation period is available even to employers that are not “applicable large employers” subject to shared responsibility payments.
Q.16: What if an employee fails to complete enrollment materials within 90 days of meeting eligibility requirements?
A.16: The guidance makes it clear that, so long as an employee is permitted to enroll within 90 days, if the employee fails promptly to complete enrollment and does so after 90 days there is no violation of the maximum waiting period.