ErisaALERT 2013-02 Shared Responsibility Part II

In our last ErisaALERT we covered the basics of the shared responsibility requirements and provided highlights of the proposed regulations. In this ErisaALERT we will dig a little deeper into some aspects of the proposed guidance. At the end of the document is a glossary of some key terms. The proposed regulations are complex; there is no “one size fits all” application of the rules.

The rule revisited
An applicable large employer (ALE) must offer minimum essential coverage (more guidance expected) to full-time employees and their dependents (not spouses) that is affordable AND provides minimum value (calculators not yet finalized) or face an assessable penalty.

Bringing it all together
The degree of complexity in applying the regulations depends on each employer’s demographics and the choices made regarding the various measurement periods.

Determine if you are an ALE
For each calendar month in the preceding year (e.g., 2014 ALE status is determined by counting employees in 2013). Count the number of full-time employees and full-time equivalents (FTE) if necessary; divide by 12 and round down. FTEs are calculated by aggregating the number of hours of service for non full-time employees (but not more than 120 hours) divided by 120. If the number of full-time employees and full-time equivalents is 50 or greater you are an ALE.

Special rules for seasonal employees – if the result calculated above exceeds 50 for 120 days or less during the preceding calendar year and the employees in excess of 50 during that time period are seasonal workers, the employer is not considered an ALE for the calendar year. Four calendar months can be treated as the equivalent of 120 days; the four calendar months/120 days do not have to be consecutive.

Maintain documentation to support your calculation.

Simple example of an applicable large employer determination
ABC Company employs

• 20 full-time employees each averaging 35 hours of service (HOS) per week during 2015
• 40 employees each averaging 90 HOS per month
• No seasonal employees

FTE calculation (40 x 90)/120 = 3600/120 = 30

ABC Company has 50 full-time employees (30 FTE + 20 FT employees) and is an ALE for 2016.

Note: special rules exist for employers with seasonal employees.

Measurement periods

Choose your standard measurement period – initial measurement period, administrative period and stability period (refer to the glossary of key terms). It is not clear if the choices must be included in the actual plan document or in an administrative policy associated with the plan document. It is not clear if the various periods can be changed and if yes, under what circumstances.

The rules are different for new employees and ongoing employees. Ongoing employees are employees who have been employed for one standard measurement period.

Full-time employees
An employee who was employed on average at least 30 hours per week during the standard measurement period must be treated as a full-time employee for a stability period that begins immediately
after the standard measurement period and any applicable administrative period.

Documenting hours of service
The proposed regulations borrow from the qualified retirement plan area in defining hours of service. An hour of service means each hour for which an employee is paid or entitled to payment for the performance of duties for the employer as well as vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leaves of absence.

Non-hourly employees (e.g., salaried employees) Non hourly employees – must use one of the following methods for calculating hours of service:

1. Actual hours of service worked and hours for which payment is made or due
2. Days worked equivalency whereby an employee is credited with 8 hours of service for each day the employee would be required to be credited with at least one hour of service
3. Weeks worked equivalency whereby the employee is credited with 40 hours of service for each week for which the employee would be required to be credited with at least one hour of service.

An employer can use a different method (of the three above) for non-hourly employees in different classifications. An employer cannot use an equivalency if it substantially understates an employee’s hours, for example, an employer cannot use a days worked equivalency for an employee working three
10 hour days. The equivalency used must generally reflect the hours actually worked.

Practically speaking, it is conceivable that actually counting hours can be avoided by deeming salaried employees and regularly scheduled hourly employees as full-time employees and offering them coverage.

Hourly employees – many hourly employees regularly work a full-time schedule (e.g., 35-40 hours per week). Hours are already recorded for such employees.

However, some hourly employees are not regularly scheduled employees but rather work variable hours and are referred to as variable hour employees.

New non-variable hour and non-seasonal employee – if a new employee is reasonably expected to be a full-time employee at date of hire, the employer won’t be subject to an assessable penalty if the employer offers coverage at or before the conclusion of the employee’s initial three full calendar months of employment.

New variable hour and new seasonal employees – employer can designate 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 calendar month following the employee’s start date.

Administrative period must not exceed 90 days in total. If an applicable large employer begins the initial measurement period on the first day of the month following a new variable hour or seasonal hour employee’s start date, the period between the employee’s start date and the first day of the next month must be taken into account in applying the 90 day limit on the administrative period.

There is a limit on the combined length of the initial measurement period and administrative period applicable to a new variable hour employee or a new seasonal employee. The initial measurement period and administrative period taken together cannot extend beyond the last day of the first calendar
month beginning on or after the first anniversary of the employee’s start date.

If the position or status of a new variable hour employee or new seasonal employee materially changes before the end of the initial measurement period in such a way that if the employee had begun in the new position, the employee would reasonably have expected to work 30 hours per week, the employer is not required to treat the employee as a full-time employee for purposes of determining and calculating any liability until the first day of the fourth calendar month following the change in status or if earlier and the employee averages more than 30 hours of service per week during the initial measurement period, the first day of the first month following the end of the initial measurement period including any administrative period associated with the initial measurement period.

Practically speaking, while utilizing various measurement/stability periods for different employee classifications may be driven by economics, do not forget to factor in the cost of recordkeeping all the data that you will probably be asked to provide should an employee go to an Exchange and qualify for a tax credit/subsidy.

>Rehires

Employees rehired after termination of employment or resuming service after other absence – rehired employee can be treated as a new employee only if the employee did not have an hour of service for a period of at least 26 consecutive weeks immediately preceding the resumption of services. Alternatively, the employer may choose a rule of parity approach in which the period of break (at least four consecutive weeks) is compared to the period of pre-break service. If the period of break is greater than the period of pre-break service (but less than 26 weeks), the rehired employee may be treated as a new employee.

Affordability

The statute provides that employer provided coverage is unaffordable if the employee premium is greater than 9.5% of household income. Recognizing that employers do not know an employee’s household income, safe harbor guidance was issued providing that the affordability test would be satisfied if the lowest cost self-only coverage does exceed 9.5% of wages reported in Box 1 of the W-2.

The proposed regulations provide additional safe harbors:

• Rate of pay (130 hours x hourly rate of pay)
• Federal Poverty Line ( 9.5% does not exceed FPL/12 for single individual)

Some considerations of choosing an affordability safe harbor include:

• 9.5% of Box 1 of W-2
• Determined after the end of the year
• Doesn’t include salary reductions
• Rate of pay
• Prospective
• Employer can not reduce wages of hourly employee
• Federal Poverty Line
• Assume FPL for an individual is $11,170
• ($11,170 x 9.5%)/12 = $88.43

You must choose what works best for you and will be relatively easy to document.

Some key terms
Applicable large employer (ALE) -Generally, an employer is an ALE if it employs on average at least 50 fulltime employees (including full-time equivalents (FTE)) during the previous calendar year.

Full-time employee – An employee who is employed an average of at least 30 hours per week during a calendar month. 130 hours of service in a calendar month is equivalent to 30 hours per week. The equivalency rule must be
applied on a reasonable and consistent basis.

Full-time equivalent employee (FTE) – FTEs are used solely for purposes of determining if an employer is an applicable large employer.

Variable hour employee – Based on facts and circumstances, the employer cannot determine whether an employee is reasonable expected to work 30 hours per week during the initial measurement period.

Seasonal worker – Seasonal worker – employers may apply a reasonable, good faith interpretation of the term “seasonal worker”.

Hour of Service (HOS) -Hour of service means each hour for which an employee is paid or entitled to payment for the performance of duties for the employer as wells vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leaves of absence.

Standard Measurement period At least three but not more than 12 consecutive months; used by the employer in determining if an employee is a full-time employee under the look-back measurement method.

Initial Measurement period – At least three consecutive calendar months but not more than 12 consecutive calendar months; used for determining whether new employees are full-time employees under the look-back measurement period

Stability period– Period that follows a measurement period (standard or initial) that is used by an ALE as part of the process in determining whether an employee is a full-time employee under the look-back measurement method. The stability period must be at least six consecutive calendar months but not shorter in duration than the standard measurement period.

Administrative period– Administrative period is the period of up to 90 days that begins immediately after the end of a standard measurement period and ends immediately before the associated stability period. The administrative period must overlap with the prior stability period. Special rules for initial measurement period.

What should Plan Sponsors do now?

1. Decide on your plan’s measurement, stability and administrative periods. The proposed regulations provide a number of useful examples illustrating the rules.
2. Decide if you will apply different measurement, stability and administrative periods for different classes of employees.
3. Assess your workforce demographics. You may wish to model various scenarios.
4. Decide which affordability safe harbor you will use and determine if your plan will satisfy the safe harbor requirements.
5. Determine if your plan meets the minimum value test. You may want to see if the HHS calculator will work for your plan; if not, be on the look-out for the IRS calculators.
6. Understand the Exchange rules as it relates to documentation that you will have to provide to prove you offered minimum essential coverage that met the affordability and minimum value requirements.
7. Understand government reporting requirements (discussed in Part III of this series).

You may want to check our blog or facebook page periodically for quick updates on compliance issues.

Note: all links are active as of the date of issuance of this ErisaALERT.

ACA, shared responsibility