ErisaALERT©
The IRS recently issued Notices 2012-58 and 2012-59. Notice 2012-58 addresses the determination of full-time employee status for purposes of shared responsibility. Notice 2012-59 addresses the 90 day waiting period requirements. This Alert summarizes important points in each notice and provides a to-do list for plan sponsors.
Notice 2012-58 will be of particular interest to employers with part-time or seasonal employees. Be forewarned, its application can be complex and may require some mental gymnastics to understand and apply. It is important to keep in mind that Notice 2012-58 is a safe harbor and plan sponsors do not have to follow it. The question then becomes, if a plan sponsor does not utilize the safe harbor, what do they do? Hopefully, we will get more guidance. Interestingly, the Notice asks for comments but provided a very short response time, i.e., September 30, 2012. The 90 day waiting period applies to both grandfathered and non-grandfathered plans. The shared responsibility requirements apply to non-grandfathered plans. Both provisions are effective January 1, 2014 and apply to insured and self-insured group health plans. The guidance can be relied on through 2014 and in certain circumstances into 2015.
We will begin with the least complex Notice, the 90 day waiting period.
Notice 2012-59
This notice is substantially identical to the concurrently issued DOL Technical Release No. 2012-02. PHS Act §2708 imposes a 90 day maximum eligibility period for group health plan years beginning on or after January 1, 2014. This requirement applies to both grandfathered and non-grandfathered plans.
Waiting period
- A group health plan may not impose a waiting period that exceeds 90 days.
- A waiting period is the period of time that must pass before an otherwise eligible employee can enroll in the plan.
- An employee is eligible for coverage if the employee has met the plan eligibility requirements e.g., being in an eligible classification, working full time or achieving job related licensure requirements specified in the plan.
- Eligibility conditions that are based on elapsed time are allowed as long as it doesn’t exceed 90 days.
- The requirement is satisfied if the plan provides that an employee can elect coverage on a date that doesn’t exceed the 90 day waiting period. The plan is not penalized if the employee does not make an election during the 90 day period.
- A group health plan cannot require a service requirement of more than 1200 cumulative hours.
Hours of service requirement for variable hour employees
A group health plan which imposes an hours based eligibility requirement on working full time can take a reasonable period of time to determine if employee meets the hours requirement. Use of a measurement period must be consistent with the measurement requirements of IRC §4980H (see discussion of Notice 2012-58) whether or not the employer is a large employer subject to the shared responsibilities requirements of §4980H.
If a plan requires a 90 day waiting period after a measurement period, the coverage effective date cannot exceed 13 months from the employee’s date of hire plus any remaining days in the calendar month if the employee is hired other than the first of the month. Thankfully, the guidance provides examples.
Notice 2012-58
Brief overview of shared responsibility also known as pay or play
A large employer (generally at least 50 full-time employees) is subject to an “assessable payment” if:
1. The employer does not offer minimum essential coverage to full-time employees AND any full time employee is eligible to receive a premium tax credit or cost sharing reduction
OR
2. The employer offers full-time employees the opportunity to enroll in minimum essential coverage AND one or more full-time employees is certified to receive a premium tax credit or cost-sharing reduction because the coverage is either not affordable (exceeds 9.5% of the employee’s W-2 earnings OR does not meet minimum value (less than 60% of the cost of benefits).
The penalty is $2,000 per full time employee where no minimum essential coverage is offered or $3,000 per full-time employee where coverage is either not affordable or does not meet the minimum value requirement. The penalty is calculated monthly. For purposes of calculating the amount of the monthly penalty, the number of full-time employees is reduced by 30 and the result is multiplied by 1/12th of either $2,000 or $3,000.
Determining the number of full-time employees
For employers with large part-time or seasonal employees applying the rules might be onerous. We will start with some key definitions:
Standard measurement period – for “ongoing employees”, the employer can choose a defined period of time of at least three months but not more than 12 consecutive calendar months. An ongoing employee is generally an employee who is employed for at least one standard measurement period.
Initial measurement period – employers with variable or seasonal employees may designate a period of time between 3 and 12 months to determine whether a new employee will work enough hours to be considered a full time employee. If the employee is determined to not be a full-time employee, the employer does not have to offer coverage during the stability period (see definition below) following the initial measurement period. However, the stability period must not be more than one month longer than the initial measurement period, i.e., coverage must begin before 13 months after the date of hire.
Stability period:
• For an employee who is determined to be a full time employee during the measurement period, the stability period is a period of at least six consecutive months that follows the measurement period and is no shorter in duration than the measurement period.
• For an employee determined not to be a full time employee during the measurement period, the employer could treat the employee as not a full time employee during the stability period, but the stability period could not exceed the measurement period.
Comment: the distinction is that an employee determined to be a full time employee must receive coverage for at least six months or the duration of the measurement period if greater. Employees who are not full time employees, are not required to be covered during the stability period and the six month requirement is removed.
Administrative period – in addition to the initial measurement period, the employer is permitted to apply an administrative period, not to exceed 90 days, before the start of the stability period. The intent is to provide employers time to identify who is a full time employee and notify the employee of the availability of benefits.
Comment: it is unfortunate that the definitions did not follow the retirement definitions with which plan sponsors are familiar, e.g., look back year instead of measurement period, eligibility computation period instead of initial measurement period, and current year instead of stability period.
Variable hour employee – a new employee is a variable hour employee if, based on the facts and circumstances at the start date, it cannot be determined that the employee is reasonably expected to work on average at least 30 hours per week.
Seasonal employee – through 2014, employers are permitted to use a reasonable good faith interpretation of the term seasonal employee.
Employers may use measurement periods and stability periods that differ in length or in their starting and ending dates for:
- Collectively bargained employees and non-collectively bargained employees,
- Salaried and hourly employees,
- Employees of different entities and
- Employees located in different States.
We will go through two examples to explain the application of the safe harbors.
Ongoing employee examples
The plan year is the calendar year. The employer chooses the calendar year as the stability period; 10/15-10/14 as the measurement period and 10/15 -12/31 as the administrative period. Only employees who work 30 hours per week during the measurement period are eligible for coverage in the stability period.
During the period of 10/15/2013 through 12/31/2013 (the administrative period), the employer will review the hours worked for the period 10/15/2012-10/14/2013 (the measurement period) to determine which employees will be eligible for coverage for the 2014 calendar year (the stability period). The employer will notify eligible employees during the administrative period and collect all necessary forms and enroll the employees effective 1/1/2014.
Employee A is a long service full time employee and continues to be a full time employee during the measurement period of 10/15/2012 through 10/14/2013 and is therefore eligible for coverage during the 2014 stability period as well as the administrative period from 10/15/2013-12/31/2014.
Employee B has always been a full time employee. However, Employee B was not full time for the standard measurement period of 10/15/2012 through 10/14/2013. Employee is covered through 2013 but does not have to offered coverage during the 2014 stability period.
In this example the safe harbor is satisfied because the measurement and stability period are not longer than 12 months; the stability period for Employee A is not shorter than the standard measurement period; the stability period for Employee B is not longer than the standard measurement period and the administrative period is no longer than 90 days.
Comment: employers with primarily salaried employees working more than 30 hours should have no trouble with these safe harbors. For employers with part-time employees, counting hours may or may not be cumbersome depending on whether there is a process ( an HRIS) in place counting hours for retirement plans. The calculation of the hours for purposes of the safe harbor will require some programming and testing. An employer with similar characteristics as the example choosing to utilize the safe harbor may have to act quickly to make programming changes.
New employees who are variable hour or seasonal employees
The plan year is the calendar year. The employer chooses the calendar year as the stability period; 10/15-10/14 as the measurement period and 10/15 -12/31 as the administrative period. Only employees who work 30 hours per week during the measurement period are eligible for coverage in the stability period; only full-time employees are eligible for group health coverage. The employer uses an initial measurement period that starts on the date of hire; an administrative period that runs from the end of the initial measurement period through the end of the next calendar month.
Employee C starts on May 10, 2014; therefore the initial measurement period is 5/10/2014 through-5/9/2015. During the administrative period of 5/10/2015 through 6/30/2015, the employer will determine if the new employee works an average of 30 hours and if yes, will offer coverage for the stability period that runs from July 1, 2015 through June 30, 2016.
The employer satisfies the safe harbor because the initial measurement period does not exceed 12 months, the administrative period does not exceed 90 days and the combined initial measurement period and administrative period does not last beyond the first day of the calendar month beginning on or after the one year anniversary of the employee’s start date. The employer complies with the safe harbor for the initial measurement period. However, the employer must count hours during the standard measurement period of 10/15/2014 through 10/14/2015 to determine eligibility for coverage in the entire 2016 stability period.
The Notice provides increasingly more complex examples.
What should Plan Sponsors do?
Plan sponsors should read and understand the notices especially if they have a large part-time workforce and offer benefits to part-time employees. Decisions must be made whether or not to use the safe harbors and the length of the measurement and stability periods.
Whether or not they utilize the safe harbors, employers must make sure their systems accurately track hours.
Ensure that any waiting periods satisfy the 90 day waiting period.
You may want to check our facebook page periodically for quick updates on compliance issues.
Note: all links are active as of the date of issuance of this ErisaALERT.Disclaimer: This material is for the sole purpose of providing general information and does not under any circumstances constitute legal advice and should not be used as a substitute for legal advice. You should seek the advice of counsel when applying the requirements to your plan. For more information on this ErisaALERT contact us by phone at 610-524-5351 and ask for Mary Andersen, 610-337-7270 or 215-508-5629 and ask for Theresa Borzelli.
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