Counting Hours and Days Under the ACA

The Affordable Care Act Creates a New High Stakes Game of Counting Hours and Days

This article has been updated as part of a three part series. The updated articles should be read instead of this article (which is out of date). Part OnePart TwoPart Three .

Beginning on January 1, 2014 companies will need to decide whether to Play or Pay under the Affordable Care Act (ACA).  New Code §4980H will require employers to offer 95 percent of their full-time employees minimum essential coverage or pay a penalty.  For §4980H purposes a full-time employee is an employee who averages at least 30 hours of service per week.  An employer has the option to treat 130 hours of service as the monthly equivalent of 30 hours of service per week so long as the rule is applied reasonably and consistently across the employer’s workforce.  This publication will explain the hours of service and employee classification rules that are critical to complying with §4980H.

The first important item for employers to understand is what counts toward the 30 hours of service threshold that classifies an employee as a full-time employee.  An employee must be credited with an hour of service for each hour the employee is paid or entitled to be paid for the performance of duties on the job.  Additionally, an employee must be credited with an hour of service for each hour the employee is paid or entitled to be paid due to vacation, holiday, illness, incapacity, layoff, jury duty, military duty, or leave of absence.  If an employer does not count an employee’s hours of service accurately, the worker could be misclassified which could lead to a §4980H penalty, a penalty for violating the 90-day waiting period limitation, and/or lawsuits from the employee.  As a result, accurately counting an employee’s hours of service is the first step to complying with the employer’s duties under the ACA.

Assuming an employer does not offer coverage to all of its employees, the employer will have to track each employee’s hours of service.  For an employee paid on an hourly basis an employee’s actual hours of services must be calculated in accordance with the hours of service rules discussed above.  However, the employer has three options for counting hours of service, if an employee is not an hourly employee.  First, the employer could count the employee’s actual hours of service in the same manner it calculates the hours of service for hourly employees.  The second option credits an employee with eight hours of service for each day the employee is credited with an hour of service under the hours of service rules discussed above.  The third option credits an employee with 40 hours of service per week for each week the employee is credited with an hour of service under the hours of service rules discussed above.  The proposed rules prevent employers from manipulating an employee’s hours of service under the second and third option.

Once an employer has a system in place that accurately tracks its employees’ hours of service the next step is to classify an employee as a new full-time employee, a seasonal employee, a variable hour employee or an ongoing employee.  Different rules apply to each employee classification.

A new full-time employee is an employee who the employer reasonably expects to accumulate an average of at least 30 hours of service per week.  If an employee meets this definition and the employer sponsors a group health plan, the employee must be offered coverage by the conclusion of the employee’s initial three calendar months.  A calendar month is defined as one of the 12 months such as January, February, or March.  If an employer complies with the rule, the employer will be in compliance with §4980H with respect to that employee for all calendar months beginning on or after the employee’s start date.  A partial calendar month will not factor into any §4980H penalty.  However, if an employer does not comply with the rule, the employer will not be in compliance with §4980H with respect to that employee for the first full calendar month after the employee’s start date and any subsequent month for which coverage is not offered to the employee.

Example 1 – Employer ABC is an applicable large employer for §4980H purposes.  ABC sponsors a health plan that covers all full-time employees as defined under §4980H.  Stanley begins working at ABC on March 15, 2014 and is required to accumulate 40 hours of service per week under his employment contract.  To comply with §4980H ABC allows Stanley the opportunity to enroll in its plan by June 30, 2014.  As a result, ABC will have complied with §4980H with respect to Stanley for April, May, and June.  However, if ABC fails to offer coverage to Stanley by June 30, 2014, ABC will have violated §4980H with respect to Stanley for April, May, June and any subsequent month until Stanley is given the opportunity to enroll in coverage for the entire calendar month.  Astute readers of the ACA will notice this is a circumstance an employer could comply with §4980H and violate the 90-day waiting period limitation of the ACA.  To comply with both provisions of the ACA, ABC must allow Stanley the opportunity to enroll in coverage by June 12, 2014.

A seasonal employee is not defined in the proposed regulations.  Instead, employers will be permitted to use a reasonable, good faith interpretation of the term seasonal employee through at least 2014.  If you believe your company has a seasonal employee issue, please contact us to discuss various planning issues.

A variable hour employee is an employee that based on the facts and circumstances at the employee’s start date (the date the employee is first credited with an hour of service) the employer cannot determine if the employee is reasonably expected to average at least 30 hours of service per week.  An employee is also considered a variable hour employee if the employee is initially expected to accumulate 30 or more hours of service per week for a limited duration and the employer cannot determine based on the facts and circumstances if the employee will average at least 30 hours of service per week during the Initial Measurement Period (a term explained below).  Beginning in 2015, an employer will not be allowed to factor in the likelihood that the employee will no longer be employed by the end of the Initial Measurement Period when determining if an employee is a variable hour employee.

The §4980H penalties are applied on a monthly basis.  If an employer has employees who average more than 30 hours of service a week some months but not others, these employees would have to go in and out of the employer’s health plan on a monthly basis to comply with §4980H.  The IRS and Treasury recognized this problem and tried to make things simpler for employers by creating a safe harbor.  The safe harbor allows employers to look back at an employee’s hours of service to determine the employee’s status and use that status for a certain period of time going forward regardless of the hours of service the employee works subsequent to the employer counting the employee’s hours of service.  This will prevent employees from going in and out of an employer’s health plan on a monthly basis.  If an employer uses the safe harbor, the employer will be able to adjust the beginning and end of its Measurement Periods (discussed below) to match payroll periods that are one week, two weeks, or semi-monthly in duration.

An employer that does not elect to use the safe harbor would be required to total each employee’s hours of service on a monthly basis.  This would be a huge challenge as an employer would have to accurately count the hours of service for each employee each month regardless of when the payroll period fell.  This could be an issue for employers using a payroll system that operates every week or two weeks as these payroll periods will frequently overlap into two months.  Additionally, as mentioned above, an employee may have to move in and out of an employer’s plan as frequently as monthly to comply with §4980H.  The following describes the safe harbor that has been created to assist employers.

The safe harbor incorporates three periods to simplify the process for employers when tracking an ongoing employee’s hours of service.  An ongoing employee is an employee who has been employed for at least one Standard Measurement Period.  The Standard Measurement Period is a time period chosen by the employer of at least three, but not more than 12 consecutive months.  It makes sense to tie the Standard Measurement Period to the start of a payroll period which is allowed under the proposed regulations.  The employer will look back at each ongoing employee’s total hours of service during the Standard Measurement Period to determine whether the employee averaged at least 30 hours of service per week to be classified as full-time.

While the employer has a choice when selecting the length of the Standard Measurement Period, there are only two logical options for employers.  The most logical choice for an employer is to select a Standard Measurement Period of 12 months.  This option requires the least amount of administrative work and provides employees with certainty on whether the employee will be covered by the employer’s plan in yearly increments.  It is possible an employer has a six month period that requires its workforce to put in a lot of hours and a six month period that requires fewer hours.  An employer with many seasonal employees comes to mind for this scenario.  In this case a six month Standard Measurement Period may make sense  for reducing the employer’s cost of providing coverage or paying a fine under §4980H.  However, for the overwhelming majority of employers the 12 month Standard Measurement Period will be the best option.  The rest of the paper will assume the employer selects a 12 month Standard Measurement Period for its ongoing employees.  If you believe your company would benefit from using a six month Standard Measurement Period, please contact us to discuss the nuances it presents.

The second period associated with the safe harbor is referred to as the Stability Period.  The Stability Period is a period that follows the Standard Measurement Period and any Administrative Period.  Assuming the Standard Measurement Period is 12 months, the Stability Period will be 12 consecutive calendar months.  If an employer determines an employee is a full-time employee during the Standard Measurement Period, the employer must offer the employee coverage for the entire corresponding Stability Period regardless of the employee’s hours of service so long as the employee remains employed.  If the employer determines an employee is not a full-time employee during the Standard Measurement Period, the employer does not have to offer the employee coverage for the entire corresponding Stability Period regardless of the employee’s hours of service during the Stability Period.

The final period an employer can utilize under the safe harbor is the Administrative Period.  The Administrative Period may last up to 90 days, but may neither reduce nor lengthen the Standard Measurement Period or the Stability Period.  To prevent gaps in coverage the Administrative Period will overlap with the prior year’s Stability Period during which time an employee’s classification (full-time or not full-time) will remain unchanged from the prior Stability Period classification. 

Example 2 – Assume employer ABC is an applicable large employer and sponsors a group health plan for all of its full-time employees as defined by §4980H.  ABC has elected to use a Standard Measurement Period for ongoing employees that begins on November 10 of year one and ends on November 9 of year two.  The ABC plan uses a 52 day Administrative Period running from November 10 of year two until December 31 of year two.  The corresponding Stability Period runs from January 1 of year three until December 31 or year three (assume these are the plan terms all ongoing employees in all of the examples that follow).  Holly, an hourly employee, has been employed by ABC for five years and has some years where she averages more than 30 hours of service a week and others where she falls just below the 30 hours of service a week threshold.  From November 10, 2014 until November 9, 2015 Holly averages 30.1 hours of service per week.  Holly would be considered a full-time employee of ABC for §4980H purposes from January 1, 2016 until December 31, 2016 regardless of Holly’s hours of service during that time frame so long as Holly remained employed by ABC.  During the Administrative Period from November 10, 2015 until December 31, 2015 Holly would remain classified as she was under the prior Stability Period whether that be full-time or not full-time. 

Similar to the safe harbor rules for ongoing employees, the safe harbor uses three periods to determine if a new variable hour or new seasonal employee is a full-time employee.  The Measurement Period in this case is referred to as the Initial Measurement Period.  The Initial Measurement Period is a time period chosen by the employer of at least three, but not more than 12 consecutive months.  The Initial Measurement Period must begin by the first day of the calendar month following the employee’s start date.  For simplicity an employer will want to use this option and start the Initial Measurement Period on a date after the employee’s start date.  This will reduce the number of Initial Measurement Periods an employer will have to track for its workforce.  It makes sense to tie the Initial Measurement Period to the start of a payroll period which is allowed under the proposed regulations.

Once again, the employer will have a choice on the length of the Initial Measurement Period.  However, the most logical choice will be an 11 month Initial Measurement Period.  This will allow an employer flexibility and cushion time to make sure an employee that is classified as full-time during the Initial Measurement Period has the opportunity to enroll in coverage in order to comply with §4980H and the 90-day waiting period limitation.  An employer could use a 12 month Initial Measurement Period and still comply with the law.  However, a 12 month Initial Measurement Period will lead to situations when the employer will have only a few days to make coverage available to an employee who is determined to be full-time.  If your company is using a Standard Measurement Period of six months, the length of your company’s Initial Measurement Period will need to be adjusted accordingly.  Please contact Health Care Attorneys P.C. if your company plans on using a Standard Measurement Period of six months to discuss more details.

If an employee is a full-time employee during the Initial Measurement Period, the subsequent Stability Period must be the same length as the Standard Measurement Period used for ongoing employees.  The Stability Period must use calendar months meaning the Stability Period must begin on the first day of a month.  The Stability Period will begin immediately after the Initial Measurement Period and any Administrative Period.  The employee must be treated as a full-time employee for the duration of the Stability Period regardless of the employee’s hours of service during that time frame so long as the employee remains employed.

If an employee is not a full-time employee during the Initial Measurement Period, the employer does not have to treat the employee as a full-time employee during the Stability Period.  The Stability Period must not be more than one month longer than the Initial Measurement Period and must not exceed the remainder of the overlapping Standard Measurement Period plus any Administrative Period.

The Administrative Period associated with the Initial Measurement Period includes all periods between the start date and the date the employee is first allowed to participate in the employer’s health plan not counting the Initial Measurement Period.  This time frame cannot exceed 90 days.  Additionally, the Initial Measurement Period plus the 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.  If the employee’s start date is the first day of a month, the rule will give an employer 13 months to offer an employee determined to be a full-time employee the opportunity to participate in the employer’s health plan.  If the employee’s start date is any other day of the month besides the first day, the rule will give an employer 13 months plus a partial month to offer an employee determined to be a full-time employee the opportunity to participate in the employer’s health plan. 

Example 3 – ABC has elected to use an 11 month Initial Measurement Period for new variable hour employees.  An employee’s Initial Measurement Period begins on the first day of the month following the employee’s start date.  The corresponding Stability Period lasts 12 months and begins a year after the first day of the Initial Measurement Period (assume these are the plan terms for all new variable hour employees in all of the examples that follow).  Taylor is hired on July 24, 2014 at which time ABC cannot reasonably determine if Taylor will average at least 30 hours of service a week.  Taylor’s Initial Measurement Period will run from August 1, 2014 until June 30, 2015.  Taylor averages 29.6 hours of service during the Initial Measurement Period.  Therefore, ABC will not have to treat Taylor as a full-time employee for §4980H purposes for the subsequent stability period that runs August 1, 2015 until December 31, 2015. 

There are special rules for an employee transitioning from the Initial Measurement Period to the Standard Measurement Period.  There are four scenarios an employer will encounter.  The first situation occurs when the employee is a full-time employee during both the Initial Measurement Period and the overlapping Standard Measurement Period.  In this case the employer must make coverage available to the employee during the Stability Period associated with both the Initial Measurement Period and the Standard Measurement Period so long as the employee remains employed.

Example 4 – Lilly, an hourly employee, is hired by ABC on February 10, 2014 at which time ABC cannot reasonably determine if Lilly will average at least 30 hours of service a week.  During Lilly’s Initial Measurement Period from March 1, 2014 until January 31, 2015 Lilly averages 31.6 hours of service per week.  Additionally, during Lilly’s overlapping Standard Measurement Period from November 10, 2014 until November 9, 2015 Lilly averages 32.3 hours of service per week.  Therefore, Lilly will be considered a full-time employee for the Stability Period associated with Lilly’s Initial Measurement Period from March 1, 2015 until February 28, 2016.  Lilly will also be considered a full-time employee for the Stability Period associated with Lilly’s overlapping Standard Measurement Period from March 1, 2016 until December 31, 2016.

In the second situation the employee is not a full-time employee during both the Initial Measurement Period and the overlapping Standard Measurement Period.  In this case the employer does not have to make coverage available to the employee in the subsequent Stability Period associated with both the Initial Measurement Period and the Standard Measurement Period.

Example 5 – Recall example 3 when Taylor averages 29.6 hours of service during his Initial Measurement Period that ran from August 1, 2014 until June 30, 2015.  During Taylor’s overlapping Standard Measurement Period, from November 10, 2014 until November 9, 2015 Taylor averages 29 hours of service a week.  As a result Taylor will not be considered a full-time employee for the Stability Period associated with Taylor’s Initial Measurement Period from August 1, 2015 until December 31, 2015.  Additionally, Taylor will not be considered a full-time employee for the Stability Period associated with Taylor’s overlapping Standard Measurement Period from January 1, 2016 until December 31, 2016.

In the third combination the employee is a full-time employee during the Initial Measurement Period, but is not a full-time employee during the overlapping Standard Measurement Period.  In this case the employer must make coverage available to the employee for the duration of the Stability Period associated with the Initial Measurement Period.  At the conclusion of the Stability Period associated with the Initial Measurement Period, the employer does not have to offer the employee coverage for the duration of the Stability Period associated with the Standard Measurement Period.

Example 6 – Brody, an hourly employee, is hired by ABC on September 3, 2014 at which time ABC cannot reasonably determine if Brody will average at least 30 hours of service a week.  During Brody’s Initial Measurement Period from October 1, 2014 until August 31, 2015 Brody averages 31.6 hours of service per week.  Additionally, during Brody’s overlapping Standard Measurement Period from November 10, 2014 until November 9, 2015 Brody averages 29.6 hours of service per week.  Therefore, Brody will be considered a full-time employee for the Stability Period associated with Brody’s Initial Measurement Period from October 1, 2015 until September 30, 2016.  However, Brody will not be considered a full-time employee for the Stability Period associated with Brody’s overlapping Standard Measurement Period from October 1, 2016 until December 31, 2016.

In the fourth combination the employee is not a full-time employee during the Initial Measurement Period, but is a full-time employee during the overlapping Standard Measurement Period.  In this case the employer must make coverage available to the employee for the entire Stability Period associated with the Standard Measurement Period.

Example 7 – Same facts as Example 5 except Taylor averages 32 hours of service during his Standard Measurement Period from November 10, 2014 until November 9, 2015.  As a result Taylor will not be considered a full-time employee for the Stability Period associated with Taylor’s Initial Measurement Period from August 1, 2015 until December 31, 2015.  However, Taylor will be considered a full-time employee for the Stability Period associated with Taylor’s overlapping Standard Measurement Period from January 1, 2016 until December 31, 2016.

The safe harbor makes it easier for employers to comply with §4980H.  However, the myriad rules associated with the safe harbor are anything but simple.  Employers must have a system in place that accurately tracks its employees’ hours of service and accurately classify them according to the §4980H rules.  Please contact Health Care Attorneys P.C. if you would like to learn more.


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