Trouble On the Horizon for Employers Who Do Not Document Eligibility Conditions

The beginning of 2016 has found many employers rushing to gather the necessary data to complete the Form 1094-C and the Form 1095-C. While assisting clients through the difficult areas of these forms, we encountered something troubling. Employers are failing to memorialize the eligibility conditions for their health plans. This will not only create a problem with the 4980H penalties, but also, and perhaps more importantly, it clearly violates the Summary Plan Description (SPD) regulations.

The Affordable Care Act (ACA) requires all Applicable Large Employers to offer coverage to their full-time employees or risk paying a penalty. The regulations provide an employer with two options for determining who should count as a full-time employee. The first, default method, known as the monthly measurement method treats an employee as full-time if the employee accumulates 130 or more hours of service per month. Alternatively, the regulations allow an employer to adopt a look back measurement method. The look back measurement method allows an employer to measure certain employees’ hours of service over a period of up to 12 months before the employee is classified as full-time or not as full-time. However, to utilize the look back measurement method an employer must adopt a policy explaining the length of the periods and the specific dates selected. A document explaining the look back measurement method is critical in case of an audit. Shockingly, only a few employers who are on top of the ACA have taken such action. This could create several issues.

First, a Federal Law known as ERISA (Employee Retirement Income Security Act of 1974) requires a plan participant to receive a SPD within 90 days of becoming covered by the plan. The SPD serves as the primary vehicle for informing participants about the plan and how it operates. There are regulations that set out the contents that must be in the SPD. The requirement most pertinent to this article is the SPD must “include a statement of the conditions pertaining to eligibility to receive benefits…” (see 29 CFR 2520.102-3(j)(2)). Before the ACA was in place this requirement was often easy to satisfy as an employer’s eligibility conditions could often be linked to a job title or other simple variable. This may continue to be the case for employers, particularly those who operate in a white collar industry. However, an employer who elects to use the look back measurement method will have to include the details of the initial measurement period and standard measurement period, including dates, in order to satisfy the SPD requirements if the health plan’s eligibility conditions are properly synchronized.

The other pertinent record to this discussion is the document the health plan uses to determine eligibility. An insurance company needs to be able to know who is eligible for the plan so it knows who to cover with the plan’s benefits. However, an insurance company has no skin in the game as it relates to the 4980H penalties. This is perhaps creating part of the problem as the insurance company does not care if the look back measurement method is accurately (or even correctly) explained and incorporated into the eligibility conditions. Consequently, there is frequently one set of eligibility standards that apply for the purposes of the look back measurement method and a separate set of standards applied to the actual health plan.  Furthermore, sometimes the health plan’s SPD is not providing any eligibility conditions. This lack of synchronization is a problem.

For an employer who does not synchronize its look back measurement method with its health plan eligibility, it is easy to for see a situation where an employee accumulates hundreds of thousands of dollars of medical expenses and then there is a dispute involving the employee, the employer, and the insurer on who is liable for the medical expenses. These types of claims are common place when eligibility conditions are not clear. This is an additional reason the SPD must contain a clear statement explaining the plan’s eligibility conditions which is consistent with the employer’s look back measurement method.

An employer operating in a white collar industry may not encounter any problems without synchronizing its look back measurement method with its health plan’s eligibility conditions. The white collar employer may have eligibility conditions based on something simple like an employee’s job title. However, to be safe, we view it as a best practice to have the look back measurement method synchronized with an employer’s eligibility conditions for the plan. This is particularly true when an employer operates in a field with variable hour employees. For example, it is essential that a staffing company utilize eligibility conditions that synchronize the look back measurement method and the plan’s eligibility conditions. First, staffing companies typically have employees who have hours that are difficult to ascertain at the employee’s start date. For this reason almost all staffing companies have adopted (or should have adopted) a look back measurement method to track who is and who is not a full-time employee. If a staffing company (or any employer with variable hours employees) does not incorporate the look back measurement method into its eligibility conditions, the staffing company may fail the 95 percent rule in 2016. As discussed in previous publications the 95 percent rule requires an employer to offer coverage to all but five percent of its full-time employees or risk paying a section 4980H(a) penalty. Paying a 4980H(a) penalty is never a good option but some employers, particularly employers operating in industries with a lot of variable hour employees like staffing companies, may end up inadvertently violating the 95 percent rule if their look back measurement method and plan eligibility conditions are not synchronized.

Let’s take a quick oversimplified look at how this may cause additional problems. Suppose there is a staffing company who has almost entirely variable hour employees. The staffing company (perhaps unwisely) elected to use a six month initial measurement period and standard measurement period and even adopted a policy setting out the specific dates used by the company. The staffing company’s standard measurement periods run from November 1 through April 30 and May 1 through October 31 with corresponding stability periods of January 1 through June 30 and July 1 through December 31. The company’s initial measurement period will begin on the first day of the calendar month following the employee’s start date (or on the employee’s start date if the employee’s start date is on the first day of a calendar month) and continue six consecutive months. The administrative period will last one month plus any time before the employee’s start date and the beginning of the initial measurement period. The corresponding initial stability period will last six consecutive calendar months. This setup is very typical although arguably the best setup for all employers is a 12 month initial measurement period and standard measurement period.

Here is how the staffing company could get into trouble. Suppose it has 100 employees who are ongoing employees and 50 employees who are in an initial measurement period. First, the 100 ongoing employees who are likely to have hours that fluctuate greatly (because that is the nature of staffing industry) could cause a problem if the staffing company is not able to onboard employees into the health plan as set out by the staffing company’s look back measurement method. It is easy to see a scenario where an employee is a full-time employee during the first standard measurement period (November 1 through April 30) and not a full-time employee during the second standard measurement period (May 1 through October 31). If this is the case, the staffing company may want to only offer the employee coverage for the first stability period (January 1 through June 30) and not for the second stability period (July 1 through December 31). This is certainly a viable strategy to avoid any section 4980H penalties. However, if the look back measurement method is not incorporated into the eligibility conditions of the plan the staffing firm is sponsoring, the staffing company may not be able to take this employee off coverage midyear. The extra cost to the staffing company in this situation would be covering an employee and paying a portion of the employee’s premium for an employee who does not need to be offered coverage by the staffing company for half the year. The cost of this error could add up quickly as a negative for the employer and a positive for the insurer.

Alternatively, it is just as easy to imagine a scenario where an employee is not a full-time employee during the first standard measurement period (November 1 through April 30) but is a full-time employee during the second standard measurement period (May 1 through October 31). In this scenario the staffing company would only have to offer the employee coverage for the second stability period (July 1 through December 31) and not for the first stability period (January 1 through June 30). Again, this would be a viable strategy to avoid any section 4980H penalties. However, if the look back measurement method is not incorporated into the eligibility conditions of the plan the staffing company is sponsoring, the staffing company may not be able to onboard the employee to the plan. In the worst case scenario, enough employees gain eligibility for the second stability period and are not given an opportunity to enroll in the plan causing the staffing company to fail the 95 percent rule and potentially be liable for a section 4980H(a) penalty. Regardless, if the employee is considered a full-time employee for the final six months of the year, the employee could trigger a 4980H(b) penalty if a proper offer of coverage is not made on a timely basis.

Similarly, if an employee of the staffing firm comes out of an initial measurement period with the requisite number of hours to be considered full-time, that employee will need to be given the opportunity to enroll in the health plan. If the employee is not given the opportunity to enroll, the staffing firm could fail the 95 percent rule as discussed above. Again, if the employee is considered a full-time employee for the final six months of the year, the employee could trigger a 4980H(b) penalty if a proper offer of coverage is not made on a timely basis.

Regardless of the eligibility conditions an employer’s plan uses, the employer must have the specific eligibility conditions in its SPD. If an employer is using the look back measurement method to determine eligibility, the employer must explain the look back measurement method it is adopting with specific dates and times frames. There are countless SPDs being provided to employers from “reputable” cookie cutting SPD providers that are falling short of this standard. While this may have been an accepted practice prior to the ACA, the regulations associated with the SPD clearly require an employer to include “a statement of the conditions pertaining to eligibility to receive benefit…” within the SPD.

Past practices implemented by the health care industry have fallen short of properly explaining a plan’s eligibility conditions in the SPD. The law is clear. A proper SPD must include a statement explaining the eligibility conditions of the plan. The ACA has only complicated the eligibility conditions an employer has to include in its SPD. All employers should review their SPD to make sure the plan’s eligibility conditions are discussed in detail and are synchronized with any look back measurement method policy the employer has in place. Failing to do so could be costly.


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