IRS Defines Tracking Rules for Variable Hour Employees
On January 2, 2013, the IRS issued proposed regulations related to defining what variable hour employees are, an optional method for identifying full-time employees for purposes of determining and calculating an employer’s potential liability for a shared responsibility payment, what hours or work periods can be used for tracking, and transition of periods between current and newly hired employees.
Additionally, other guidance related to eligibility periods and dependents was provided. This guidance from the IRS was added to Shared Responsibility Rules under IRS Notice 2012-58. Although the proposed regulations are not final, employers may rely on them until further guidance is issued.
The proposed regulations also include important transition relief. Employers that intend to utilize the look-back measurement method for determining full-time status for 2014 will need to begin their measurement periods in 2013 to have corresponding stability periods in 2014. The IRS recognizes that employers that intend to adopt a 12-month measurement period and a 12- month stability period will face time constraints.
Under the proposed regulations’ transition relief, solely for purposes of stability periods beginning in 2014, employers may adopt a transition measurement period that:
- Is shorter than 12 months, but not less than 6 months long; and
- Begins no later than July 1, 2013, and ends no earlier than 90 days before the first day of the first plan year beginning on or after Jan. 1, 2014.
For example, an employer with a calendar year plan could use a measurement period from April 15, 2013, through Oct. 14, 2013 (six months), followed by an administrative period ending on Dec. 31, 2013. An employer with a fiscal year plan beginning April 1 that also elected to implement a 90-day administrative period could use a measurement period from July 1, 2013 through Dec. 31, 2013 (six months), followed by an administrative period ending on March 31, 2014.
ACA’s employer penalty is referred to as the “employer shared responsibility payment.” It requires large employers to either “play” by offering health coverage to their full-time employees and dependents that is affordable and provides minimum value or “pay” a substantial excise tax. The amount of the excise tax generally depends on whether or not an employer offers coverage to substantially all of its full-time employees and dependents.
Definitions and Guidance Highlights
- Defining an “applicable large employer” penalties:<
- 4980H(a) liability, or the Pay-Or-Play penalty, occurs when the employer fails to offer its full-time employees (and their dependents) the opportunity to enroll in a “Minimum Essential Coverage” (MEC) health plan and any full-time employee receives a subsidy (i.e.; a premium tax credit or cost sharing reduction) when purchasing coverage through a public “Exchange”. In this case the employer may be liable for a $2,000 per employee per year non-deductible penalty for every fulltime equivalent employee, not counting the first 30;
- 4980H(b) liability applies if the employer does offer a health plan, but it either is not MEC qualified or is deemed unaffordable under the 9.5% of W-2 wage safe harbor for single only coverage. If any full-time employee receives a subsidy when purchasing coverage through a public “Exchange”, the employer may be liable for a $3,000 per subsidized employee per year non-deductible penalty.
- An applicable large employer is defined as having employed an average of 50 or more full-time employees (30 hours average or more per week worked) during the preceding calendar year.
- The IRS guidance provides transition relief in that non-calendar year plans will not be required, or be liable for penalties above, until the first plan year date after January 1, 2014.
Note that any changes to plan year periods to avoid ACA implementation or requirements are no longer permitted to be made.
- An additional safe-harbor to penalties under 4980H(a) was established for employers who provide coverage to “substantially all”, defined as 95% or more, of its full-time employees. This standard allows it to offer coverage to all but 5% (or 5 in total if greater) of its full-time employees. This is to minimize the potential risks due to small administrative mistakes that could otherwise trigger penalties.
- Affordable coverage safe harbors include:
- W-2 safe harbor: the employer provides MEC coverage not costing the employee more than 9.5% of their W-2 wages for single coverage;
- Rate of Pay safe harbor: An employer can take the hourly rate, multiplied by 130 hours per month, to determine a monthly “rate of pay” for testing the 9.5% contribution for single coverage.
- Federal Poverty Limit Safe Harbor. Coverage is deemed affordable if the employee’s cost for single coverage does not exceed 9.5% of the FPL.
- Defining the variable hour employee
- If an employee in a 12-month variable hour tracking method works more than 1560 hours in any measurement period, they become a full time eligible who must be enrolled for benefits;
- If it is a current employee, the measurement period can track the current open enrollment period for eligibility. For Example:
- If it is a new hire, the initial measurement period must follow the initial payroll period in which the employee is hired, and be tracked for 12 months thereafter. Once that initial measurement period has been completed, the employee would revert to the same measurement period being applied to all current employees, even where the two overlap over some months. For example:
- If an employer uses a look-back measurement period for its ongoing employees, the employer may also use a similar method for new variable hour or seasonal employees.
- Definitions of Variable Hour and Seasonal Employees: An 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.
- For 2014, a new employee who is expected to be employed initially at least 30 hours per week may be a variable hour employee if the employee’s period of employment at 30 or more hours per week is reasonably expected to be of limited duration and it cannot be determined whether it will last for the initial measurement period. Effective as of Jan. 1, 2015, employers must assume that employees will be employed for the entire initial measurement period.
- Through at least 2014, employers are permitted to use a reasonable, good faith interpretation of the term “seasonal employee.” Absent of any definition above, if the employee is working 30 or more hours per week, they must be defined as a full-time equivalent and provided eligibility for health benefits no later than the 90th day of employment.
- Short-term Employees and High Turnover Positions: The proposed regulations do not contain special rules for new short-term employees or employees hired into high-turnover positions. Although the IRS is still accepting comments on these types of employment, rules were not provided in the proposed regulations due to the potential for abuse.
- Defining what is counted as hours toward meeting qualification during a measurement period
- A full-time employee is an employee who was employed on average at least 30 hours of service per week. The proposed regulations treat 130 hours of service in a calendar month as the monthly equivalent of 30 hours per service per week
- All hours of service performed for entities treated as a single employer under the Code’s controlled group and affiliated service group rules must be taken into account.
- Hourly Employees: For employees paid on an hourly basis, an employer must calculate hours of service from records of hours worked and hours for which payment is made or due for vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence.
- Non-hourly Employees: For employees not paid on an hourly basis, employers are permitted to calculate hours of service by:
- Counting actual hours of service from records of hours worked and hours for which payment is made or due;
- Using a days-worked equivalency method under which an employee is credited with eight hours of service for each day with an hour of service; or
- Using a weeks-worked equivalency method under which an employee is credit with 40 hours of service per week for each week with an hour of service.
- Employers may use different methods for non-hourly employees based on different classifications of employees if the classifications are reasonable and consistently applied. Employers may change methods each calendar year. However, employers may not use the days-worked or weeks-worked equivalency methods if those methods would substantially understate employees’ hours of service. Certain classes of employees may be treated differently for establishing measurement periods:
- Collectively bargained employees (Union);
- Salary versus hourly employees;
- By state of residence of the employee.
- Types of Paid Hours of Service that qualify for tracking:
- Physical clocked work hours;
- Holiday hours;
- Paid leave of absence such as;
- Sick Time;
- Employer Paid Disability Time;
- Vacation days;
- On-Call time, such as someone awaiting being brought to a job site;
- Jury duty;
- Funeral paid time off;
- Paid FMLA leave;
- Military duty time paid by the employer.
- For seasonal employees, there is a 501 hour rule that can be applied for a break in service. For example, if a school hires aides that work nine months a year at 30 hours or more per week, the summer break would provide a credit of 501 hours to be applied to the tracking period hours for the purpose of full time eligibility qualification. In this example, an educational variable hour employee that works 1059 or more hours would qualify as a full-time equivalent eligible for benefits.
- It is recommended that the definition for variable hour employees not exclude otherwise eligible employees in any manner that cannot be defended by practical example, and where inconclusive the employer is directed to define a standard providing the employee the “advantage” for eligibility.
- Short-term Employees and High Turnover Positions: The proposed regulations do not contain special rules for new short-term employees or employees hired into high-turnover positions. Although the IRS is still accepting comments on these types of employment, rules were not provided in the proposed regulations due to the potential for abuse. As noted however—solely for 2014—an employer may take into account an employee’s likely short-term employment. Also, as a general rule, ACA’s pay or play penalty does not apply to full-time employees who have been employed for three months or less.
- Rehired Employees and Employees Returning from Leave: The proposed regulations include guidance for employers on how to classify an employee who earns an hour or more of service after the employee terminates employment (or has a period of absence). If an employee goes at least 26 consecutive weeks without an hour of service and then earns an hour of service, he or she may be treated as a new employee for purposes of determining the employee’s full-time status. The employer may apply a rule of parity for periods of less than 26 weeks. Under the rule of parity, an employee is treated as a new employee if the period with no credited hours of service is at least four weeks long and is longer than the employee’s period of employment immediately before the period with no credited hours of service.
- For an employee who is treated as a continuing employee, the measurement and stability periods that would have applied to the employee had he or she not experienced the break in service would continue to apply upon the employee’s resumption of service. While measurement periods can be defined as from three to twelve months in length, no benefit stability period can be less than six months.
- In reviewing the establishment of reasonable measurement periods, it would appear the twelve month period is most advantageous and the least administratively burdensome for employers.
- The DOL and IRS have demonstrated there will not be patience shown to any employer who claims they cannot track these periods based on shortcomings in procedures or systems.
- Defining employee classes and eligibility waiting periods applied
- For full time employees, benefit eligibility waiting periods can be no longer than the 90th day of employment
- For variable hour employees, benefit eligibility can be no longer than the 13th month after the start of the qualifying measurement period, and any additional partial month until the first of the following month. For example, if someone is hired on 2/6/13, and qualifies as an FTE the following year on 2/6/14, they must be eligible for coverage no later than 4/1/14.
- Eligibility versus coverage
- Employers must make coverage eligibility available, depending upon the status of the employee, but nothing compels the employer to cover an employee outside of the required contribution being made:
- If a variable hour employee qualifies for coverage, but then drops hours and cannot make full contribution payments to their plan, they can be dropped from coverage for non-payment;
- If a covered variable hour employee terminates employment, their coverage is terminated and treated the same as any other COBRA qualifying event.
- Spousal and Dependent eligibility further defined:
- Spouses do not have to be made eligible for coverage, nor are they required to have employer contributions paid toward their coverage;
- Children up to their 26th birthday do have to be eligible for coverage, but no employer contributions are required to be paid toward their coverage;
- If an employer provides the employee with credible minimum essential benefits (Bronze plan) and the cost to the employee is affordable (less than 9.5% of W-2 income), both the employee and any dependents are then ineligible for receiving Federal subsidy for waiving employer coverage and purchasing insurance on their state provided exchange.
- Note – this position in blocking dependent subsidy is receiving significant negative press and public reaction, and may be addressed or changed in the future.
- Plan summaries and SPD’s must define benefit eligibility periods under the new regulations as providing coverage no later than the 90th day of employment. Many fully insured plans do not have this language in their plan summaries as they are mass produced. Where this is the case, an ERISA wrapper must be provided to every employee that discloses the employer eligibility period.
IRS Defines Tracking Rules for Variable Hour Employees is provided to The Horton Group clients for informational purposes only and should not be construed as legal advice. Readers should contact legal counsel for legal advice.
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