March 23rd marked five-years since the Patient Protection and Affordable Care Act (ACA) became law and it has already had a significant impact on how employers offer health insurance coverage to employees. Employers with 50 or more full-time and full-time equivalent (FTE) employees are known as Applicable Large Employers (ALE) and are subject to the controversial Employer Shared Responsibility provision (Employer Mandate). This mandate took effect for employers with 100 or more full-time and FTE employees on January 1, 2015. Employers with 50 to 99 full-time and FTE employees are exempt from compliance until 2016 if they meet certain requirements.
Determining who a full-time employee is for purposes of the Employer Mandate continues to be one of the more challenging aspects of the law, particularly for employers like Dunkin’ Donuts franchise owners who can have high turnover and employees with hours that vary. Employers must correctly identify their full-time employees and offer health insurance coverage to 70 percent of them (in 2015; 95 percent in 2016) and their dependents by no later than the first day of the fourth month of their employment to avoid potential tax penalties ($2,000 times the number of full-time employees, less 80 if one receives a Health Insurance Exchange subsidy).
ALEs will also be penalized if their coverage does not meet the affordability and minimum value standards of the ACA, which is $3,000 times the number of full-time employees receiving an Exchange subsidy, but no more than the potential tax penalties discussed above. Beginning in 2016, employers must also report information about their employees and coverage to the IRS. Employers should prepare now for these reporting requirements as the IRS will use the information provided to enforce the Employer Mandate.
The Employer Mandate defines a full-time employee as one who works 30 hours or more per week, calculated on a monthly basis. In general, an employer must use the same tracking method for all employees. Acceptable methods for tracking include counting employees’ hours of service for each month. Alternately, an employer may use the look-back measurement method, which permits employers to select a measurement period of 3-12 months during which the employer tracks employees’ hours. If during the selected measurement period, an employee works 30 hours or more per week, the employer must offer that employee health insurance coverage during a subsequent stability period no shorter than 6 months and at least as long as the initial measurement period. What’s more, the employer must offer coverage to this employee during the stability period regardless of the number of hours the employee works throughout that period.
Employers with high staff turnover should be aware that selecting a longer measurement period will not necessarily exclude from coverage a short-term employee who works 30 hours or more. The Employer Mandate requires employers to treat a new employee as a full-time employee if the employer reasonably expects at the time of hire that the employee will work 30 or more hours per week. The employer may not take into account the possibility that the employee may not work for the employer for the entire, initial measurement period. For example, if an employer reasonably expects that a new employee will work 30 hours per week for only four months, the employer must still offer coverage on the first day of the fourth month of employment, even if the employer’s measurement period is 12 months.
However, if an employer cannot determine whether a new employee is reasonably expected to work 30 hours or more per week as of his/her start date, this employee is a variable hour employee. In this case, the employer is not required to offer coverage until the employer’s stability period. For example, if an employer’s initial measurement period is 12 months, the employer does not have to offer health insurance until 13-14 months after the employee’s date of hire. Employers with a large number of short-term, variable hour employees may want to consider a 12-month measurement period. The longer measurement period for these employees would likely permit employers to save the associated time and expense of covering them on their plans.
In addition to informing coverage decisions, tracking employees’ hours will help employers meet the ACA’s reporting obligations. In early 2016, employers must report information about their employees and coverage to their employees and the IRS. There are two types of reporting, one of which helps the government enforce the individual mandate and administer premium credits and subsidies to individuals. The second applies to ALEs subject to the Employer Mandate. ALEs are required to report information about their offer of coverage, insurance plan, the lowest monthly premium cost, and their full-time employees. The IRS will use this information to assess penalties under the Employer Mandate and determine employees’ eligibility for premium subsidies on the Health Insurance Exchanges.
Despite recent legal challenges, the ACA is expected to remain the law of the land. The more employers know now, the greater their likelihood of success in navigating its many minefields. All employers offering health insurance should select or update any existing record-keeping systems to track employees’ hours and collect information about their health insurance plans in order to meet the ACA’s reporting requirements. Finally, it is recommended that employers consult with trusted advisors, including their benefits brokers, legal counsel, and accountants to review questions and additional requirements of the law. •
Rachel E. Muñoz is a partner at Morgan, Brown & Joy, LLP. She represents employers in the full range of labor and employment legal services.