IRS Issues Guidance on How to Deal With a Change to an Employee’s Measurement Period Under ACA Employer Mandate
The Internal Revenue Service (IRS) issued Notice 2014-49, which proposes an approach for dealing with changes to an employee’s look-back measurement method in determining the employee’s full-time status under the Affordable Care Act’s (ACA) “employer mandate.” The new guidance would apply to situations where an employee’s measurement period changes due to the employee’s transfer to a different position or due to the employer’s decision to modify the measurement period for that employee’s classification.
As we have written before, employers with 50 or more full-time employees may face penalties under the ACA’s employer mandate if they do not offer affordable, minimum value health coverage to substantially all of their full-time employees. The ACA defines full-time employees as those employees who work on average 30 hours per week or 130 hours per month. The final regulations provide two general methods to determine whether employees are considered full-time: a month-to-month method and a “look-back measurement period” method. Under the month-to-month measurement method, an employee’s hours are counted on a monthly basis to determine whether the employee is considered full-time (i.e., works an average of 30 hours per week or 130 hours per month). Under the look-back measurement period method, the employee’s average hours are determined over a measurement period (the duration of the measurement period is set by the employer, within certain parameters). The employee’s hours during the measurement period determine the employee’s full-time status for a subsequent stability period (with an optional administrative period between the measurement period and the stability period). Employers may choose to apply different measurement methods for different classifications of employees (e.g., collectively and non-collectively bargained employees, employees covered by different collective bargaining agreements, salaried and hourly employees, and employees who work in different states) as long as the measurement method is applied consistently within employee classifications.
Applying the look-back measurement period method can be a challenge when an employee transfers to a position where a different measurement method applies or when the employer wishes to modify the measurement method that applies to a classification of employees. In Notice 2014-49, the IRS proposed the following approaches in these situations:
Transferred Employees Who Are In an Administrative or Stability Period
When an employee transfers to a position where a different measurement method applies, if the employee is already in an administrative period or stability period applicable to the previous position, the employee’s full-time status determination for the previous position remains in effect until the end of that stability period. After the end of that stability period, the employee’s full-time status is determined based on the measurement method that applies under the new position. If the employee’s full-time status cannot be determined after the end of the stability period (for example, because the employee has not been employed over the full initial measurement period for the new position), then the rule described below for transferred employees who are not in an administrative or stability period applies.
Transferred Employees Who Are Not In an Administrative or Stability Period
If the transferred employee is not in an administrative period or stability period at the time of the transfer, the employee’s full-time status is determined solely under the measurement method that applies to the second position, and includes all service performed in the first position during that measurement period.
Employer Changes Applicable Measurement Method
The IRS pointed out that changes to the measurement method (including changes from the look-back measurement period method to the month-to-month method, or vice versa) have already been addressed in the final regulations at 26 C.F.R. § 54.4980H-3(f). But if the employer changes the duration of the look-back measurement period for an employee, the employee’s full-time status is determined under the rules described above for transferred employees, as if the employee had transferred from a position to which the original measurement method applies to a position to which the revised measurement method applies as of the effective date of the change.
The employer mandate will take effect as of January 1, 2015 for employers with 100 or more full-time employees. Employers with between 50 and 99 full-time employees will not be subject to the mandate until January 1, 2016, provided they meet certain requirements.