HEALTH CARE REFORM IMPLEMENTATION HOURLY EMPLOYEE MEASUREMENT PERIODS FULL-TIME EQUIVALENT EMPLOYEE CALCULATION

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1 2014 HEALTH CARE REFORM IMPLEMENTATION HOURLY EMPLOYEE MEASUREMENT PERIODS FULL-TIME EQUIVALENT EMPLOYEE CALCULATION The Affordable Care Act ( ACA ) requires employers with 100 or more full-time employees to offer qualified health insurance coverage to substantially all full-time employees, as of plan years on or after January 1, Full-time is defined as working, on average, 30 hours/week or 130 hours/month. Full-time employment status is measured through a look back measurement period. The following timeline illustrates a look back calendar to assist employers in structuring hourly workforces in advance of the 2015 ACA employer coverage mandate. If the employer sets a measurement period that is shorter than 12 months in 2014 (in advance of 2015 requirements), special transition rules apply. See pages 2-3 for details addressing the transitional rules PLAN YEAR Measurement Period BEGIN DATE (1 year look back ) Measurement Period BEGIN DATE (Shortest look back ) Measurement Period END DATE (Prior to Admin Period) Administrative Period END DATE (Allocation for Enrollment) January October 15, 2013 April 14, 2014 October 14, 2014 December 31, 2014 February November 15, 2013 May 14, 2014 November 14, 2014 January 31, 2015 March December 15, 2013 June 14, 2014 December 14, 2014 February 28, 2015 April January 15, 2014 June 14, 2014 January 14, 2015 March 31, 2015 May February 15, 2014 June 14, 2014 February 14, 2015 April 30, 2015 June March 15, 2014 June 14, 2014 March 14, 2015 May 31, 2015 Transition Rule: Must Set a 6 Month Look Back by July 1, 2014 to have a 12 Month Stability Period in 2015 General Rule: 6 Month Look Back Period = 6 Month Stability Period July April 15, 2014 June 14, 2014 April 14, 2015 June 30, 2015 August May 15, 2014 N/A May 14, 2015 July 31, 2015 September June 15, 2014 N/A October July 15, 2014 N/A November August 15, 2014 N/A December September 15, 2014 N/A June 14, 2015 August 31, 2015 July 14, 2015 September 30, 2015 August 14, 2015 October 31, 2015 September 14, 2015 November 30, 2015

2 HOURLY EMPLOYEE MEASUREMENT PERIODS Calendar and Non-Calendar Year Plans for 2015 The shared responsibility requirements of the ACA are effective for employers with 100 or more full-time employees, as of plan years on or after January 1, 2015 (accounting for full-time equivalent employees) ; and effective for employers with 50 or more full-time employees, as of plan years on or after January 1, 2016 (accounting for full-time equivalent employees). Shared Responsibility rules apply only to large employers. As an initial threshold question, employers must determine large employer status under the ACA. Employer coverage mandate, penalty and reporting requirements, collectively, shared responsibility requirements of the ACA are delayed until plan years on or after January 1, 2016, for employers with fulltime employees (accounting for fulltime equivalent employees). Large employers are required to offer qualified, affordable coverage to full-time employees, but not required to offer this coverage to full-time equivalent employees, i.e., part-time employees. Full-time equivalent employees are counted ONLY to determine if above the threshold to qualify as a large employer. Large employers must accurately determine which employees must be considered full-time employees, to minimize penalty exposure. SPECIAL TRANSITION RULES FOR 2015 PLAN YEARS Shared Responsibility requirements and resulting employer strategies include defining full-time employees and use of the optional look back measurement period approach. During the first year of implementation of the shared responsibility requirements, an employer may have a shorter look back period and still have a 12 month stability period, IF established by July 1, Following the look back measurement period for hourly employees, large employers will determine which hourly employees must be offered coverage, as of plan years on or after January 1, 2015 (if employing 100 or more full-time employees); or as of plan years on or after January 1, 2016 (if employing 50 or more fulltime employees). When determining full-time status, all hours of service (any time an employee is paid or entitled to payment) must be considered. Hours of service can be calculated on a monthly basis or by using the optional look back measurement method. Regularly scheduled hours may no longer be used in employee job descriptions in employment manuals. Calculating hours of service may require action steps by employers to structure hourly workforces in advance of the employer shared responsibility requirements. Employers with variable hour employees may continue to use a three to six month look back period to assess full-time employment (130 hours per month;1,560 hours per year); however, the resulting coverage period will be the same length as this period (no less than 6 months of coverage). NOTE: The transition rule allows for a shorter look back period while maintaining a 12 month coverage period (stability period) and must be established by July 1, 2014.

3 The shorter/shortest look back period options result from transition rules, intended to provide additional time for implementation. The initial one year delay of the shared responsibility requirements, as of July 2014, and the subsequent two year delay for employers with employees, provides time for employers to implement a 12 month look back period. REMINDER: Most employers are choosing to use a 12 month measurement period because it requires the measurement to occur only once a year and allows health coverage to be offered in alignment with an annual group health plan year. KEY DEFINITIONS o Full-time Employee (FTEs) Working an average of 30 hours/week or 130 hours/month. Coverage must be offered by the first day of the fourth month following hire. o Variable Hour Employee Uncertainty at date of hire as to number of hours to be worked in a year. Variable hour includes seasonal and temporary employees, IF hours worked are uncertain at the beginning of the measurement period. o A variable hour employee is one who when based on the facts and circumstances at the start date, it cannot be determined that the employee is reasonably expected to work at least 30 hours per week for entire measurement period. o Examples for an employer to consider when making the determination between variable hour and full-time (not intended as all inclusive, but general guidance): Whether the employee is replacing an employee who was/was not full-time Extent to which employees in comparable positions are/are not full-time Whether the job was advertised, communicated or otherwise documented (for example, through a contract or job description), as requiring hours of service that would average 30 hours of service per week o Seasonal Employee An employee in a position for which the customary annual employment is six months or less, and that period of employment begins each calendar year in approximately the same part of the year, such as summer or winter. o Ongoing Employee Employed for at least one complete standard measurement period o Initial Measurement Period Only applies to newly hired variable hour employees; same rules apply in defining the resulting stability period o Standard Measurement Period Applicable to all employees to determine each employee s full -time status o Stability Period Length of time an employee is eligible for health plan coverage once deemed full-time. Must be equal in length to the Standard Measurement period; however, transition rules are applicable for plan years on or after January 1, 2015 (to allocate for time to transition workforces to new requirements).

4 o Administrative Period Processing window after the end of the measurement period to notify and enroll eligible full-time employees. The 90-day waiting period limitation is incorporated within the administration period. o 90-Day Waiting Period Effective January 1, 2014, the waiting period for full-time employees cannot exceed 90 days. o The 90 day waiting period is effectively eliminated for those newly hired employees subject to hourly tracking, IF deemed to be full-time employee following the hourly measurement and look back measurement period. o Qualified coverage must be available following a brief administrative period. Administrative periods must be shorter than the last day of the month following the one-year anniversary of the employee s hire date (13 months plus a partial month). FULL-TIME EMPLOYMENT STATUS DETERMINATIONS: SPECIFIC SITUATIONS Teachers and other education employees may be considered full-time employees based on a school year, rather than a calendar year schedule. Adjunct faculty may be credited with 2¼ hours of service per week for each hour of classroom teaching. Volunteer workers for tax-exempt entities are not considered fulltime employees, e.g., volunteer firefighters. Seasonal employees working six months or less are not considered full-time employees; this includes employment during holiday seasons No special provisions or exceptions for certain types of employees including: o Short-term employees hired directly by the employer (separate special rules apply for employees hired thought a staffing firm) o High-turnover positions o Paid interns Consequently, employers must consider hours of service in the same manner as any other employee, and some may earn full-time status while others may remain variable hour employees indefinitely. LOOK-BACK MEASUREMENT PERIODS: DETAILS Regulatory clarifications provide two different types of measurement periods: 1) a standard measurement period that applies to ongoing employees 2) and an initial measurement period that applies to new hire variable hour and seasonal employees. Employers must apply a measurement period uniformly for all employees within a certain categories of employees defined in the rules. An employer may differentiate (1) between using the monthly method versus the look back measurement method, or (2) length or dates for the measurement period for the following categories of employees: Hourly vs. salaried employees Union vs. non-union employees (or employee under separate collectively bargained agreements) Employees in different states Different entities within a controlled group or affiliated service group

5 However, in most cases this rule will have relatively little impact on most employees. As an example, employees working, on average > 30 hours per week, are considered full-time regardless of whether the employer uses a monthly OR measurement period approach. APPLYING THE STANDARD MEASUREMENT PERIOD TO ONGOING EMPLOYEES When determining full-time status using a measurement period, any employee who has been employed for one full standard measurement period is considered an ongoing employee. Employers may use a 3-12 month measurement period to measure hours of service to determine full-time status. The measurement period need not be based on calendar months, but instead may be based on the period that begins on any date of the calendar month and ends on the immediately preceding date in the following calendar month (i.e. March 15 to April 14). This allows employers to design measurement periods that align more closely with non-calendar month payroll periods. STANDARD STABILITY PERIOD & STANDARD ADMINISTRATIVE PERIOD Employee full-time determinations made during the measurement period applies for a corresponding stability period, which must be as long as the measurement period, but no less than 6 months. A stability period must be based on calendar months. Most employers will choose to align the stability period with the group health plan year. For an employer using a 12 month measurement period, any employee with 1,560 hours of service (30 hrs. x 52 weeks) during the measurement period must be considered full-time as long as remaining employed during the corresponding stability period regardless of the employee hours of service during the stability period. An employer is allowed to implement an administrative period between the end of the measurement period and the beginning of the stability period. The standard administrative period cannot exceed 90 calendar days (NOT three months). TAKEAWAYS STEP ONE: Determine large employer status under the ACA. Part-time employees are counted solely to determine the total number of full-time equivalent employees based on the full-time equivalency calculation. If above the threshold count to be a large employer, coverage must be offered to full-time employees only. STEP TWO: To minimize penalty exposure, large employers must accurately determine which employees are considered full-time employees, in advance of the employer shared responsibility requirements (mandate, penalty and reporting requirements) of the ACA.

6 FULL-TIME EQUIVALENCY EMPLOYERS ARE REQUIRED TO OFFER QUALIFIED, AFFORDABLE COVERAGE TO FULL-TIME EMPLOYEES, BUT NOT REQUIRED TO OFFER COVERAGE TO PART-TIME EMPLOYEES UNDER THE AFFORDABLE CARE ACT (ACA) FULL-TIME EQUIVALENCY : STEP BY STEP IS THE EMPLOYER A LARGE EMPLOYER UNDER THE ACA? Full-time is defined as working, 30 hours/week or 130 hours/month, on average, under the ACA. Employers with fewer than 50 full-time employees remain exempt from the ACA requirements to offer qualified, affordable coverage to full-time employees or pay penalties. Part-time employees are counted solely to determine the total number of full-time equivalent employees through a specific full-time equivalency calculation.

7 If full-time employees PLUS full-time equivalent employees is > 100 (for plan years on or after January 1, 2015), the employer is considered a large employer and therefore, subject to the shared responsibility

8 requirements.

9 To determine whether an employer will be considered a large employer, as of January 1, 2015; and therefore, subject to the mandate as of the plan year on or after January 1, 2015: Consider the following calendar year plan steps based on records of actual hours of service for the preceding year: 1. Determine the number of full-time employees for each month in the calendar year This includes seasonal employees. To calcuate the hours for seasonal employees under full-time equivalency an employee is considered full-time if at least 120 hours of service were worked for that month (monthly equivalent of 30 hours per week); solely to determine IF an employer is considered a large employer under the ACA. 2. Determine number of full-time equivalents for each calendar month Calculate the aggregate number of hours of service of part-time employees (maximum 120 hours for any one employee) Divide total number of part-time employees by 120 The result (including any fraction) is the full-time equivalents for that month 3. Determine full-time equivalents for the year Add total monthly full-time equivalents to the total of full-time employees for each month Add totals for all 12 months in the year and divide by 12 to determine average number of full-time equivalents and full-employees/month IF the total is not a whole number, round down to the next lowest whole number 4. Determine if a Large Employer: Subject to ACA Shared Responsibility IF the total is 100 or greater, the group is an applicable large employer for the 2015 plan year (if a single employer not in a controlled group) As of plan years on or after January 1, 2016: IF the total is 50 or greater, the group is an applicable large employer (if a single employer not in a controlled group or affiliated service group) IF the total is less than 100, the group will not be an applicable large employer for the 2015 plan year

10 Note: If a controlled group is a large employer for a calendar year, every member of the group is a large

11 employer separately subject to the employer shared responsibility requirements of the ACA FULL-TIME EQUIVALENCY ILLUSTRATION EXAMPLE: COMPANY EMPLOYS 45 FULL-TIME EMPLOYEES & 120 PART-TIME EMPLOYEES (PART-TIME WORKING 20 HOURS PER WEEK) = 80 HOURS /MONTH 1) DIVIDE AGGREGATE HOURS OF ANNUAL PART-TIME EMPLOYEE SERVICE BY 1,560 (30 hrs X 52 weeks = 1,560) 2) ADD THIS TOTAL (FULL TIME EQUIVALENT EMPLOYEES) TO THE NUMBER OF FULL-TIME EMPLOYEES TO DETERMINE IF ABOVE THE THRESHOLD COUNT AS A LARGE EMPLOYER o Total # of Part-time Employees: 120 times hours per week (20) = 2,400 o 2,400 times number of weeks (52) = 124,800 o 124, 800 divided by 1,560 (30 hrs per week) = Total Full-Time Equivalent (FTE) Employees, 80 o 80 plus Number of Full-Time Employees 45 = 125 o 125 EMPLOYEES FOR PURPOSES OF QUALIFYING AS A LARGE EMPLOYER 2014 Oswald Companies Health Care Reform Implementation Review Andrea Esselstein, J.D. aesselstein@oswaldcompanies.com; Luke Clark, Sir Benefits Consultant lclark@oswaldcompanies.com; Disclaimer: Materials are solely for informational purposes as an educational resource. Please contact counsel to obtain advice with respect to any specific issue.