GRIST InDepth: ACA guidance defines full-time employees and waiting periods for health coverage By Barbara McGeoch and Amy Bergner of Mercer s WRG Oct. 11, 2012 In This Article Summary Agencies offer guidance on two key ACA provisions Guidance on waiting periods General sharedresponsibility guidelines on full-time employees Safe harbor for ongoing employees Safe harbor for new employees Establishing safe-harbor time periods Penalties Summary Recent guidance gives employers useful direction on two key health care reforms taking effect in 2014. First, a multiagency release explains how group health plans must limit waiting periods to 90 days. Second, an IRS notice addresses when employer-sponsored group health plans must treat employees as full-time to avoid shared-responsibility penalties. Both documents can be relied on until 2015, allowing employers to begin preparing for these reforms. Relevant tasks include determining how to take advantage of new safe harbors; weighing permitted compliance alternatives; and, ultimately, drafting plan materials to reflect the design choices made. Some employers may want to start tracking employee work hours as early as Oct. 15, 2012, even though the full picture isn t yet complete to make all 2014 decisions. Agencies offer guidance on two key ACA provisions Recent guidance gives employers needed direction on two key Affordable Care Act (ACA) requirements taking effect in 2014: the 90-day limit on group health plan waiting periods and the full-time employee definition under the employer shared-responsibility rules. 90-day limit on waiting periods. Under ACA, group health plans (grandfathered or not) must not impose waiting periods longer than 90 days before an eligible individual can be covered. This requirement applies for plan years starting on or after Jan. 1, 2014. A multiagency release explains the 90-day limit and allows employers to adopt eligibility conditions that precede a waiting period, unless those conditions are designed to thwart the 90-day limit (see Waitingperiod penalties below.) Full-time employee defined. IRS Notice 2012-58 addresses when employees must be treated as full-time under ACA s employer shared-responsibility mandate. Effective Jan. 1, 2014, employers with 50 or more full-time equivalent employees must offer full-time employees (and their dependents) affordable health coverage with a minimum value, or face possible penalties (see Shared-responsibility penalties below). An employee averaging at least 30 hours of service per week is considered full-time for this mandate.
GRIST InDepth: ACA guidance defines full-time employees and waiting periods for health coverage Page 2 The IRS guidance addresses how to measure full-time status for ongoing employees and new hires, with special rules for new variable-hour or seasonal employees who may work 30 hours per week during some months but not others. The guidance creates enforcement safe harbors; employers measuring full-time employee status as described in the relevant safe harbors may avoid paying shared-responsibility penalties. Previous guidance addressed potential methods of counting service (GRIST #20110089, May 6, 2011). Many unanswered questions remain, however, including how to measure the affordability of an employee s plan contribution (and the role of dependent contributions), determine a plan s minimum value, and calculate penalties i.e., for a controlled group or for each employer. Reliance. Employers can rely on both pieces of guidance at least through the end of 2014. To take advantage of the safe harbors, however, employers may want to start tracking employees work hours as of Oct. 15, 2012. Despite lingering uncertainties particularly for employers with large part-time or seasonal workforces regulators don t seem inclined to delay the Jan. 1, 2014, effective date. This article describes the new guidance, discusses implications for employers and identifies still-unanswered questions. Guidance on waiting periods Employers do not have to offer group health plan coverage, but if they do, ACA restricts a plan s ability to impose waiting periods longer than 90 days, effective for plan years starting on or after Jan. 1, 2014. A waiting period is the time that a plan may impose before health coverage is effective for an employee or dependent otherwise eligible to enroll. Nearly all group health plans grandfathered or not must comply with this waiting-period restriction, but plans exempt from certain other ACA mandates, such as stand-alone dental or vision, or retiree-only plans, may be exempt (GRIST #20100220, Sept. 2, 2010, and GRIST #20100154, June 22, 2010). Under the guidance, coverage for employees or dependents generally must start within 91 days after they become eligible. So if a plan s only eligibility condition is a 90-day waiting period, the common practice of starting coverage on the first of the month after someone becomes eligible will no longer be allowed. A plan satisfies the waiting-period limit if employees and dependents can become covered by the 91st day, even if employees take longer to actually elect coverage. Eligibility conditions can precede waiting periods. The guidance confirms that an employer may impose additional eligibility conditions (other than a lapse of time), as long as they are not designed to circumvent the 90-day limit on waiting periods. Permissible conditions include: Working in an eligible job classification (including a full-time position) Achieving job-related licensure Working a cumulative number of hours
GRIST InDepth: ACA guidance defines full-time employees and waiting periods for health coverage Page 3 An eligibility condition that requires more than 1,200 cumulative hours of work will be considered a term designed to avoid compliance with the 90-day cap on waiting periods. Example. A health plan requires part-time employees to work 1,200 hours before becoming plan-eligible. Sarah starts as a part-time employee working 25 hours per week on Jan. 3, 2014, and completes 1,200 hours on Dec. 15. To satisfy the 90-day, waiting-period limit, the plan must allow Sarah to become covered no later than March 16, 2015, the 91st day after she satisfied the 1,200-hour eligibility condition. Special rule for new variable-hour employees. Some plans condition eligibility on an employee working full time or regularly working a minimum number of hours in a specified time period. However, plans may have difficulty predicting whether a new employee will regularly work full time (or the required number of hours). In such cases, the plan may take a reasonable measurement period to determine whether the employee meets the eligibility condition. The IRS shared-responsibility guidance details how long a plan can take to assess whether a variablehour employee works full time (or the minimum hours per period). Plans are allowed to rely on the shared-responsibility guidance when applying the 90-day waiting period to variable-hour employees. (For a general discussion of how measurement periods work, see General sharedresponsibility guidelines on full-time employees.) In general, a plan can take up to a year from a new variable-hour employee s start date to determine whether that employee works full time (or the specified number of hours). However, a plan that uses a 12-month measurement period cannot make a variable-hour employee who has satisfied the full-time or minimum-hours criteria wait another 90 days to enroll after the measurement period has ended. Instead, the plan must make coverage effective no later than 13 months from the employee s start date, plus unless the employee started on the first of a calendar month the time remaining until the first day of the next calendar month. Example. A health plan requires employees to work full time, defined as 30 hours per week, to be eligible. Albert starts on Nov. 26, 2013, and will work between 20 hours and 45 hours per week, depending on work demands and his availability. Given this variability, the plan cannot initially tell whether Albert meets its eligibility criteria. The plan uses a 12-month measurement period and determines on Nov. 25, 2014, that Albert has worked enough hours, on average, to be considered full-time and eligible for coverage. To satisfy the waiting-period limit, the plan must allow Albert to enroll no later than Jan. 1, 2015 (13 months plus a partial month after Albert s start date). General shared-responsibility guidelines on full-time employees An employer risks shared-responsibility penalties if any of its full-time employees buys health coverage from an exchange and is eligible for income-based assistance. The penalty size varies, depending on whether the employer generally offers full-time employees health coverage meeting affordability and minimum-value standards. (For more on penalty calculations, see
GRIST InDepth: ACA guidance defines full-time employees and waiting periods for health coverage Page 4 Penalties below.) Employers seeking to avoid penalties will want to know which employees count as full-time and offer them qualifying health coverage in time to satisfy the 90-day, waiting-period limit. Employer strategy. To minimize potential shared-responsibility penalties, employers may need to revise their plans eligibility conditions to reduce the number of hours employees must work, on average, to enroll. This article is written with this strategy in mind. However, some employers may want to consult with advisers and legal counsel to explore other approaches. For example, some employers may accept shared-responsibility penalties as the price for keeping certain employee classes ineligible, making their coverage unaffordable or offering only plans that fail to meet the minimum-value standard (see, for example, GRIST #20120172, Aug. 14, 2012). Safe harbors. For shared-responsibility purposes, a full-time employee is anyone who works on average at least 30 hours per week or under expected regulations 130 hours per month (sometimes referred to in this article as the minimum-hours threshold ). Full-time status is easy enough to determine when an employee is hired to work a regular number of hours each week on an ongoing basis. But for variable-hour employees, such as part-time or seasonal staff, the task is more challenging. The IRS guidance provides two safe harbors that employers can use to decide if an employee has averaged 30 or more hours per week. One safe harbor applies to ongoing employees, the other to new employees. The safe harbors are complex, but both rely on some defined time periods that generally must be measured in a uniform fashion for all employees. Defined time periods. The safe harbors allow employers to use these time periods to predict whether an employee will qualify as full-time for shared-responsibility purposes: Measurement period (previously called the lookback period). Employers select a fixed three- to 12-month measurement period for determining whether an employee has averaged at least 30 hours of service per week. (See GRIST #20110089, May 6, 2011, for methods of counting hours of service.) Stability period. After meeting the minimum-hours threshold during the measurement (lookback) period, employees must be treated as full-time regardless of actual hours worked during a subsequent stability period, provided they remain employed. Employees who fail to meet the minimum-hours threshold during the measurement period do not have full-time status during the stability period and will not trigger shared-responsibility penalties. The stability period can t be shorter in duration (number of months) than its associated prior measurement period. Further, if an employee meets the minimum-hours threshold during the measurement period, then the ensuing stability period for coverage availability must last at least six full, consecutive calendar months. If the employee did not meet the
GRIST InDepth: ACA guidance defines full-time employees and waiting periods for health coverage Page 5 minimum-hours threshold, the stability period cannot be longer than the measurement period. (An exception for certain new variable-hour employees is discussed below.) Optional administrative period. Employers may need time after the measurement period ends to decide which employees must be offered coverage during the ensuing stability period. The safe harbor allows an optional administrative period between the measurement and stability periods so employers can notify employees qualifying for coverage and handle enrollment tasks. The administrative period can t exceed 90 days or be applied in a way that imposes a gap in employees coverage. Later sections of this article discuss the specific safe harbors for ongoing versus new employees and the guidelines for establishing each time period. Viewed together, these safe harbors mean employers will have rolling cycles, each consisting of a measurement period, an administrative period (if any) and a stability period, with portions of each cycle overlapping, as shown by this example: Example of successive safe harbor cycles with administrative periods 1. Between three months to 12 months in length, at employer s choice 2. Up to 90 days in length 3. No shorter than Cycle 1 measurement period, and at least six full calendar months long for eligible employees 4. No shorter than Cycle 2 measurement period, and at least six full calendar months long for eligible employees Uniform periods, except between certain employee groups. An employer generally must apply its selected measurement and stability periods on a consistent basis to employees. But an employer s measurement and stability periods can vary in length and/or in starting and ending dates for different specified categories of employees: Collectively bargained versus noncollectively bargained employees Salaried versus hourly employees Employees working in different entities Employees located in different US states It isn t clear how this guidance interacts with existing IRS nondiscrimination rules that ban better treatment of higher-paid employees. Those nondiscrimination rules also allow exemption or differing treatment of certain classes of employees but the classes don t match those listed in
GRIST InDepth: ACA guidance defines full-time employees and waiting periods for health coverage Page 6 this IRS notice. Employers wanting to adopt different periods for employees using the permitted categories should closely examine the interaction between the nondiscrimination rules and shared-responsibility guidance. Effective date. This ACA requirement to offer qualifying coverage or face shared-responsibility penalties applies for months after Dec. 31, 2013. Safe harbor for ongoing employees One of two main safe harbors for determining full-time status applies to ongoing employees : those who have worked for the employer throughout at least one standard measurement period. Standard measurement and stability periods. The measurement and stability periods that an employer selects to apply to its ongoing employees are called its standard measurement and stability periods. Optional administrative period. Where employers decide to use this option, the administrative period adopted can t reduce or increase the length of the standard measurement or standard stability period. To prevent the administrative period from causing any gaps in a person s coverage (once the periods have completed a full cycle), the administrative period must overlap with the prior standard stability period. For practical reasons, an employer probably will want its standard stability period to coincide with its plan year, its standard measurement period to end just before each upcoming plan year, and an intervening administrative period to allow enrollment activities to occur. The following diagram illustrates how these periods might interact for a calendar-year plan that has its first stability period beginning in 2014 and later: Example of ongoing employee safe harbor and calendar-year plan Employer offers affordable, minimum-value coverage for all of 2014 to ongoing employee who meets full-time status during Cycle 1 s standard measurement period and/or for all of 2015 to ongoing employee who meets that status during Cycle 2 s standard measurement period.
GRIST InDepth: ACA guidance defines full-time employees and waiting periods for health coverage Page 7 Interaction with maximum 90-day waiting period. It s not entirely clear how this safe harbor for determining the full-time status of ongoing employees interacts with guidance on applying the 90-day, waiting-period limit to employees hired before Jan. 1, 2014, who were previously ineligible for coverage. That guidance appears to give waiting-period relief during safe-harbor permitted periods for only new variable-hour and seasonal employees. This suggests that ongoing employees who first satisfy a plan s eligibility conditions as of Jan. 1, 2014, must actually begin coverage on that day without any waiting period. Employers may opt to await further clarification before deciding precisely what date these employees have to be offered coverage. Example. Linda was hired during 2008 to work 32 hours per week and continues to do so on and after Jan. 1, 2014. Before that date, her employer s health plan required an employee to work 35 hours per week to be eligible, so Linda had yet to qualify for coverage. Although existing guidance is unclear, regulators suggest that Linda, as an ongoing employee who regularly works more than 30 hours per week, must be offered coverage on Jan. 1, 2014, for the employer to avoid shared-responsibility penalties. Employees with a change in employment status. Future IRS guidance will address how to treat ongoing employees who experience a change in employment status (e.g., from part-time to fulltime status). Safe harbor for new employees A second safe harbor applies for determining which new employees must be treated as meeting the minimum-hours threshold. This safe harbor has a simple rule for new hires expected to meet the threshold from their start dates, plus a series of more complex rules for new variable-hour and seasonal employees. In addition, an employer must establish separate initial measurement and stability periods for new hires that may overlap with its standard measurement and stability periods for ongoing employees. New hires expected to work full time. If a new employee in an eligible class is reasonably expected to average at least 30 hours of service per week, offering qualifying coverage that takes effect by the end of the employee s initial three full calendar months of employment satisfies the shared-responsibility mandate. But that may not satisfy the 90-day cap on waiting periods. Interaction with 90-day maximum waiting period. The waiting-period guidance sets stricter timelines than the shared-responsibility safe harbor for these new employees. Coverage for new hires expected to meet the minimum-hours threshold must become effective by the 91st day after the employee becomes eligible (assuming the employee timely completes any enrollment steps). Example. John is hired on Feb. 20, 2014, as a swimming instructor to work 32 hours per week. His employer s health plan (which runs on the calendar year) covers swimming instructors once they have satisfied a 90-day waiting period. To avoid shared-responsibility
GRIST InDepth: ACA guidance defines full-time employees and waiting periods for health coverage Page 8 penalties, the employer must offer John coverage that begins on May 31, 2014 (the final day of his first three full calendar months of employment). But to avoid penalties for exceeding the waiting-period limit, the employer must offer John coverage that begins no later than May 22, 2014 (the 91st day after he first satisfies the plan s eligibility conditions). Employer impact. Employers should review their current plan provisions and administration to identify any needed adjustments. Employers that want to offer coverage that begins on certain days (for example, the first or possibly the first and 15th of any calendar month) must be careful to trim their waiting periods sufficiently. To give a simple example, a 60-day waiting period with coverage effective on the first of the next month would satisfy both sets of guidance, regardless of the day/month the employee initially meets eligibility conditions. Of course, an employer could get more creative. Employers with calendar-year plans should expect to begin applying the shared-responsibility and waiting-period guidance on Jan. 1, 2014. Although the 90-day, waiting-period restriction applies on a plan-year basis, it s unclear how the shared-responsibility guidance applies to employers with noncalendar-year plans in this context. New variable-hour and seasonal employees. If an employer can t reasonably predict on the start date whether a new employee will work on average at least 30 hours per week, the employer may treat this person as a variable hour employee. Variable-hour status also applies if a new employee is expected to average at least 30 hours per week for only a short time and thus is unlikely to meet the minimum-hours threshold during the entire initial measurement period. (This is possible, for example, when a retail worker is initially hired to work full time over the heavy holiday season and then quickly drop to part-time status.) Good-faith interpretation of seasonal employees. The guidance doesn t define seasonal employee for purposes of the minimum-hours threshold. Through at least 2014, employers may use any reasonable, good-faith interpretation of that term. Temporary employees and others not addressed. The guidance doesn t provide safe harbors for temporary staff, high-turnover positions or other types of workers presenting unusual issues, although the IRS is considering the need to do so. In the meantime, employers may have to track hours and use measurement and stability periods to determine whether these employees could trigger shared-responsibility penalties. Initial measurement and stability periods. The initial measurement and stability periods are unique to each new variable-hour or seasonal employee, reflecting the individual s actual start date or, alternatively, the start of the first calendar month after that date. Many employers might want to have all initial measurement periods start on the first of a calendar month; otherwise, every day of the year potentially could start a new measurement period.
GRIST InDepth: ACA guidance defines full-time employees and waiting periods for health coverage Page 9 Several limitations, however, must be considered in setting these periods and measuring variable-hour and seasonal employees status for shared-responsibility purposes. These restrictions are highlighted below, followed by examples illustrating the key principles: The initial measurement period and administrative period, combined, can t extend beyond 13 months, plus a fraction of a month. Specifically, the combined periods must end by the last day of the calendar month that starts on or immediately after the first anniversary of an employee s start date. New employees initial stability periods can t be shorter than the standard stability period for ongoing employees. In operation, this restriction will generally require a 12-month initial stability period for new employees if an employer uses a 12-month standard stability period. Once a new employee has completed an initial measurement period and an entire standard measurement period, the employee must be tested for full-time status. Starting with that standard measurement period, the employee s full-time status is determined at the same time and using the same conditions applied to other ongoing employees. An employee who meets full-time status during the initial measurement period must be treated as full-time for the entire initial stability period. This is so even if the employee s hours drop below the full-time threshold during the overlapping or immediately following standard measurement period. If an employee fails to meet full-time status during the initial measurement period, then both of these conditions apply: The initial stability period can t be more than one month longer than the employee s initial measurement period and can t extend beyond the standard measurement period (plus any administrative period) in which the employee s initial measurement period ends. If the employee meets full-time status during the overlapping or immediately ensuing standard measurement period, the employee must be treated as full-time for the entire stability period associated with that standard measurement period. This is so even if that stability period starts before the close of the employee s initial stability period. For a new variable-hour or seasonal employee, calculating the 90-day limit on any administrative period uses total days between the start date and the date the employee is first offered coverage, reduced by the number of days in the initial measurement period. This means an employer choosing to simplify tracking by starting all initial measurement periods on the first of a month will have fewer days after the initial measurement period ends to handle the enrollment process before the employee s stability period must begin.
GRIST InDepth: ACA guidance defines full-time employees and waiting periods for health coverage Page 10 Employer impact. These guidelines for determining the full-time status of new variable-hour or seasonal employees are illustrated by two diagrams below. The first uses an initial measurement period of 11 months, which maximizes the administrative period for handling the enrollment process and still fits within the above 13-month rule. The other uses a 12-month initial measurement period, which allows an employer to measure employee hours over the longest possible period. The following diagram illustrates an employer that chooses to use an 11-month initial measurement period, beginning on the variable-hour employee s start date. Example of variable-hour employee safe harbor and calendar-year plan: 11-month initial measurement period followed by single administrative period Jim s initial measurement and administrative periods, combined, don t exceed 13 months plus a fraction of one month (May 10, 2014 June 30, 2015), and those combined periods don t extend beyond the final day of the first calendar month after Jim s first employment anniversary. Jim s initial stability period of 12 months (July 1, 2015 June 30, 2016) allows his employer to use a 12-month standard stability period, which is permitted even though his initial measurement period is only 11 months because either: A stability period can be longer than the associated measurement period for an employee who meets full-time status. An initial stability period can be one month longer than the associated initial measurement period for an employee who fails to meet full-time status. If Jim meets full-time status in his initial measurement period, his employer will offer him affordable, minimum-value coverage during his entire initial stability period. If Jim meets full-time status during the standard measurement period, his employer will offer him affordable, minimum-value coverage during the entire standard stability period, regardless of whether Jim met that threshold during his initial measurement period. Neither Jim s Initial Cycle administrative period (April 10 June 30, 2015) nor his employer s Standard Cycle administrative period (Oct. 15 Dec. 31, 2015) exceeds 90 days.
GRIST InDepth: ACA guidance defines full-time employees and waiting periods for health coverage Page 11 The following diagram illustrates an employer that chooses to use a 12-month initial measurement period, beginning on the first day of the month after the variable-hour employee s start date. Example of variable-hour employee safe harbor and calendar-year plan: 12-month initial measurement period using split administrative period Sam s initial measurement and administrative periods, combined, don t exceed 13 months plus a fraction of one month (May 10, 2014 June 30, 2015), and those combined periods don t extend beyond the final day of the first calendar month after Sam's first employment anniversary. Sam s initial stability period of 12 months (July 1, 2015 June 30, 2016) allows his employer to use a 12-month standard stability period, which is permitted because his initial measurement period is 12 months long. If Sam meets full-time status in his initial measurement period, his employer will offer him affordable, minimum-value coverage during his entire initial stability period. If Sam meets full-time status during the standard measurement period, his employer will offer him affordable, minimum-value coverage during the entire standard stability period, regardless of whether Sam met that threshold during his initial measurement period. Sam s Initial Cycle administrative period doesn t exceed 90 days, although it is split into one 22- day period (May 10 May 31, 2014) and another 30-day period (June 1 June 30, 2015). Employer s Standard Cycle administrative period (Oct. 15 Dec. 31, 2015) doesn t exceed 90 days. Establishing safe-harbor time periods The shared-responsibility safe harbors, applied with the waiting-period guidance, are quite complex, but many employers current processes for determining employee benefit eligibility may generally fit within the safe harbors. One of the first compliance tasks for any employer is to determine appropriate measurement, administrative and stability periods for its plan. Onset of first measurement and stability periods is unclear. The safe-harbor guidance doesn t specify when employers first stability periods need to begin. Regulators have stated informally that the first stability period must begin Jan. 1, 2014. However, the guidance only gives examples of employees hired after Jan. 1, 2014, which has led some practitioners to believe that
GRIST InDepth: ACA guidance defines full-time employees and waiting periods for health coverage Page 12 the safe harbors permit employers to begin their first measurement periods on Jan. 1, 2014, then offer coverage in the first stability period after that date. Until further guidance is available, employers with calendar-year plans may want to play it safe and prepare for their first stability periods to begin Jan. 1, 2014. Under this approach, employers should consider determining before 2014 which employees currently ineligible for health coverage will meet the minimum-hours threshold. To avoid shared-responsibility penalties (discussed below), employers must offer those employees coverage effective Jan. 1, 2014. Employers could extend this offer during annual enrollment in the fall of 2013. (Employers with noncalendar-year plans could hold a special midyear enrollment for this purpose.) As mentioned above, however, exactly how this approach aligns with the 90-day, waiting-period guidance is unclear. When to start measuring hours worked. Some employers may want to impose a 12-month measurement period followed by an administrative period, with a stability period matching the calendar year. To do so, employers need to begin tracking hours of service by Oct. 15, 2012, to set the first stability period equal to calendar-year 2014. For employers that currently record hours of service, this may simply involve sharing already-captured payroll or workforce management data with benefit staff and enrollment vendors. For other employers, however, settling on a strategy and beginning to track needed data this autumn may prove more daunting. Setting length of stability period. Many employers will want to use a 12-month stability period. Even for employee groups with erratic schedules, using a long measurement period should help reduce the odds that short periods of intense work will cause an employee to meet the minimumhours threshold. A 12-month stability period also facilitates the traditional practice of offering ongoing employees an annual enrollment opportunity, which is easier for employers and their service vendors to administer than more frequent enrollment chances. Employers adopting this approach could still limit midyear enrollment to employees experiencing infrequent life events (such as a change in dependents), so newly eligible variable-hour workers could not exit and reenter the plan every three or six months. For employers with large numbers of short-term employees, shorter measurement and stability periods may be optimal, at least for certain permitted categories of employees. But when designing a health benefit strategy to minimize shared-responsibility penalties, a 12-month stability period generally should be considered before alternative approaches to determine eligibility. Special considerations for January 2014 strategy. Some employers that want their first stability period to begin Jan. 1, 2014, may be unable to begin capturing needed data early enough (e.g., as of Oct. 15, 2012) to allow a 12-month first measurement period, followed by a nearly 90-day administrative period ending Dec. 31, 2013. Consequently, those employers may need to adopt a measurement period shorter than 12 months. That decision may impact the length of the first stability period starting Jan.1, 2014:
GRIST InDepth: ACA guidance defines full-time employees and waiting periods for health coverage Page 13 For ongoing employees not qualifying as full-time during the measurement period, the stability period cannot be longer than that measurement period, so the employer may not be able to adopt a 12-month first stability period for those employees. For employees qualifying as full-time during the measurement period, the employer can use a 12-month first stability period, even though that measurement period was shorter. Regulators haven t given any specifics but have informally acknowledged that employers may need flexible transition approaches. Penalties The new guidance doesn t address penalties for either waiting-period or shared-responsibility failures. But employers should keep a few points in mind when considering the new guidelines. Waiting-period penalties. Violating the 90-day, waiting-period limit triggers the same excise tax penalty that applies for noncompliance with many ACA group health plan standards: $100 per person affected for each day of violation. A minimum penalty of $2,500 per person may apply in some circumstances. The penalty can be waived in some cases for example, if none of the responsible parties knew (or reasonably should have known) of the violation. Special rules apply to government and church plans and to small employers (50 or fewer employees during the prior calendar year) with insured plans (GRIST #20100101, Aug. 23, 2010). Unlike the shared-responsibility penalty which some employers may prefer to pay rather than expand coverage the penalty for exceeding the 90-day waiting period has no upside for an employer. Individuals improperly delayed from participating in the plan can take action to recoup medical expenses incurred during the period they should have had coverage, and the employer can face large excise taxes and additional penalties for breach of fiduciary duties. Shared-responsibility penalties. ACA provides for two different types of shared-responsibility penalties, with dramatically different financial impacts on an affected employer: Employers not offering coverage. Employers that don t offer coverage to full-time employees (and their dependents) face shared-responsibility penalties if at least one full-time employee buys health insurance exchange coverage and is eligible for income-based assistance. The annual penalty will be up to $2,000 for every full-time employee, excluding the first 30 full-time employees. Employers offering coverage. Employers offering full-time employees (and their dependents) health coverage that fails the minimum-value or affordability tests will face an annual penalty of up to $3,000 for each full-time employee who buys health insurance exchange coverage and qualifies for federal income-based assistance. However, the annual penalty for any employer is subject to a cap, calculated by multiplying $2,000 by the total
GRIST InDepth: ACA guidance defines full-time employees and waiting periods for health coverage Page 14 number of full-time employees regardless of exchange coverage or eligibility for assistance after subtracting 30 full-time employees (GRIST #20100309, April 19, 2011). What about offering coverage to some, but not all, full-time employees? Regulators have yet to explain exactly how the penalty will apply if an employer offers some, but not all, of its fulltime employees affordable, minimum-value health plan coverage. An earlier notice (Notice 2011-36) indicates that an employer offering coverage to substantially all full-time employees won t face the penalty for not offering coverage (GRIST #20110089, May 6, 2011). For example, an employer shouldn t incur this penalty if it mistakenly classifies a very small number of employees as part-timers ineligible for coverage, and one of those employees gets taxpayersubsidized exchange coverage. However, the notice doesn t define substantially all and thus leaves employers without a good sense of how this penalty will operate. No employer wants to offer coverage to most employees and still end up getting penalized up to $2,000 for every full-time employee, even those who receive employer-subsidized coverage because it failed to extend coverage to enough of its workforce. So employers interested in excluding some classes of workers from coverage eligibility (see, for example, GRIST #20120172, Aug. 14, 2012) must take care in applying the safe harbors and monitor future guidance for permitted flexibility. Employer next steps The regulatory picture isn t complete enough for employers to know exactly which employees must be offered what type of coverage at what contribution amount to avoid sharedresponsibility penalties. Nonetheless, the new guidance provides useful information for planning how to track hours so employers can determine employees full-time status and related maximum waiting periods in 2014. As part of those preparations, employers may want to consider the following actions: Decide whether or how to adjust plan waiting periods. Employers should review their coverage conditions to ensure compliance with the 90-day maximum waiting period. Calendar-year plans should be ready to apply compliant waiting periods on Jan. 1, 2014. Employers with noncalendar-year plans can probably wait until the first day of their 2014 plan years. Gather data to determine whether or how the safe harbors are relevant. Some employers with stable workforces and fixed work schedules won t need to rely on the safe harbors. However, employers with variable-hour or seasonal employees will almost certainly need to consider the safe harbors. Other employers may need to gather information to see whether they have groups such as temporary employees, interns or part-timers that are currently ineligible for benefits but work 30 or more hours per week on average. Employers planning to rely on the safe harbors should determine whether currently captured data is sufficient to begin tracking hours.
GRIST InDepth: ACA guidance defines full-time employees and waiting periods for health coverage Page 15 Consider safe-harbor approaches for offering 2014 health coverage. Employers whose plan eligibility and coverage operates in accordance with the safe-harbor parameters will not face shared-responsibility penalties for 2014. However, employers are not required to set their plan eligibility and entry dates to satisfy the safe-harbor conditions. An employer that doesn t do so presumably will avoid penalties if it can show how it otherwise met the sharedresponsibility mandate (to offer coverage to substantially all employees averaging at least 30 hours of service per week). But it isn t clear how much leeway IRS will grant. If using safe harbors, determine optimal measurement, administrative and stability periods. Employers using the safe harbors will need to examine their workforce patterns, needed timeframes for internal administration and vendor activities, and other factors to determine the optimal duration and beginning and ending dates of the various periods. For example, an employer may want to align its safe-harbor administrative period with the amount of time typically used to identify eligible employees, send eligibility files to vendors and conduct enrollments, allowing for additional time in case needed to analyze data about work hours. Amend plan documents and other related materials. After determining the best approach for 2014 health coverage eligibility and participation, an employer should amend its plan document, summary plan description and other materials to reflect any new eligibility, enrollment and entry-date provisions. Employers also may want to consider other related changes that could require amendment and communication. For example, an employer may decide to amend its cafeteria plan and related materials to delete current provisions allowing midyear enrollments based on an employee s work schedule or location. For more information, contact Mercer s WRG at +1 202 263 3950. WRG only: #20120200