By Carol E. Potaczek, JD
How many full-time employees do you really have? Does your calculation include full-time equivalent employees? That determination is based on employees’ hours of service, and that’s something you need to know, because, for 2016, employers with at least 50 employees are applicable large employers (ALEs) and are, therefore, subject to the employer shared responsibility provisions of Code Sec. 4980H. Employee counted for purposes of determining liability for employer shared responsibility payments include full-time “equivalent” employees, as well as full-time employees.
Under Act Sec. 1513(a) of the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148), employers designated as ALEs must offer employees (and their dependents) health care coverage that meets ACA standards of minimum essential coverage or make an employer shared responsibility payment to the IRS. Employers must make a payment to the IRS if the employer does not offer minimum essential coverage to at least 95 percent of its full-time employees (and their dependents) and at least one full-time employee receives the premium tax credit for purchasing coverage through the health insurance marketplace, according to a tax tip recently issued by the IRS, reminding employers that it is important to review their ALE status annually (IRS Health Care Tax Tip 2016-02, January 6, 2016).
For 2015, the shared responsibility provisions applied to employers with 100 or more full-time employees, and those with 50-100 employees could apply for transition relief. The transition relief is not available, however, for 2016.
Fines are steep. How much are these shared responsibility payments? If you have 50 or more full-time employees or full-time equivalent employees, based on hours of service, and you are an ALE for purposes of the employer shared responsibility provisions, and you do not offer them insurance or your offer of insurance coverage is not affordable or doesn’t meet certain minimum standards, you are generally subject to penalties. You may owe a payment if at least one of your full-time employees enrolls in a plan through the Health Insurance Marketplace and receives a premium tax credit.
Unlike calculations purposes of determining the amount of an Employer Shared Responsibility payment that you may owe, you would only take into account full-time employees and not full-time equivalent employees. The fines are steep, however, and it is best to avoid them.
If you are an ALE and you do not offer coverage or you offer coverage to fewer than 95% of your full-time employees (and their dependents), you could owe a payment equal to the number of your full-time employees for the year (minus up to 30) multiplied by $2,000, if at least one full-time employee receives the premium tax credit. (Remember that for purposes of this calculation, a full-time employee does not include a full-time equivalent).
If you offer coverage for some months but not others during the calendar year, the payment is computed separately for each month for which coverage was not offered. The amount of the payment for the month equals the number of full-time employees the employer employed for the month (minus up to 30) multiplied by 1/12 of $2,000.
If you offer coverage to at least 95% of your full-time employees (and their dependents), but one or more of your full-time employees still receives a premium tax credit, the payment is computed separately for each month. The amount of the payment for the month equals the number of full-time employees who receive a premium tax credit for that month multiplied by 1/12 of $3,000. The amount of the payment for any calendar month is capped at the number of the employer’s full-time employees for the month (minus up to 30) multiplied by 1/12 of $2,000.
Note that the Employer Shared Responsibility provisions provide an inflation adjustment mechanism beginning in years after 2014.
Know hours for all employees, not just full-time ones. You must keep track of your employees’ hours of service for this purpose, because, according to the IRS (Q&A on Employee Shared Responsibility Provisions Under the Affordable Care Act, May 20, 2015), which of your employees is full-time is “based on each employee’s hours of service” and the rule determining ALE status (although not employer-shared responsibility payments) is based, not just on the number of your full-time employees, but on the number of your full-time equivalent employees, as well.
According to the IRS, an employee is “full-time” if he or she works an average of at least 30 hours per week. IRS final regulations provide that, for this purpose, 130 hours per month is considered to be the monthly equivalent of 30 work hours per week.
What about disability periods? The above seems simple enough, but what about employees on disability, either long- or short-term? Do you count the hours they would normally work, or the hours for which they are receiving disability? Those situations are more confusing, but in Notice 2015-87, the IRS addresses that dilemma.
The IRS incorporated into regulations under 4980H (IRS Reg. Sec. 54.4980H-1(a)(24)) certain relevant provisions of ERISA regulation 2530.299b-2(a) to provide parallels between the two sections on the basic definition of hours of service and clear up any discrepancies, but it did not incorporate certain mechanical rules in the ERISA regulations that do not relate directly to the identification of which employees are full-time employees. These provisions incorporate the ERISA provisions to address situations in which payments are made or due under a plan that is just maintained to comply with applicable workmen’s compensation, or unemployment or disability laws to an employee for a period during which no duties are performed.
In those situations, the IRS says, for purposes of using hours of service to determine the full-time status of an employee, there is no hour of service, whether the employee is directly or indirectly paid. Likewise, the incorporation of the ERISA provisions means that payments just reimbursing an employee for medical expenses that he or she incurred do not result in hours of service.
The IRS points out, however, that there is a mechanical limitation in the ERISA regulations on the crediting of those hours which is irrelevant to the definition of full-time employee and full-time equivalent employee. That means that there is no 501-hour limit on the hours of service that must be credited to an employee for any single continuous period during which the employee does not work, if the hours of service would otherwise qualify as hours of service.
Source of payments. The IRS regulations under Code Sec. 4980H incorporate some other provisions of ERISA Reg. Sec. 2530.200b-2 on the hours of service for which an employee is not performing any work duties. These relate to the source of the payments and are to be used to determine if an hour of service must be credited. For this purpose, a payment is considered to be made by or due from an employer no matter whether the payment comes directly or indirectly from the employer. This includes trust funds and insurers to which the employer might contribute or pay premiums, and it does not matter if the payments are made for a particular employee or for a group of employees.
So, in situations where an employee is not currently performing services for an employer for a certain period, but is receiving short-term or long-term disability payments during that period, these result in hours of service while the recipient employee retains status as an employee of the employer. The only exception to this is if the payments are made from an arrangement to which the employer did not contribute directly or indirectly.
Therefore, if the employee pays into a disability arrangement with after-tax contributions, that arrangement would generally be treated as one to which the employer did not contribute, and those payments would not give rise to hours of service. Similarly, for periods during which the employee is not working but is receiving workers compensation wage replacement benefits provided by a state or local government program, there are no hours of service.
Counting methods. Finally, how exactly do you count hours of service even for your full-time workers? The IRS provides two methods for that. There is a default, monthly measurement period, during which an ALE would determine each employee’s status as a full-time employee by simply counting the employee’s hours of service for a calendar month.
The IRS has also provided an optional look-back stability period safe harbor to determine whether ongoing, as opposed to newly-hired, employees are full-time employees. Under this method, an employer can determine an employee’s status as a full-time employee during a future, or “stability” period, based on the employee’s hours of service during a prior, or “measurement” period.
More specifically, an employer determines each employee’s full-time status by looking back at a defined period of not less than three but not more than 12 consecutive calendar months, as chosen by the employer (standard measurement period), to determine whether during the measurement period the employee averaged at least 30 hours of service per week. This look-back method is only available to determine and compute liability for an employer shared responsibility payment, and not for determining if an employer is an ALE.
If the employee is determined to be a full-time employee during the measurement period, the employee is treated as a full-time employee during a subsequent stability period, regardless of the employee’s number of hours of service during the stability period, so long as he or she remains an employee. For an employee determined to be a full-time employee during the measurement period, the stability period would be a period of at least six consecutive calendar months that follows the measurement period and is no shorter in duration than the measurement period.
If the employee is determined not to be a full-time employee during the measurement period, the employer is permitted to treat the employee as not a full-time employee during a stability period that followed the measurement period, but the stability period could not exceed the measurement period.
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