Health Reform WK-EDGE The ins and outs of the look-back measurement method
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Friday, April 22, 2016

The ins and outs of the look-back measurement method

By Lauren Bikoff, MLS

Among employers, large and small, it is now common knowledge that the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) imposes tax penalties on applicable large employers (ALEs) both that do and do not offer health care coverage to full-time employees (FTEs) and their dependents. The rules surrounding the employer mandate are complicated, and even though employers with more than 100 employees have had to comply with the employer shared responsibility provisions since 2015, some employers are still struggling to make sure they are meeting all of the requirements.

In 2016, complying with the ACA’s requirements became even harder because transition relief that was available in 2015 has expired. An ALE is defined by the ACA as an employer with 50 or more employees. The requirements were effective for employers with 100 or more employees as of 2015, but the IRS had given employers with 50 to 99 employees until 2016 to begin offering minimum essential coverage to substantially all of their FTEs.

In addition, the definition of “substantially all” has expanded: in 2015, transition relief provided that employers only needed to make a qualifying offer of coverage to at least 70 percent of FTEs and their dependents. In 2016, “substantially all” has reverted back to the statutory definition of 95 percent. Because of this, it is more important than ever that employers determine FTE status correctly.

As specified in IRS Notice 2012-58, there are only two methods for determining an employee’s status as full-time: the monthly measurement method and the look-back measurement method. The notice provides complicated details about how an employer should implement the look-back measurement method. Recently, Wolters Kluwer spoke with Garrett Fenton, Member at Miller & Chevalier, and Ryan Moulder, Partner at Health Care Attorneys, to discuss the ins and outs of the look-back-measurement method.

How does the method work?

To use the look-back measurement method, 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 (the standard measurement period). “The employer will look back at an employee’s total hours of service during this time in order to determine whether the employee averaged at least 30 hours of service per week in order to be classified as a FTE,” noted Moulder.

If the employee is determined to be a FTE during the measurement period, the employee is treated as a FTE during the 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. The stability period must be no shorter in duration than the corresponding measurement period, and employees determined to be FTEs during the measurement period must be offered coverage throughout the entire stability period.

Alternatively, if the employee is determined not to be a FTE during the measurement period, the employer is permitted to treat the employee as not a FTE during the stability period.

“The intent of the look-back measurement method is to assist employers by providing stability and continuity to its full-time workforce,” said Fenton. “The thought is that it will simplify the determination of who needs to be offered coverage and what constitutes a FTE, especially with regard to variable hour and seasonal employees who otherwise might go in and out of FTE status throughout the year.”

Using the look-back measurement method is essential for employers with a variable hour and seasonal workforce. According to Moulder, “A variable hour employee is a new employee who the employer cannot reasonably determine at the employee’s start date whether the employee will work an average at least 30 hours of service per week during the initial measurement period. A seasonal employee is an employee who is hired into a position for which the customary annual employment is six months or less.”

However, it is important to note that new employees who are reasonably expected to be FTEs must be offered coverage within 90 days. “I think there is some confusion there,” noted Fenton. “If I hire someone full-time that will be working 40 hours plus per week, and I know that they will be working 40 hours plus per week, I have to offer them coverage within 90 days. I can’t wait until the end of the initial measurement period to then say that I will offer them coverage over the next stability period.”

What is better: the look-back or the monthly method?

The monthly measurement method is admittedly much less complex than the look-back measurement method. The monthly measurement method is the default option, during which an ALE would determine each employee’s status as a FTE by simply counting the employee’s hours of service during a calendar month.

However, “for employers who have employees with hours of service that fluctuate from month to month, the look-back measurement method is really the only way to ensure the employer is not at risk of paying a Sec. 4980H(b) penalty,” said Moulder. “To be considered to have offered coverage for the purposes of the 4980H penalties an employer must offer coverage for each day of the calendar month. Therefore, if through the year an employee’s hours of service fluctuate right around 130 per month, the look-back measurement method is the only realistic option.”

Fenton agreed, saying, “I think for most employers, the conventional wisdom is that the look-back measurement method is going to be more beneficial, in that it provides stability and continuity. While it can be difficult to administer, it requires a lot of data, and you must rely on your vendors to make sure they are getting it right and applying it correctly, overall it likely is going to be to an employer’s benefit to use the look-back measurement method rather than the monthly measurement method.”

How do I document the look-back method?

Using the look-back measurement method helps an employer determine each employee’s FTE status, and determines whether or not that employee will be offered coverage. Employers need to document their methodology for determining each employee’s FTE status.

“There really is not a set of hard and fast rules about what documentation an employer needs,” said Fenton. “Employers just need to make sure that they can defend themselves when the IRS comes knocking and says that they have a FTE who received coverage on the exchange and received a tax credit, and now they owe a shared responsibility tax. So, you should probably document the hours logged by each employee, and the determination that was made, either in-house or by your vendor, about each employee’s FTE status.”

Most employers have solved this issue by hiring a software company that tracks an employer’s workforce’s hours of service, and also provides Form 1094-C and 1095-C reporting, noted Moulder. “However, many smaller employers have not been willing to pay a per-employee fee to these software companies to track hours of service, making the look-back method cumbersome for smaller employers to administer,” he said.

Does this process need to be communicated to employees?

The Employee Retirement Income Security Act of 1974 (ERISA) requires that plan participants receive a summary plan description (SPD) within 90 days of becoming covered by the plan. Regulations require that SPDs contain a statement of the conditions of eligibility to receive benefits. According to Moulder, “For an employer who does not synchronize its look-back measurement method with its health plan eligibility, it is easy to envision a situation where an employee accumulates hundreds of thousands of dollars of medical expenses and then there is a dispute involving the employee, the employer, and the insurer on who is liable for the medical expenses. These types of claims are common place when eligibility conditions are not clear. This is a huge issue that almost all employers are overlooking. Even TPAs providing generic SPDs are not including the look-back measurement methods adopted by employers into the SPD.”

Some employers believe that they do not have to describe the mechanics of the look-back measurement method explicitly to employees. However, they do need to make it clear who is going to be eligible for coverage. “There is no requirement that you describe the legal rules to your employees,” noted Fenton. “It’s more making sure employees know if they will be eligible for coverage based on their job category, and just describing accurately how many hours an employee will have to consistently be working to be eligible for coverage, and making sure that is reflected correctly in your plan document.”

What do I need to do going forward?

Since all ALEs are now required to offer coverage to 95 percent of FTEs or face a tax penalty, it seems likely that the majority of employers have systems in place to track employee hours and are working the kinks out of the look-back measurement method. However, it is important to keep on top of this process and make sure “whatever best practices that were put in place are being maintained,” noted Fenton. “There are a lot of areas in this process where there can be footfalls.”

The fact is that “we are still waiting to see how aggressively the IRS is going to enforce these rules,” concluded Fenton. “I would recommend that employers stay on top of any developments on this, and pay attention to any additional guidance from the IRS. Just because we are in 2016 now, and are in full enforcement mode, it doesn’t mean that there won’t be changes or transitional rules or guidance coming out, especially in an election year such as this one.”

Attorneys: Garrett Fenton (Miller & Chevalier). Ryan Moulder (Health Care Attorneys, P.C.).

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