Affordable Care Act — Start Your FTE Countdown Now

17 December 2012 Labor & Employment Law Perspectives Blog

Little over a year from now, many significant aspects of the Patient Protection and Affordable Care Act (ACA) will kick in. Among other things, beginning in 2014, covered employers must provide health insurance to all full-time employees or pay significant monetary fines. Given that this deadline is fast approaching, now is the time for employers to start thinking about their classification of employees as full- or part-time. Issues of full- versus part-time classification arise in several aspects of the ACA’s mandatory coverage provision. For one thing, companies are only subject to the ACA’s coverage requirements if they employ more than 50 “full-time equivalent” (FTE) employees (determined on a “controlled group” basis). While full-time employees are defined for this purpose as those who are employed on average at least 30 hours per week, the ACA does not allow employers to escape liability by only hiring part-time employees. Part-time employees are treated as FTEs by adding up the total amount of hours worked by part-timers in a month and dividing by 120. Put another way, if five part-time employees each work 104 hours in a month, they will be treated as four FTEs for purposes of determining whether an employer is subject to the ACA’s coverage requirements.

Although part-time employees’ hours count toward determining whether the 50 FTE threshold is satisfied, covered employers will not be required to offer coverage to their part-time employees. Instead, guidance under the ACA provides that, in situations where a new hire is “reasonably expected” to work an average of 30 or more hours per week on a going forward basis, that employee must be offered health insurance within 90 days of hire.

However, circumstances may prevent an employer from being able to reasonably anticipate whether a variable-hour or seasonal employee will ultimately work full time. (See Foley’s September 17, 2012 Labor and Employment Law Perspectives). For example, a retailer may hire an employee to work more than 30 hours per week during the holiday season, but is unsure of how many hours that employee will work once the busy holiday period ends. In such situations, the ACA provides a safe harbor, allowing the employer to wait up to 12 months to retroactively determine the status of variable-hour employees. Under this safe harbor, the employer must choose a “measurement period” of between three and 12 consecutive months to calculate whether 30 or more hours per week are worked, and the employee is later entitled to coverage for a certain period thereafter. IRS Notices 2012-58 and 2012-17 provide further analysis of how to approach variable-hour and other issues related to FTE classification.

Employers that anticipate hiring variable-hour or seasonal employees should make a decision during the next several months with respect to the length of the measurement periods that will be used. Additionally, as the number of part- and full-time employees will have significant financial consequences under the ACA, employers would be well served to begin anticipating the makeup of their workforce in ample time to plan for 2014.

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