IRS' Final Employer Shared Responsibility Rules: Who is a "Full-Time" Employee?
Step 1: Determine who is an “Employee”
An employer’s first step should be to identify which individuals are “employees” under the common-law standard. Under this standard, an employment relationship generally exists when the person for whom the services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished but also as to the details and means by which that result is accomplished. For purposes of the “pay or play” penalty provisions, leased employees, sole proprietors, partners in a partnership, and 2 percent S-corporation shareholders are not considered employees.
Employers should take care to not improperly treat an individual who should be considered an employee as an independent contractor. A mischaracterization will impact the employer’s determination of whether it has offered coverage to 95 percent of its full-time employees (70 percent for 2015 only) and whether it owes a penalty when a so-called independent contractor purchases coverage on the Marketplace and receives a premium tax credit.
Step 2: Capture the Employee’s Hours of Service
An employee is considered a “full-time employee” for a month if the employee averages at least 30 hours of service per week during that month (or averages 130 hours of service for the month). The “hours of service” that must be counted for this purpose include:
- Each hour for which the employee is paid, or entitled to payment, for the performance of duties for the employer; and
- Each hour for which the employee is paid, or entitled to payment, by the employer on account of a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty, or leave of absence.
If an employer is part of a controlled group, hours of service for each member of the controlled group must be counted.
Hours of service with respect to foreign service income, compensation paid to certain “bona fide volunteers” and compensation paid through certain government-sponsored work study programs can be excluded.
For hourly-paid employees, an employer must count each hour of service based on the employer’s records. For non-hourly paid employees, such as salaried employees, an employer may choose to count hours of service under any one of the following methods:
- Counting actual hours of service (like an hourly employee);
- Crediting an employee with 8 hours of service for each day for which the employee would be required to be credited with one hour of service (days-worked equivalency method); or
- Crediting an employee with 40 hours of service for each week for which the employee would be required to be credited with at least one hour of service (weeks-worked equivalency method).
An employer may change its method of crediting hours of service for non-hourly employees each calendar year and may apply different methods for counting hours of service to different classifications of non-hourly employees, so long as the classifications are reasonable and consistently applied. However, an employer is prohibited from using an equivalency method if it would substantially understate the employee’s hours of service. For example, applying the days worked equivalency method to an employee who works three 10-hour days per week is not allowed.
Step 3: Determine who is a Full-Time Employee.
The final regulations provide an employer with several options when it comes to determining which employee qualifies as a full-time employee.
Select the Method to be Used for Determining Full-Time Employee Status
The initial decision an employer must make is whether to determine full-time employee status based on the monthly method or the look-back method, or some combination of the two methods.
The monthly method is best suited for those employers whose employees (or certain categories of employees) are either clearly full-time or part-time (and who rarely shift between those statuses), and who do not employ variable hour or seasonal employees. For all other employers, the look-back method is likely the better choice.
An employer is permitted to apply the monthly method for some employees and the look-back method for others. The categories for which different methods may apply are:
- Collectively bargained and non-collectively bargained employees;
- Each group covered by separate collective bargaining agreements;
- Salaried employees and hourly employees; and
- Employees who primary places of employment are in different states.
For example, an employer may choose to apply the monthly method for salaried employees and the look-back method for hourly employees.
The Monthly Method
Under the monthly method, for each calendar month, a “full-time employee” is an employee who averaged at least 30 hours of service per week in that month (or alternatively, 130 hours in that month). A weekly rule, which allows an employer to treat some months as having four weeks and some as having five weeks, and then averaging an employee’s hours over the relevant four- or five-week period, is also available.
A special rule is available under the monthly method that allows an employer to impose a waiting period under its health plan without becoming subject to a penalty for full-time employees who are in the waiting period. Under this special rule, an employer won’t be subject to a penalty with respect to a full-time employee for the first month an employee qualifies as a full-time employee and the following two calendar months if (a) the employee is otherwise eligible for coverage under the plan, (b) the employee is offered coverage by the first day of the second calendar month after the month in which the employee is first treated as a full-time employee (provided the employee is still employed on that day), and (c) the coverage offered provides minimum value. This rule applies to both new hires and part-time employees who switch to full-time status. It is also important to note that there is a separate provision under the ACA that limits health plan waiting periods to no more than 90 calendar days. Employers should ensure that their plans also comply with this 90-day rule.
This special rule generally cannot be applied more than once during an employee’s period of employment, however, and cannot be applied if the employee was previously eligible for other group health plan coverage with the employer. Please see our related newsletter entitled “How Do You Handle Breaks in Service?” for information regarding when an employee who resumes services after a termination or other break in service can be treated as a new employee for purposes of this special rule.
As a result, an employer using the “monthly method” who desires to avoid or minimize the penalties should (a) ensure that its plan’s waiting periods do not delay participation beyond the two calendar months after the month an employee is first considered a full-time employee (and no more than 90 calendar days) and (b) ensure that a full-time employee who was previously eligible for coverage, who switches to part-time status and then resumes full-time status, becomes eligible for health plan coverage as soon as practicable after resuming full-time status (without the imposition of a new waiting period) and (c) ensure that it is complying with the ACA provision that limits waiting periods to not more than 90 calendar days.
The Look-Back Method
Under the look-back method, an employer determines an employee’s full-time status based on the hours of service credited during a look-back “measurement period.” If the employee’s hours of service during the measurement period average 30 or more per week, then the employee is considered a full-time employee during a subsequent “stability period.” To give employers time to make that determination and provide enrollment materials to the full-time employee if necessary, an employer may use an “administrative period,” which is simply a window of time between the end of the measurement period and the start of the stability period for those administrative tasks to be performed.
Determine the measurement period. There are two types of measurement periods:
(1) An “initial measurement period” for newly hired seasonal, variable hour or part-time employees. This period can start on the employee’s date of hire, the first day of the payroll period after the date of hire, or the first day of the month after the date of hire.
For this purpose:
- A “seasonal” employee is an employee whose customary annual employment is 6 months or less, with the period starting typically at the same time each year.
- A “variable” hour employee is an employee who, at his or her start date, cannot be characterized as either a full-time employee or part-time employee, because his or her hours are expected to fluctuate. For example, an employee who might work 20 hours one week and 35 the next would be considered a variable hour employee.
- A “part-time” employee is an employee who clearly will be working less than 30 hours per week.
What about an employee who, at their start date, will be working 30 or more hours per week on a regular basis? These employees are NOT subject to an initial measurement period. Instead, the employer must use the monthly method for these employees until they have worked for one full “standard measurement period.”
(2) A “standard measurement period” for ongoing employees. This is the “typical” measurement period that an employer will apply again and again for its continuing employees. All employees, including full-time employees, must be measured each standard measurement period.
In each case, the measurement period must be at least 3 but not more than 12 months long, as selected by the employer. The initial measurement period and the standard measurement period need not be the same length.
An employer can specify different measurement periods for the following categories of employees: (i) each group of collectively bargained employees governed by a separate collective bargaining agreement, (ii) collectively bargained and non-collectively bargained employees, (iii) salaried employees and hourly employees, and (iv) employees whose primary places of employment are in different states. An employer may change its measurement periods for future years but generally cannot change such periods once they have begun.
Special rules permit an employer to adjust the start and end dates of a measurement period in order to avoid splitting an employee’s regular payroll periods.
Please see our related newsletter entitled “How Do You Handle Breaks in Service?” for information about how breaks in service, including a termination of employment and rehire, affect an individual’s status as a new employee versus an ongoing employee.
Determine the stability period. As mentioned above, the stability period is the period that follows each measurement period. If an employee qualifies as a full-time employee at the end of the measurement period, then he or she is considered a full-time employee for the duration of the following stability period, even if the employee experiences a reduction in hours during the stability period. On the flip side, if an employee does not qualify as a full-time employee at the end of the measurement period, then he or she is not considered a full-time employee for the duration of the following stability period.
A few points about stability periods:
- They must be at least 6 months in length.
- They must be at least as long as the measurement period, except as described below.
- If a new hire does not qualify as a full-time employee at the end of his or her initial measurement period, the stability period for that individual (during which they are not considered a full-time employee) cannot be more than one month longer than the initial measurement period.
- The stability period for new employees must be the same length as the stability period for ongoing employees.
An employer can specify different stability periods for the following categories of employees: (i) each group of collectively bargained employees governed by a separate collective bargaining agreement, (ii) collectively bargained and non-collectively bargained employees, (iii) salaried employees and hourly employees, and (iv) employees whose primary places of employment are in different states.
Determine the administrative period. As mentioned above, the administrative period is the period in between the end of the measurement period and the start of the stability period, during which the employer performs the administrative tasks relevant to these rules, such as calculating the average hours for the prior measurement period, and providing enrollment materials if necessary. For ongoing employees, the annual open enrollment period is the equivalent of the administrative period.
A few points about administrative periods:
- They cannot exceed 90 calendar days.
- For new hires, the combined length of the initial measurement period and administrative period cannot exceed one full calendar month following the new hire’s anniversary date of employment.
- For new hires, if an employer starts the initial measurement period later than their start date (such as on the first of the month after hire date), then the period between the employee’s start date and the date their measurement period begins counts against the 90 day administrative period for that individual.
- For ongoing employees, it must overlap with the prior stability period. In other words, for ongoing employees who qualify as full-time employees, the administrative period (typically, the open enrollment period) cannot be used as a period for which no health plan coverage will be offered.
An employer can specify different administrative periods for the following categories of employees: (i) each group of collectively bargained employees governed by a separate collective bargaining agreement, (ii) collectively bargained and non-collectively bargained employees, (iii) salaried employees and hourly employees, and (iv) employees whose primary places of employment are in different states.
Put it all together. Once an employer has made all of the decisions discussed above, it can then determine who qualifies as a full-time employee and for what time period such an individual must be treated as a full-time employee for purposes of the employer shared responsibility penalty provisions. In summary, for any group of employees for whom an employer is using the look-back method:
- A new variable, seasonal or part-time employee is measured during their initial measurement period. Their status (as a full-time employee or not) applies for the following stability period, for so long as they remain an employee.
- A new variable, seasonal or part-time employee is also measured again during the first standard measurement period that commences after his or her start date. As a result, there may be an overlap of the initial and standard measurement period. If there is a gap between the end of the initial measurement period and the start of the standard measurement period, on the other hand, the individual’s status as a full-time employee (or not) as determined during the initial measurement period continues to apply during the gap.
- A new employee who is reasonably expected to work 30 or more hours per week (i.e., a new employee who does not qualify as a variable, seasonal or part-time employee) must be enrolled in accordance with the monthly measurement method until the employee’s hours of service are measured for one full standard measurement period (at which time the employer may switch to the look-back method for these employees).
- Meanwhile, ongoing employees (regardless of status) are measured each standard measurement period, and their status (as a full-time employee or not) applies for the following stability period, for so long as they remain an employee.
Special rules apply for a new variable, seasonal or part-time employee whose status changes to full-time during their initial measurement period, for full-time employees who cease to be full-time, and for employees who experience a change in position (such as from hourly to salaried) that results in a change in their measurement periods. Those rules are beyond the scope of this newsletter.
Transitioning from 2014 into 2015
So, how does an employer get from “here to there” so that it’s ready for 2015? There is a special transition rule available in 2014 that may be helpful. Under this transition rule, an employer may use a 12-month stability period in 2015 if they adopt a transition measurement period for ongoing employees that is:
- at least 6 but no more than 12 months long and
- begins no later than July 1, 2014 and ends no earlier than 90 days before the first day of the plan year beginning on or after January 1, 2015.
For example, an employer with a calendar plan year may decide that it wants to use a 12-month measurement period for both new hires and ongoing employees. The standard measurement period (for ongoing employees) will run from October 15 of one year through October 14 of the following year. The employer will take the last two weeks of October to determine who qualifies as a full-time employee, and then will use November and December as its annual open enrollment period. (This period from October 14 through December 31 is the administrative period.) Anyone who qualifies as a full-time employee during that standard measurement period will be offered coverage for the next plan year. (The plan year is the stability period.)
To be ready for 2015, this employer would normally have to count hours for the period October 15, 2013 through October 14, 2014. But, the employer hasn’t set up its human resources system to count hours yet and doesn’t want to retroactively do so. Relying on the special transition rule, this employer can instead choose to use a 6-month standard measurement period during 2014, from May 15, 2014 through October 15, 2014 and still use the 12-month plan year stability period. An employee completing 30 hours of service per week on average during that measurement period is considered a full-time employee for the entirety of the 2015 plan year (the stability period).
Meanwhile, any new variable, seasonal or part-time employee hired after May 15, 2014, will start their 12-month initial measurement period on their hire date. In addition, the regular standard measurement period will start October 15, 2014, and will run through October 15, 2015.
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