The final regulations (February 2014) on the Employer Shared Responsibility (ESR) provisions of the Affordable Care Act (ACA) clarify how employers must treat certain categories of new hires, as either full-time employees, variable hour employees, or seasonal employees. These Employer Shared Responsibility provisions are not effective until 2015 for employers with 100 or more full-time employees and full-time equivalents, and not until 2016 for employers with 50-99 full-time employees and full-time equivalents.
For many employers, the clarification means employers must offer benefits to new hires a lot sooner than they thought they would (once the ESR provisions are effective, not before then). This article explains how to identify newly-hired full-time employees and gives three detailed examples with explanations.
The Bottom Line
In all three examples below, the final regulations require that a large employer treat the new hire as a full-time employee and offer coverage by the first day of the fourth month. This applies even if the new employee is in a category of employees for whom the employer has elected to apply the “Look-back” measurement method rather than the Monthly measurement method. (See page 4 for a short discussion of the Measurement Methods.) The reason these employees must be treated as full-time employees is because they do not meet the definitions of “variable hour employee” or “seasonal employee” in the final regulations.
Consider the following examples, then see whether the treatment required by the final regulations matches what you thought would be appropriate.
Example 1: Summer Intern or Fixed-Term Project Employee
You hire an employee as a summer intern for three to four months or as a project employee to work on a particular project or contract that is for six to seven months. The employee is expected to work more than 30 hours/ week (130/month) on a regular basis but only for the limited periods noted. You intend to employ the summer intern 20-25 hours/week (if at all) after the summer, and you do not know whether you will continue to employ the project worker after the project or contract ends. Neither of these positions are “seasonal” as defined in the final regulations (i.e., positions that generally can be performed only during certain times or seasons of the year). This assumes the “summer” internship does not meet the definition of “seasonal” because the intern could be hired at any time during the year. However, one might argue that
summer interns are seasonal employees (if the employer does not intend to hire them on a part-time basis after the summer) because the “summer internship” can only be performed during the summer while students are on break from school. Employers who wish to take this position should obtain a legal opinion from their own attorney.
Result: You must track employees’ hours for each calendar month because these employees cannot be treated as variable hour employees since they are reasonably expected at date of hire to work more than 30 hours per week.
Reason: First, the final regulations specify that, “for a new employee who is reasonably expected at the employee’s start date to be a full-time employee (and who is not a seasonal employee),” an employer must track the new employee’s hours each calendar month and must offer coverage by the first day of the fourth calendar month. This applies even if the new employee is in a category of employees for whom the employer has elected to apply the “Look-back” measurement method rather than the Monthly measurement method.
Second, these employees must be considered newly-hired full-time employees because they do not meet the definition of “variable hour” employees. Specifically, section 54.4980H-1(a)(49)(i)(A) of the final regulations provides that a “Variable hour employee” means “an employee if, based on the facts and circumstances at the employee’s start date, the applicable large employer member cannot determine whether the employee is reasonably expected to be employed on average at least 30 hours of service per week during the initial measurement period because the employee’s hours are variable or otherwise uncertain.” (Underlining added.)
Section 54.4980H-1(a)(49)(ii)(A) enumerates some of the factors an employer can consider in determining whether an employee is reasonably expected to be (or reasonably expected not to be) employed on average at least 30 hours of service per week during the initial measurement period. It also specifies that no one factor is determinative and that employers can consider other factors as well. The factors listed in the regulations are:
- whether the employee is replacing an employee who was a full-time employee or a variable hour employee,
- the extent to which the hours of service of employees in the same or comparable positions have actually varied above and below an average of 30 hours of service per week during recent measurement periods, and
- whether the job was advertised, or otherwise communicated to the new employee or otherwise documented (for example, through contract or job description) as requiring hours of service that would average at least 30 hours of service per week, less than 30 hours of service per week, or may vary above and below an average of 30 hours of service per week.
In the two situations in Example 1 (a summer intern or an employee hired to work on a particular project or contract), these employees were hired to work more than 30 hours a week on a regular basis but only for a short period of time. Thus, they cannot be treated as variable hour employees, because their hours are not expected to sometimes average more than 30 hours per week and sometimes less than that.
However, an employer might be able to exclude from eligibility all summer interns (even if they work full-time), because the ESR provisions allow an employer to offer coverage to only 70% of full-time employees in 2015 (and 95% thereafter). It just depends on what percentage of the employer’s workforce is summer interns or project employees.
Example 2: High Turn-Over Position
You hire two new employees to work 35 hours /week making “cold calls.” In the past, very few if any employees in this position have remained on the job for more than three months.
Result: You must track these employees’ hours for each calendar month because they cannot be treated as variable hour employees since they are reasonably expected at date of hire to work more than 30 hours per week.
Reason: Section 54.4980H-1(a)(49)(ii)(A) of the final regulations, after enumerating some of the factors an employer can consider, continues by stating: “For purposes of determining whether an employee is a variable hour employee, the applicable large employer member may NOT take into account the likelihood that the employee may terminate employment with the applicable large employer (including any member of the applicable large employer) before the end of the initial measurement period.”
Example 3: “Seasonal” Employee who Works Eights Months a Year
You hire an employee as a “seasonal” employee and you consider the season to be eight months. Or, you hire an employee to work the summer season, and you also hire that employee to work the winter season. Examples of such a situation could be a mountain/lake resort or recreation area that has summer sports and winter skiing, or a municipality that hires employees in the winter as snow plow drivers and in the summer as parks and recreation employees.
Result: You must track these employees’ hours for each calendar month because they do not meet the “seasonal employee” definition in the final regulations.
Reason: The final regulations (section 54.4980H-1(a)(38)) define a “seasonal employee” as “”an employee who is hired into a position for which the customary annual employment is six months or less.” This definition applies for purposes of determining whether a particular employee is full-time or not. The proposed regulations defined a “seasonal worker” by reference to a four-month (or 120-day) period for purposes of determining employer size, but they did not define seasonal for purposes of determining a particular employee’s full-time status.
Thus, an employer cannot define an employee who works eight months of the year as a “seasonal” employee for purposes of determining full-time status and eligibility for coverage. The preamble to the final regulations does note, however, that if seasonal employment is extended in a particular year beyond its customary duration, the employee will not cease to be considered a seasonal employee. The preamble gives the example of a ski instructor whose customary annual employment is six months or less but who in a particular year works seven months due to an unusually long or heavy snow season.
The situation of an employee who is hired for two separate seasonal positions is not addressed in the final regulations, but when IRS regulators were asked this question at the May 2014 American Bar Association Benefits and Tax meetings, they did not hesitate in responding that such an employee would not be considered a seasonal employee.
If at time of hire the employee is reasonably expected to work on average at least 30 hours per week or 130 per month, the employer must treat the new hire as a full-time employee and offer benefits by the first day of the fourth calendar month, even if the employer hires the employee to work only eight months of the year.
The Bottom Line under the Final ESR Regulations
In all three of the above situations, many employers would like to track the new employee’s hours during an initial measurement period (probably 12 months), and then, if the employee averages at least 30 hours/week (or 130 hours/month) during the initial measurement period, the employer would offer coverage during the associated stability period. This stability period would not begin until 13-14 months after the employee’s date of hire, and by that time the employee probably would not be working for the employer.
In all three examples, however, the final regulations require that a large employer treat the new hire as a full-time employee and offer coverage by the first day of the fourth month. That is, the employer cannot treat any of the above employees as variable hour or seasonal employees, track their hours during a measurement period, and not offer coverage until 13 months later.
Employers Must Apply the same Measurement Method to All Employees in the Same Category
A large employer must use either the Monthly Measurement Method or the Look-Back Measurement Method to determine whether or not a particular employee works full-time. The final regulations (at 54.4980H-3(d)(1)(v)) require that an employer use the same Measurement Method for all employees in the same category, and they also list the four permissible categories of employees:
- Collectively bargained employees and non-collectively bargained employees
- Each group of bargained employees covered by a separate bargaining agreement
- Salaried employees and hourly employees
- Employees whose primary places of employment are in different States.
Thus, an employer cannot use the Monthly Measurement Method for employees who are expected to work full-time and the Look-Back Measurement Method for employees who are variable hour or seasonal employees.
Reminder: Why an Employer Needs to Track Hours of Variable Hour and Seasonal Employees
The reason a large employer needs to track hours of variable hour and seasonal employee is to determine and document the months during which such individuals are full-time and not full-time. The employer needs to know this for two reasons:
- To determine to whom and when the employer must offer coverage, and
- To determine when the employer might be subject to a penalty.
When the Employer Must Offer Coverage: Employers must offer coverage to full-time employees as of the end of the allowable waiting period. If you are confused by the three- month versus 90-day waiting periods, you are not alone. The different waiting periods are articulated in different sets of ACA regulations. The final ESR regulations limit the length of the eligibility waiting period to no more than three calendar months, while the final Waiting Period regulations (issued February 20, 2014) set the maximum at 90 days, which often in practice will mean that coverage must begin on the first of the month after 60 days. New proposed Waiting Period regulations (issued concurrently with the final regulations) would allow employers to start the 90-day waiting period immediately after a bona fide “orientation period” of not more than one month. This could result in an eligibility date of the first of the month following 90 days, which would generally be the same as the ESR “first of the fourth month” limit.
When the Employer Might be Subject to a Penalty: If at least one full-time employee of the employer buys health insurance in a public Exchange (Marketplace) and qualifies for a subsidy (either a premium tax credit or a cost-sharing reduction), the employer must pay a penalty. There are two different types of penalties. The IRC section 4980H(a) penalty applies if a large employer offers coverage to less than 70% of its full-time employees in 2015 (or to less than 95% after the 2015 plan year). This penalty is $166.67/month times the total number of “full-time” employees minus the first 80 (minus the first 30 after 2015). The penalty calculation does not include variable hour or seasonal employees who are in their measurement or administrative periods, even if they in fact worked on average at least 30 hours/week or 130/month during those periods. Nor does it include those who are in their stability periods but who did not qualify for coverage based on their hours worked during the associated measurement period.
The other penalty is the IRC section 4980H(b) penalty. It applies if a large employer offers coverage to at least 70% of its full-time employees (95% after 2015), but for some full-time
employees the coverage is either not “affordable” or does not provide minimum value. This penalty is $250/month for each full-time employee who buys health insurance in a public Exchange (Marketplace) and qualifies for a subsidy and for whom the employee cost for self-only coverage under the lowest-cost option available from the employer is more than 9.5% of the employee’s household income (or one of three safe harbors), or for whom the employer coverage offered does not provide at least minimum value. Again, the penalty calculation does not apply if the employee who qualified for a subsidy was a variable hour or seasonal employee who was in his/her measurement or administrative periods, nor does it include those employees who are in their stability periods but who did not qualify for coverage based on their hours worked during the associated measurement period. Additionally, the (b) penalty cannot be more than the (a) penalty would have been had it applied.
Summary and Employer Action Items
The bottom line is this:
- If you hire a non-seasonal employee whom you reasonably expect (at date of hire) to work at least 30 hours/week or 130 hours/month, you must track hours each calendar month and offer benefits by the first day of the fourth month if the employee averages at least 130 hours/month for the first three months. This applies even if you hire this employee for a short-term position or a summer internship (unless you take the position, upon advice from your legal counsel, that a summer intern is a “seasonal” employee).
- If you hire a non-seasonal employee and you cannot reasonably determine at date of hire if they will work on average at least 30 hours/week (130 hours/month), you can track their hours over their “initial measurement period” and not offer benefits until the associated “stability period,” if the employee averaged at least 130 hours/ month during the measurement period. The stability period might not begin until 13-14 months after the date of hire.
- If you hire an employee who meets the new definition of a “seasonal employee,” you can track their hours over their “initial measurement period” and not offer benefits until the associated “stability period” if they averaged at least 130 hours/month during the initial measurement period. You do not have to offer benefits by the first day of the fourth month.
PDF of this Article: Understanding When to Offer Coverage to NEW HIRES – VH or FT EEs 6-17-14