Posted by: groupsplus | April 3, 2013

Health Care Reform Blog

Guidance Arrives on Safe-Harbor Methods to Determine Full-Time Employee Status and on 90-Day Waiting Period Limit

New regulatory guidance has been published interpreting some key employer provisions of the Patient Protection and Affordable Care Act (PPACA). The new guidance (i) affects how employers will determine who are “full time” employees under the PPACA’s employer shared responsibility provisions (i.e., play-or-pay mandate), (ii) interprets the maximum 90-day eligibility waiting period limit for employer group health plans and (iii) confirms the employer affordability safe harbor based on employee W-2 income rather than household income. The new guidance provides safe harbors that will be available to employers at least through 2014 while regulators prepare formal regulations.

The guidance consists of three pieces. Internal Revenue Service (IRS) Notice 2012-58 describes the safe-harbor methods employers may use to determine which employees are to be treated as full time for the purpose of the employer play-or-pay mandate. The notice includes safe-harbor methods specifically for certain newly hired “variable hour” and “seasonal” employees. IRS Notice 2012-59 and Department of Labor (DOL) Technical Release 2012-02 describe safe-harbor guidance on the 90-day eligibility waiting period limit in Public Health Service Act (PHSA) Section 2708. IRS Notice 2012-59 is virtually identical to DOL Technical Release 2012-02. Links to these three documents are at the end of this blog.

The plans affected by this guidance will include employer group health plans, whether insured or self-insured, and regardless of whether the plan is grandfathered. The guidance applies to the PPACA requirements that take effect January 1, 2014.

Background

Under Internal Revenue Code (IRC) Section 4980H, an “applicable large employer” is subject to a penalty if either (1) the employer fails to offer its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan, and any full-time employee is certified to receive a federal premium tax credit or cost-sharing reduction, or (2) the employer offers its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage, and one or more full-time employees is certified to receive a federal premium tax credit or cost-sharing reduction (generally because the employer’s coverage either is not “affordable” or does not provide “minimum value”).

Coverage under an employer-sponsored plan is deemed “affordable” to a particular employee if the employee’s required contribution to the lowest-cost plan for self-only coverage does not exceed 9.5% of the employee’s household income for the taxable year. A full-time employee with respect to any month is an employee who is employed, on average, at least 30 hours per week. Consequently, it will be crucial for employers to determine which employees are “full time” for these purposes and precisely when an individual (such as employees with variable hours and seasonal employees) may become a “full-time employee.”

The IRS previously issued several Notices describing how it planned to address these issues in regulations, including IRS Notice 2011-36, IRS Notice 2011-73 and IRS Notice 2012-17. While the IRS is not issuing formal regulations at this time, it has issued new safe-harbor guidance for 2014, described below, which builds on and in some cases modifies the guidance provided to date.

In particular, the IRS is revising the approach outlined in Notice 2012-17 for new variable-hour employees. The IRS is also providing a similar safe harbor for certain seasonal employees and is modifying the rule for “ongoing employees” to allow for the use of an “administrative period,” described below, between the measurement and stability periods. A description of the new safe-harbor guidance follows.

Safe Harbor for Determining Ongoing Employees’ Full-Time Status

For ongoing employees, employers may generally use the safe-harbor method based upon a measurement and stability period that were described in Notices 2011-36 and 2012-17. The measurement period that an employer chooses to apply to ongoing employees is referred to in the guidance as the “standard measurement period.”   An “ongoing employee” is generally an employee who has been employed by the employer for at least one complete standard measurement period.

Under the safe-harbor method for ongoing employees, an employer determines each ongoing employee’s full-time status by looking back at the standard measurement period (a defined time period of not less than three but not more than 12 consecutive calendar months, as chosen by the employer).

The employer may determine the months in which the standard measurement period starts and ends, provided that the determination must be made on a uniform and consistent basis for all employees in the same category. Employers may use measurement periods and stability periods that differ either in length or in their starting and ending dates for the following categories of employees: (1) collectively bargained employees and non-collectively bargained employees, (2) salaried employees and hourly employees, (3) employees of different entities and (4) employees located in different states. However, certain rules govern the relationship between the length of the measurement period and the stability period.

According to the guidance, if an employer chooses a standard measurement period of 12 months, the employer could choose to make it the calendar year, a non-calendar plan year or a different 12-month period (such as one that ends shortly before the start of the plan’s annual enrollment season).

If an employer determines that an employee averaged at least 30 hours per week during the standard measurement period, then the employer must treat the employee 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 the individual remains an employee. The stability period for such an employee would be a period of at least six consecutive calendar months that is no shorter in duration than the standard measurement period and that begins after the standard measurement period (and after any applicable “administrative period” described below).

If an employer determines that an employee did not work full time during the standard measurement period, the employer may treat the employee as not a full-time employee during the stability period that follows, but is not longer than, the standard measurement period. Different rules may apply to employees who move into full-time status during the year. When formal regulations are issued, they will include additional rules on the treatment of employees who experience a change in employment status during a standard measurement period.

Ongoing Employees — Option to Use an Administrative Period Under the Safe Harbor

The new guidance recognizes that an employer will need time between the standard measurement period and the associated stability period to determine, for example, which ongoing employees are eligible for coverage, and to notify and enroll employees. Thus, an employer may make time for these administrative steps by having its standard measurement period end before the associated stability period begins.

However, any administrative period between the standard measurement period and the stability period may not reduce or lengthen the measurement period or the stability period. Under the new guidance, the administrative period following a standard measurement period may last up to 90 days.

To prevent an administrative period from creating any gaps in coverage, the administrative period will overlap with the prior stability period. Thus, during any administrative period that applies to ongoing employees following a standard measurement period, ongoing employees who are eligible for coverage because of their status as full-time employees based on a prior measurement period would continue to be offered coverage.

New Employees Who Are Reasonably Expected to Work Full Time

If an employee is reasonably expected as of his/her start date to work full time, an employer that offers coverage to the employee at or before the conclusion of the employee’s initial three calendar months of employment will not be subject to the employer play-or-pay penalty under Section 4980H for failing to offer coverage to the employee for up to the initial three calendar months of employment. Rules on compliance with the 90-day waiting period limit are in the new IRS Notice 2012-59 and DOL Technical Release 2012-02, described below.

New Employees: Safe Harbor for Variable-Hour and Seasonal Employees

Variable-Hour Employees. Under the new guidance, a new employee is a variable-hour employee if, based on the facts and circumstances at his/her start date, it cannot be determined that the employee is reasonably expected to work, on average, at least 30 hours per week. A new employee who is expected to work initially at least 30 hours per week may be a variable-hour employee if, based on the facts and circumstances at the start date, the period of employment at more than 30 hours per week is reasonably expected to be of limited duration and it cannot be determined that the employee is reasonably expected to work, on average, at least 30 hours per week over the initial measurement period.

To illustrate, the guidance describes a variable-hour employee to include a retail worker hired at more than 30 hours per week for the holiday season who is reasonably expected to continue working after the holiday season but is not reasonably expected to work at least 30 hours per week for the portion of the initial measurement period remaining after the holiday season, so that it cannot be determined at the start date that the employee is reasonably expected to average at least 30 hours per week during the initial measurement period.

Seasonal Employees. The PPACA uses the term “seasonal worker” only in the context of whether an employer meets the definition of an applicable large employer. The law generally provides that if an employer’s workforce exceeds 50 full-time employees for 120 days or fewer during a calendar year, and the employees in excess of that 50 who were employed during that period of no more than 120 days were seasonal employees, the employer would not be an applicable large employer. For this purpose, “seasonal worker” means a worker who performs labor or services on a seasonal basis, as defined by the Secretary of Labor, including (but not limited to) workers covered by 29 CFR 500.20(s)(1) and retail workers employed exclusively during holiday seasons. The PPACA does not address how the term “seasonal employee” might be defined for any other purpose, such as whether a new employee of an applicable large employer is reasonably expected to work full time for purposes of any penalty under the employer play-or-pay mandate. Despite this, the new guidance provides that “through at least 2014, employers are permitted to use a reasonable good-faith interpretation of the term ‘seasonal employee’ for purposes of this notice.”

If an employer’s group health plan offers coverage only to full-time employees, the employer may use both a measurement period of between three and 12 months (the same as allowed for ongoing employees) and an administrative period of up to 90 days for variable-hour and seasonal employees. However, the measurement period and the administrative period combined may not extend beyond the last day of the first calendar month beginning on or after the one-year anniversary of the employee’s start date (totaling, at most, 13 months and a fraction of a month). These periods are described in greater detail below.

Initial Measurement Period and Associated Stability Period (Variable-Hour and Seasonal Employees)

For variable-hour and seasonal employees, the guidance permits employers to determine full-time status using an “initial measurement period” of between three and 12 months (as selected by the employer).

An employer would measure the hours of service completed by the new employee during the initial measurement period and determine whether the employee completed an average of 30 hours of service per week or more during this period. The stability period for such employees must be the same length as the stability period for ongoing employees. As in the case of a standard measurement period, if an employee is determined to be a full-time employee during the initial measurement period, the stability period must be a period of at least six consecutive calendar months that is no shorter in duration than the initial measurement period and that begins after the initial measurement period (and any associated administrative period).

If a new variable-hour or seasonal employee is determined not to be a full-time employee during the initial measurement period, the employer may treat the employee as not a full-time employee during the stability period that follows the initial measurement period. The stability period for such employees must not be more than one month longer than the initial measurement period and must not exceed the remainder of the standard measurement period (plus any associated administrative period) in which the initial measurement period ends. According to the guidance, allowing a stability period to exceed the initial measurement period by one month in these circumstances gives additional flexibility to employers that wish to use a 12-month stability period for new variable-hour and seasonal employees and an administrative period that exceeds one month. Such an employer could use an 11-month initial measurement period (in lieu of the 12-month initial measurement period that would otherwise be required) and still comply with the general rule that the initial measurement period and administrative period combined may not extend beyond the last day of the first calendar month beginning on or after the one-year anniversary of the employee’s start date.

An employee or related individual is not considered eligible for minimum essential coverage under the plan (and therefore may be eligible for a premium tax credit or cost-sharing reduction through an exchange) during any period when coverage is not offered, including any measurement period or administrative period prior to when coverage takes effect.

Transition from New Employee Rules to Ongoing Employee Rules (Variable-Hour and Seasonal Employees)

Once a new employee (who has been employed for an initial measurement period) has been employed for an entire standard measurement period, the employee must be tested for full-time status, beginning with that standard measurement period, at the same time and under the same conditions as other “ongoing employees.” Thus, an employer, for example, with a calendar-year standard measurement period that also uses a one-year initial measurement period beginning on the employee’s start date would test a new variable-hour employee whose start date is February 12 for full-time status first based on the initial measurement period (February 12 through February 11 of the following year) and again based on the calendar-year standard measurement period (if the employee continues in employment for that entire standard measurement period) beginning on January 1 of the year after the start date.

An employee determined to be a full-time employee during an initial measurement period or standard measurement period must be treated as a full-time employee for the entire associated stability period. This is the case even if the employee is determined to be a full-time employee during the initial measurement period but determined not to be a full-time employee during the overlapping or immediately following standard measurement period. In that case, the employer may treat the employee as not a full-time employee only after the end of the stability period associated with the initial measurement period. Thereafter, the employee’s full-time status would be determined in the same manner as that of the employer’s other ongoing employees.

In contrast, if the employee is determined not to be a full-time employee during the initial measurement period, but is determined to be a full-time employee during the overlapping or immediately following standard measurement period, the employee must be treated as a full-time employee for the entire stability period that corresponds to that standard measurement period (even if that stability period begins before the end of the stability period associated with the initial measurement period). Thereafter, the employee’s full-time status would be determined in the same manner as that of the employer’s other ongoing employees.

Optional Administrative Period for New Employees (Variable-Hour and Seasonal Employees)

In addition to the initial measurement period, the employer is permitted to apply an administrative period before the start of the stability period. This administrative period must not exceed 90 days in total. For this purpose, the administrative period includes all periods between the start date of a new variable-hour or seasonal employee and the date the employee is first offered coverage under the employer’s group health plan, other than the initial measurement period.

Thus, for example, if the employer begins the initial measurement period on the first day of the first month following a new variable-hour or seasonal employee’s start date, the period between the employee’s start date and the first day of the next month must be taken into account in applying the 90-day limit on the administrative period. Similarly, if there is a period between the end of the initial measurement period and the date the employee is first offered coverage under the plan, that period must be taken into account in applying the 90-day limit on the administrative period.

In addition to the specific limits on the initial measurement period (which must not exceed 12 months) and the administrative period (which must not exceed 90 days), there is a limit on the combined length of the initial measurement period and the administrative period applicable for a new variable-hour or seasonal employee. Specifically, the initial measurement period and administrative period together cannot extend beyond the last day of the first calendar month beginning on or after the first anniversary of the employee’s start date. To illustrate, the guidance provides that if, for example, an employer uses a 12-month initial measurement period for a new variable-hour employee, and begins that initial measurement period on the first day of the first calendar month following the employee’s start date, the period between the end of the initial measurement period and the offer of coverage to a new variable-hour employee who works full time during the initial measurement period must not exceed one month.

IRS Notice 2012-58 includes 11 examples illustrating various scenarios on variable-hour and seasonal employees.

90-Day Waiting Period Limit Under Public Health Service Act Section 2708

The PPACA, through the addition of Section 2708 to the PHSA, generally prevents an otherwise eligible employee (or dependent) from having to wait more than 90 days before coverage becomes effective under a group health plan.

The Departments of Labor, Health and Human Services (HHS), and the Treasury (the Departments), are developing coordinated regulations and other guidance to implement this provision of the PPACA. New guidance (issued in substantially identical form by the Departments in IRS Notice 2012-59 and DOL Technical Release 2012-02), provides temporary guidance regarding the 90-day waiting period limit. The guidance will remain in effect at least through the end of 2014. The Departments indicate that formal regulations or other guidance on these issues applicable for periods after 2014 will provide adequate time to comply with any additional or modified requirements.

Under the PPACA, as confirmed by the new guidance, a group health plan and a health insurance issuer offering group coverage may not use a waiting period that exceeds 90 days. A waiting period is the period of time that must pass before coverage for an employee or dependent who is otherwise eligible to enroll under the terms of the plan can become effective. For this purpose, being eligible for coverage means having met the plan’s substantive eligibility conditions (such as being in an eligible job classification or achieving job-related licensure requirements specified in the plan’s terms).

Eligibility conditions that are based solely on the lapse of a time period are permissible for no more than 90 days. Other conditions for eligibility under the terms of a group health plan are generally permissible, unless the condition is designed to avoid compliance with the 90-day waiting period limitation.

If, under the terms of a plan, an employee may elect coverage that would begin on a date that does not exceed the 90-day waiting period limitation, the 90-day waiting period limitation is considered satisfied. Consequently, a plan or issuer will not be considered to have violated the 90-day limit merely because employees take additional time to elect coverage.

If a group health plan conditions eligibility on an employee regularly working a specified number of hours per period (or working full time), and it cannot be determined that a newly hired employee is reasonably expected to regularly work that number of hours per period (or work full time), the plan may take a reasonable period of time to determine whether the employee meets the plan’s eligibility condition, which may include a “measurement period” that is consistent with the time frame permitted for such determinations (as described above, where IRS Notice 2012-58 provides a safe-harbor method under which an applicable large employer may use a measurement period of up to 12 months to determine whether certain types of new employees are full-time employees, without being subject to a play-or-pay penalty under Section 4980H).

An employer may use a measurement period that is consistent with Section 4980H, whether or not it is an applicable large employer that is subject to the employer play-or-pay mandate. Except where a waiting period that exceeds 90 days is imposed after a measurement period, the time period for determining whether such an employee meets the plan’s eligibility condition will not be considered to be designed to avoid compliance with the 90-day waiting period limitation if coverage is made effective no later than 13 months from the employee’s start date, plus the time remaining until the first day of the next calendar month, if the employee’s start date is not the first day of a calendar month. The new guidance illustrates these points with four examples.

Conclusion

Employers have been urgently awaiting this guidance, particularly employers with significant turnover and those with material groups of part-time and seasonal employees. Employers with low turnover and few part-time or seasonal employees will still be affected by how the rules apply to ongoing employees. The new guidance should allow all employers to begin strategic and operational planning for how full-time employees will be identified. Employers need to understand and begin applying this new guidance now in order to be prepared to determine employee status during the approach of the 2014 compliance date.

References: IRS Notice 2012-58; IRS Notice 2012-59; DOL Technical Release 2012-02

Article from Towers Watson Health Care Reform Bulletin

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