Employer Responsibility – Will You Pay or Play? Part II - The Variable Hour or Seasonal Employee Problem

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Although the employer mandate has been delayed to 2015, employers shouldn’t relax too much because significant planning still needs to be done now.  Beginning in 2015 large employers either must offer full-time employees affordable, minimum value health coverage or face potential penalties.  We discussed these rules generally in our May 6, 2013 alert.  As noted in that alert, employers that intend to offer healthcare coverage only to full-time employees and have variable hour employees or seasonal employees will face hurdles in avoiding penalties.  This alert discusses who is considered a full-time employee, the IRS safe harbors for making this determination, and actions that employers should take now to meet these requirements.

Who Is a Full-Time Employee?

An employee generally is considered full-time if he or she is a common law employee paid for, on average, at least 30 hours per week.  An employee must be credited for each hour he or she is paid or entitled to be paid, including periods where no duties are performed, such as vacation time, holidays and sick time. Employers may credit salaried employees with eight hours per day or 40 hours per week, unless such method would significantly understate the employee’s actual hours.

The Variable Hour Employee Problem

Because the coverage and penalty requirements apply on a month-to-month basis, variable hour and seasonal employees can shift in and out of the coverage requirement throughout a plan year.  In addition, a newly hired variable hour employee’s hours could increase during the course of a year so that on average the employee’s hours slip over the 30 hour per week threshold. 

This creates significant administrative burdens for an employer trying to track these employees and offer health plan coverage at just the right time throughout the year to avoid penalties.  Thankfully, the IRS recognized that the application of these rules presented a serious practical problem for employers.  Unfortunately, the complexity of the IRS’s solution has many employers still looking for alternative strategies to manage this dilemma. 

IRS Safe Harbor

The IRS safe harbor method for current employees allows employers to look back at a variable hour employee’s hours during a fixed period, determine whether the employee was full-time or part-time during that period, and then lock the employee into that status for a subsequent fixed period.  This gives the employer certainty about an employee’s status and prevents the constant on-the-plan/off-the-plan result.  However, implementing this safe harbor may be more difficult than it seems at first blush.

The safe harbor essentially works as follows:

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The employer can set the beginning and length of each period within prescribed limits.  The look back or “standard measurement period” (SMP) must be between 3 and 12 months.   If an employee averages 30 or more hours per week during the SMP, the employer must offer coverage during the subsequent “stability period.”  If the employee does not average at least 30 hours during the SMP, the employee is not considered full-time for the subsequent stability period.  The stability period may be between 6 months and 12 months, but must be at least as long as the SMP and, for employees who do not meet the full-time threshold, it cannot be longer than the SMP.  Employers may use an “administrative period” of up to 90 days between the end of the SMP and the beginning of the stability period in order to review data, make full-time status determinations, and notify and enroll eligible employees.

Practically speaking, for employers who have a calendar-year coverage period and want to have a calendar year stability period, the safe harbor can be applied as follows:

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A similar safe harbor applies for new employees.  Those employees have a different first measurement and stability period, but then are integrated into the standard measurement and stability periods.  There are special rules that apply to employees with breaks in service who are rehired.

Importantly, this means that employers need to identify variable hour and seasonal employees and start tracking those employees’ hours by Q4 of this year! 

Employer Action Steps

Employers should be making and implementing decisions now regarding how to deal with variable hour employees for 2015.  Action steps include –

  • Choosing a method for determining when an employee attains full-time status.
  • Identifying plan eligibility design changes necessary to eliminate the gap between the employer’s current eligibility provisions and the new requirements.
  • Making the necessary administrative and recordkeeping changes necessary to implement these new requirements.

Keep in mind that these rules can be fact-specific and this article is just a summary.