Beginning on January 1, 2014, it will be crucial for an employer to know the full-time or part-time status of every employee. That is when the employer mandate becomes effective under Internal Revenue Code § 4980H. Section 4980H imposes a tax penalty on an applicable large employer if the employer fails to make satisfactory minimum essential coverage available during a calendar month at an affordable price to all of its full-time employees and their dependents under an eligible employer-sponsored plan.
The penalty can be surprisingly steep. On an annualized basis, the penalty for failing to make the required coverage available to even one full-time employee is $2,000 per year for each of the employer’s full-time employees, not counting the first 30 full-time employees. The penalty for failing to offer such coverage on an affordable basis is $3,000 per year for each full-time employee for whom the coverage is unaffordable and who obtained coverage under a qualified health plan (i.e., a bronze, silver, gold, or platinum individual policy available from an Exchange).
According to the statute, “[a]n employee who is employed on average at least 30 hours of service per week” is a full-time employee for purposes of the employer mandate. Because the statute does not specify a period over which the average is to be determined, employers have looked forward to guidance on how to determine whether an employee is a full-time employee, which is an essential first step in any compliance strategy.
As I mentioned in my last post, the Internal Revenue Service issued at least temporary guidance on the “full-time employee” question late last week. Notice 2012-58 (August 31, 2012) describes a number of safe harbors related to determining whether the employer mandate under the Affordable Care Act applies. Several of those safe harbors provide comparatively easy methods for determining full-time status based on average hours during a “look-back period” and applying the determination during a “stability period.” Within certain limits, these safe harbors even allow employers to select the length of the look-back and stability periods. While the safe harbors may seem a little difficult to grasp at first, in general, they are reasonable and workable.
But as I hinted in my last post, the favorable regulatory weather may not last for long. Employers can rely on the safe harbors described in Notice 2012-58 only until regulations under Section 4980H are issued and effective. Treasury plans to issue those regulations in the very near future. Employers that do not take the necessary steps to employ the safe harbors presumably will be subject to any more stringent requirement in the regulations as of an effective date for that requirement. An employer that takes the necessary steps to implement use of a Notice 2012-58 safe harbor will continue to have the shelter of that safe harbor, but only until the later of January 1, 2015, or the end of a stability period that is based on a measuring period that begins in 2013 or 2014. After that, the regulations will apply with full force.
Notice 2012-58 announced several issues under consideration for the anticipated Section 4980H regulations. One of them sounds especially ominous.
Whether and, if so, what types of safe harbor methods should be available to employers for use in determining the full-time status of short-term assignment employees, temporary staffing employees, employees hired into high-turnover positions, and other categories of employees that may present special issues?
The reference to “employees hired into high turnover positions” suggests that the final regulations in this area could be far less favorable to employers than the safe harbors in Notice 2012-58. Under the notice-based safe harbor, each employee hired into a given position begins his or her own “initial look-back period” if it cannot be determined on the date of hire that the employee is reasonably expected to have 30 or more hours per week.
Thus, under the notice-based safe harbor, employers and employees both can benefit without benefiting at each other’s expense. Properly matched with the employer’s expected pattern of terminations and replacements, using the noticed-based safe harbor could relieve an employer from concern over inadvertently triggering a tax penalty, while at the same time allowing a series of individuals holding a position through early 2016 to be eligible for premium tax credits.
The days may be numbered for this win-win scenario. As the language quoted above indicates, Treasury already may have in mind a position-based determination of whether an employee is a full-time employee. For example, Treasury may be considering a rule that would look to the average number of aggregate weekly work-hours per position to classify all holders of that position as full time. Alternatively, Treasury may be considering some form of “tacking” rule that would stitch together a current employee’s period of service with the period of service performed by one or more previous occupants of a position. Under that scenario, a newly-hired employee would not necessarily start from scratch for purposes of determining full-time status. It also is conceivable that when a full-time employee quits and the employer hires two part-time replacements, each of them would “inherit” the average hours worked by the employee that they were hired to replace.
One thing is certain. Treasury must be reasonably far along in its thinking on these issues. To quote Notice 2012-58, “In view of the anticipated timing of regulations and other guidance . . . those who wish to submit any further comments on these or other issues relating to this notice [are requested to] do so by September 30, 2012.” This comment period is quite short, and as a practical matter it is effectively even shorter than it appears. Notice 2012-58 was made public in the late afternoon of August 31, 2012, just as the holiday weekend began. In effect, the employer community will have only about 25 days to file comments on several relatively critical issues.
Tom Christina is a shareholder in the Greenville office of Ogletree Deakins.