On Feb. 12, 2014, the IRS published final regulations on the employer shared responsibility rules. Under the final regulations, ALEs that have fewer than 100 full-time (and full-time equivalent) employees generally have an additional year, until 2016, to comply with the pay or play rules. ALEs with 100 or more full-time (and full-time equivalent) employees must comply starting in 2015.
The final regulations provide guidance on how ALEs should identify full-time employees for purposes of offering health plan coverage and avoiding a pay or play penalty.
Who is considered an "Employee"?
Under the common law standard, an employment relationship exists when the person for whom the services are performed has the right to control and direct the individual who performs the services with respect to the result to be accomplished, along with the details and means by which it is done. This is a factual determination and is not necessarily dependent on the label the employer has placed on the relationship in the past.
Who is considered a "Full-Time Employee?"
Also, all hours of service performed for entities treated as a single employer under the Tax Code’s controlled group and affiliated service group rules must be taken into account. For example, an employee who, for a calendar month, averaged 25 hours of service per week at one employer and 15 hours of service per week at an employer in the same controlled group would be a full-time employee for that calendar month.
For employees paid on an hourly basis, an employer must calculate hours of service from records of hours worked and hours for which payment is made or due for vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence.
1. Counting actual hours of service from records of hours worked and hours for which payment is made or due
2. Using a days-worked equivalency method under which an employee is credited with eight hours of service for each day with an hour of service
3. Using a weeks-worked equivalency method under which an employee is credited with 40 hours of service per week for each week with an hour of service
Employers may use different methods for non-hourly employees based on different classifications of employees if the classifications are reasonable and consistently applied. Employers may change methods each calendar year.
Each group of collectively bargained employees covered by a separate bargaining agreement
Employees whose primary place of employment are in different states
Salaried and hourly employees
Collectively bargained and non-collectively bargained employees
To give employers flexible and workable options and greater predictability for determining full-time employee status, the IRS developed an optional look-back measurement method as an alternative to the monthly measurement method. The details of this method vary based on whether the employees are ongoing or new, and whether new employees are expected to work full-time or are variable, seasonal or part-time employees.
A measurement period for counting hours of service (called a standard measurement period or an initial measurement period);
A stability period when coverage may need to be provided depending on an employee’s full-time status; and
An administrative period that allows time for enrollment and disenrollment.
The monthly measurement method must be used to identify full-time employees by all ALEs electing not to use the look-back measurement method. The monthly measurement method involves a month-to-month analysis where full-time employees are identified based on their hours of service for each calendar month. This method is not based on averaging hours of service over a prior measurement period.
To provide additional flexibility and reduce administrative burden on employers, the final regulations allow an employer to determine an employee's full-time employee status for a calendar month under the monthly measurement method based on the hours of service over successive one-week periods. Under this optional method—referred to as the weekly rule—full-time status for certain calendar months is based on hours of service over four-week periods, and for certain other calendar months on hours of service over five-week periods.
For calendar months calculated using four week periods, an employee with at least 120 hours of service is a full-time employee.
For calendar months calculated using five week periods, an employee with at least 150 hours of service is a full-time employee.
Begins on the first day of the week immediately subsequent to the week that includes the first day of the calendar month (unless the week begins on the first day of the calendar month, in which case it is included), provided the period over which hours of service are measured includes the week in which falls the last day of the calendar month.
The final regulations include guidance for employers on how to classify an employee who earns an hour or more of service after the employee terminates employment (or has a period of absence). Under the monthly measurement method, an employee must be treated as a continuing employee, rather than a new hire, unless the employee has had a period of at least 13 weeks during which no hours of service were credited (26 weeks for an employee of an educational organization).
As of the first day that employee is credited with an hour of service; or
If later, as soon as administratively practicable. (For this purpose, offering coverage by no later than the first day of the calendar month following resumption of services is deemed to be as soon as administratively practicable.)
Substantially all of the compensation will constitute income from sources outside of the United States.
The following examples illustrate the rules for the monthly measurement method. In each example, the employer is an ALE with 200 full-time employees (including FTEs) that uses the monthly measurement method to identify full-time employees and offers coverage only to employees who are full-time employees (and their dependents).
Facts: Same as Example 1, except that Employee A has zero hours of service during a nine-week period of unpaid leave (that constitutes special unpaid leave) beginning on June 25, 2017, and ending on Aug. 26, 2017. As a result of the nine-week period during which Employee A has zero hours of service, Employee A averages less than 30 hours of service per week for July 2017 and August 2017. Employee A averages more than 30 hours of service per week for each month between and including September 2017 through December 2017. Employer Z does not use the rule of parity, and Employer Z is not an educational organization.
Conclusion: Because Employee A resumes providing services for Employer Z after a period during which the employee was not credited with any hours of service of less than 13 consecutive weeks, Employer Z may not treat Employee A as having terminated employment and having been rehired. Therefore, Employer Z may not treat Employee A as a new employee upon the resumption of services, and, accordingly, Employer Z may not again apply the rule for employees first otherwise eligible for an offer of coverage. Although the nine consecutive weeks of zero hours of service constitute special unpaid leave, the averaging method for periods of special unpaid leave does not apply under the monthly measurement method. Therefore, Employer Z may treat Employee A as a non-full-time employee for July 2017 and August 2017.
Example 3—The Weekly Rule
Facts: Employer Y uses the monthly measurement method in combination with the weekly rule for purposes of determining whether an employee is a full-time employee for a particular calendar month. For purposes of applying the weekly rule, Employer Y uses the period of Sunday through Saturday as a week, including the week that includes the first day of a calendar month and excluding the week that includes the last day of a calendar month (except in any case in which the last day of the calendar month occurs on a Saturday).
Employer Y measures hours of service for:
The five weeks from Sunday, Dec. 27, 2015, through Saturday, Jan. 30, 2016, to determine an employee's full-time employee status for January 2016;
The four weeks from Sunday, Jan. 31, 2016, through Saturday, Feb. 27, 2016, to determine an employee's status for February 2016; and
The four weeks from Sunday, Feb. 28, 2016, through Saturday, March 26, 2016, to determine an employee's status for March 2016.