Our initial post about the Affordable Care Act (ACA) focused on explaining the formulas for determining your organization’s size and estimating the number of temporary workers who qualify as full-time employees. Since then, the IRS has issued additional guidance related to these calculations and other basic aspects of the law. While the regulations are not yet final, the IRS has assured employers they can rely on the interim proposals in preparing for compliance in 2014.
Below, we highlight some key ACA updates, terms and potential employer penalty costs. A big part of understanding the Act is deciphering words or phrases that have seemingly obvious meanings but whose real definitions are very specific, and for which a misunderstanding can result in a costly mistake. Becoming an expert in “ACA speak” will position you as a valuable resource to customers in helping them navigate this confusing time, besides helping your own organization manage this transition.
Calculating hours of service
A full-time employee is one who either averages at least 30 hours of service per week or has worked at least 130 hours per month. For employees paid on an hourly basis, employers are required to count actual hours of service. The IRS has clarified an “hour of service” to mean each hour for which an employee is paid or is entitled to payment, such as vacation, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence.
The “look-back rule”
If your organization meets the 50-employee test and is thus subject to the law as a “large” employer, newly-hired employees who are expected to work full-time, including both in-house and temporary workers placed in long-term full-time assignments, are exempt from the “look-back rule.” Assuming your organization offers health insurance, health plan coverage must be offered to all of these full-time employees within 90 days of their start date.
The law treats “variable hour” employees differently. These are employees who are expected to work full-time for a limited period or whose hours cannot be determined in advance to be full-time or part-time. Among ASOs, most if not all of your temporary workers are likely to meet the definition of “variable hour” employees. For these workers, the look-back rule allows you to measure their full-time status over a measurement period as long as 12 months during which they are not counted for the purpose of offering health insurance or calculating penalties.
Employees determined to be full-time during the look-back period (also called standard measurement period) must be treated as full-time during a subsequent stability period. During the stability period, you must offer health insurance coverage or pay a penalty as long as the individual remains employed regardless of the hours worked. If you use a 12-month look-back period, the corresponding stability period is also 12 months. Between the look-back period and stability period, employers can include an “administrative period” of up to 90 days to determine employees’ full-time status and, if offering health coverage, enroll eligible employees in the plan.
Links to additional information about the look-back system and its implications for staffing companies are included at the end of this article. We also plan to schedule a webinar to delve into this in more detail.
Transitional measurements for 2014
For 2014, employers will be allowed to use a minimum of six consecutive calendar months, rather than the entire 2013 calendar year, to determine if they are a large employer subject to the “shared responsibility” requirements of the law. Likewise, employers who want to use a 12-month look-back period to determine their full-time employees for 2014 can use a measurement period that is at least six months and begins no later than July 1, 2013.
Shared responsibility requirements and penalties
“Large” employers, defined as those that employ on average at least 50 full-time employees, are subject to shared responsibility requirements, based on whether they offer, or do not offer, “minimum essential coverage” to full-time employees and their dependents. “Minimum essential coverage” refers to the type of coverage an individual must have to meet the individual responsibility requirement under the ACA. “Dependents” does not include an employee’s spouse.
Large employers that do not offer minimum essential coverage will be subject to a nondeductible “play or pay” penalty if any full-time employee enrolls in Exchange coverage and receives a premium tax credit or cost-sharing reduction. The maximum annual “play or pay” penalty is $2,000 for each full-time employee, disregarding the first 30 full-time employees.
Employers that do offer minimum essential coverage to their full-time employees and dependents may be subject to a nondeductible “play and pay” penalty of $3,000 for each full-time employee who enrolls in Exchange coverage and receives a premium tax credit or cost-sharing reduction because the employer coverage fails to provide minimum value or is unaffordable.
Minimum value means the plan’s share of total allowed costs of benefits provided under the plan is at least 60% of these costs. Coverage is deemed unaffordable if the cost of coverage exceed 9.5% of the employee’s compensation.
Note: Although they sound very similar, “minimum essential coverage” has a different meaning than “essential health benefits.” As noted above, “minimum essential coverage” is the type of coverage an individual must have to meet the individual responsibility requirement. “Essential health benefits” refers to the package of items and services that must be included in health plans offered in the individual and small group markets.
To date, about half of the states have opted for Medicaid expansion, which will expand Medicaid coverage in 2014 to adults with incomes up to 138% percent of the federal poverty level, including low-income adults without children. Among the occupations with the greatest number of uninsured workers who can benefit from Medicaid expansion are food service, construction, landscaping and building support services. If your ASO is in a state that has opted to expand Medicaid, it is likely that some of your temporary staff and some of your customers’ permanent staff will become eligible for Medicaid. By encouraging eligible uninsured workers to enroll this fall, you can ensure that these individuals get a valuable benefit while also reducing the risk of penalties. The Alliance’s next installment on health care reform will focus on this important component of the Affordable Care Act.
Staffing Industry Analysts: Comments by George Reardon, special counsel for employment law firm Littler Mendelson related to recent IRS Guidance
Staffing Industry Analysts: ACA Look-Back Rule