Due to the Treasury and IRS release of the "Employer Shared Responsibility for Employers Regarding Health Coverage" Final Rule published in the Federal Register on Feb. 12, 2014, this web page is currently under construction and is being revised to reflect recent revisions to the employer mandate requirements. For a summary of what changed, please ask your advisor for a copy of our white paper.
Variable Hour and Seasonal Employees
Beginning on Jan. 1, 2015, the Patient Protection and Affordable Care Act (PPACA) employer mandate generally requires applicable large employers to offer coverage to all full-time employees (FTEs) and their dependents, or risk paying a penalty. FTEs include those employees working at least 30 hours weekly or 130 monthly hours.
Employers face special challenges in identifying which of their employees are FTEs, particularly for those with irregular or seasonal work schedules, such as landscaping and construction companies, hotels, restaurants, retail and similar businesses. These employees may be considered "variable hour" and "seasonal" employees. Employers with these types of employees may choose to implement "measurement periods" to determine whether the employee actually works enough hours to be offered coverage (so the employer avoids paying a penalty). The employer makes this determination during the "administrative period," and then coverage is provided during a "stability period," provided the employee has worked enough hours to be eligible for coverage.
Determining Which Employees Are "Variable Hour" and "Seasonal"
Before discussing the details relating to measurement periods, it's important to understand the definition of "variable hour" and "seasonal" employees.
A variable hour employee is one whose schedule cannot be definitively known in advance. In other words, the employee's hours vary such that it is not possible to determine as of the date of hire whether the employee will work 30 weekly (or 130 monthly) hours or more during their period of employment.
A seasonal employee is one who performs labor that is not performed continuously throughout the year and may only be performed at certain times during the year. The determination is focused on the type and duration of the work performed, and employers are permitted to use a reasonable, good faith interpretation of the "seasonal" definition. Examples of a seasonal employee may include holiday season retail store employees, a ski instructor or a golf course maintenance worker.
Variable hour or seasonal employees do not necessarily include:
- Non-seasonal, short-term full-time employees
- Part-time employees
- Interns employees
- Per diem employee working full-time hours
- Commission based employees
- Employees hired into high-turnover positions that are working full-time hours
- Staffing and leased employees
- Teachers and adjunct faculty
In all of these examples, if the expected hours for the employees are known, they are most likely not variable hour employees. For more information about these employees, see the section on Special Rules for Employees with Nontraditional Work Schedules.
What are Measurement, Administrative and Stability Periods?
For ongoing employees and for new variable hour and seasonal employees, employers may use an IRS approved safe harbor to determine if the employee is an FTE to whom they must offer coverage. The safe harbor uses the terms measurement period, administrative period, and stability period. These terms are defined below.
A look-back period of between three and 12 consecutive months (the employer can choose) during which the employer tracks the average weekly or monthly work hours of the employee. There are two types of measurement periods. The first is called the standard measurement period, and this is used for ongoing employees. There is also an initial measurement period that is used for new employees.
Administrative period (optional)
A time period between the measurement and stability periods. If an employee averages 30 hours or more per week (or 130 hours per month), then that employee becomes eligible for coverage (i.e., is treated as an FTE) during a subsequent coverage period, called a "stability" period.
During this period, the employer calculates the hours during the measurement period, notifies eligible employees and provides an opportunity for them to elect coverage during an open enrollment if they have satisfied the hours threshold. The administrative period cannot create a gap in coverage. It must overlap with the prior stability period for ongoing FTEs until the new stability period begins.
A look-forward period that locks in an employee's status either as a full-time employee or not a full-time employee and guarantees that the employee is eligible or not eligible for coverage, depending on the determination made during the administrative period (if used).
The stability period begins at the end of the measurement period and any administrative period, if the employer elects to have one, and is the longer of six consecutive calendar months or the length of the standard measurement period.
An "ongoing employee" is an employee who has been employed for at least one complete standard measurement period.
The safe harbor parameters for ongoing employees are outlined next.
General Parameters for Standard Periods (Ongoing Employees)
||3-12 consecutive months
||Same as standard measurement period, but at least 6 months
||Up to 90 days
Below are two examples of how the standard measurement periods for ongoing employees might work for a six-month measurement period counting hours monthly and a 12-month measurement period with an administrative period and a calendar-year plan.
Example 1: Six-month Standard Measurement and Stability Periods. Counting Hours Monthly.
6-month Standard Measurement Period
6-month Standard Stability Period
|Hours Worked Per Month
||Hours Worked Per Month: n/a
In the above example, the employee averages 134.3 hours per month (sum of total six months' hours divided by six) during the six-month measurement period. Therefore, the employee is considered an FTE eligible for coverage in the plan during the subsequent six-month stability period regardless of the number of hours the employee actually works during that stability period.
Example 2: 12-month Standard Measurement Period with an Administrative Period and a Calendar-year Plan.
12-month Standard Measurement Period
12-month Standard Stability Period
|Oct. 15, 2013
||Oct. 15, 2014
To coordinate a measurement period with an employer's calendar year plan and allow time for an administrative period , the employer could implement a 12-month standard measurement period that ends within 90 days of the beginning of the calendar year plan. The administrative period during which the employer can determine which employees averaged 30 hours or more, offer them coverage, and conduct an open enrollment period (which could coincide with the open enrollment period for its other, non-variable and non-seasonal employees).
In the above example, the 12-month standard measurement period would run from Oct. 15, 2013 through Oct. 14, 2014, with the administrative period running Oct. 15, 2014 through Dec. 31, 2014. Any employees that average 30 hours or more during the standard measurement period would be offered coverage that begins on Jan. 1, 2015, and runs through 2015 (coinciding with the employer's calendar year plan), and remain covered through 2015 regardless of how many hours actually worked during 2015. Conversely, an employee that does not average 30 hours or more during the standard measurement period is not an FTE and therefore is not offered coverage during 2015 (and the employer is not liable for a penalty on their behalf).
For new employees, the measurement periods (called "initial" measurement periods) become slightly more complicated. This is because the dates of the initial measurement periods are not set dates. Rather, they may begin on any date between the new employee's hire date and the first of the month thereafter. The table below illustrates the general parameters for initial measurement period for new employees:
General Parameters for Initial Periods (New Employees)
||3-12 consecutive months
||The longer of 6 months or the standard stability period length
||Up to 90 days, but combined initial measurement and administrative periods may not exceed 13 months after hire date)
Each new employee will have their own initial measurement period, resulting in many different initial measurement periods (although employers could group together new employees hired during one month and begin their measurement periods all together on the first of the month thereafter).
New employees will eventually transition into the standard measurement and stability periods for ongoing employees, as they become ongoing employees. The chart below outlines the interplay between 12-month initial and standard periods.
As outlined in the above chart, a new employee is measured both during the 12-month initial measurement period (which determines FTE status for the subsequent 12-month initial stability period), and during the first standard measurement period beginning after his or her hire date (i.e., 12-month Standard Measurement Period B, which determines FTE status for 12-month Standard Stability Period B). Eventually the new employee becomes an ongoing employee and is measured exclusively through the standard periods in place for ongoing employees
Change in Status and Rehires
Special rules apply for employees who experience a change in employment status during a measurement period or who are terminated but later rehired.
Change in status
If the employee was hired as a variable hour or seasonal employee, but was moved to full-time status, then the employee is considered an FTE on the first day of the fourth month following the status change (or, if earlier and the employee averages 30 hours or more per week during the initial measurement period, then the first day of the first month following the end of that measurement period).
An employee will generally retain FTE or non-FTE status during an entire stability period for as long as the employee continues to be employed by the employer. If not considered a continuing employee, the employee is considered a new employee and enters into a new initial measurement period upon rehire. There are two methods of determining when an employee returning to work following a period of absence (including a termination) will be considered a new employee.
- Under the first method, if the employee is rehired after at least 26 consecutive non-working weeks (approximately 6 1/2 months), the employee is considered a new employee.
- Under the second method, (which applies for periods of absence less than 26 weeks), if the absence was at least four weeks and exceeds the number of weeks of employment immediately preceding the absence, the employee may be treated as a new employee.
If the employee is not considered a new employee under those two methods, then upon rehire the employee will be considered a continuing employee, meaning that the employer treats the rehired employee as if the employee never left (i.e., full-time or non-full-time status is retained).
On July 9, 2013, the IRS issued Notice 2013-45, which provides a one-year delay for employers subject to PPACA's employer mandate and information reporting requirements, initially scheduled to be implemented in 2014.
It is important to note that the notice does not affect other PPACA provisions (or their effective dates), including the exchange notice, Form W-2 reporting, the summary of benefits and coverage (SBC) requirement, insurance market reforms for small groups, PPACA's fees and taxes, the individual mandate and the establishment of the exchanges.
Employer Action Required
Employers need to understand the possible impact of the employer mandate on plan designs, contribution strategies and workforce planning. Of special importance is determining what employees are FTEs to whom the employer must offer coverage. Employers should work with legal counsel to draft written policies and procedures addressing the IRS safe harbors surrounding measurement, administrative and stability periods if they have variable and seasonal employees and choose to use this safe harbor.
Additionally, employers should properly document the methodology it uses for determining employee full-time status including the measurement and stability periods used under the IRS safe harbors as well as accounting for breaks in service and leaves of absence. Given the nature and size of the penalties, a cautious employer will want to be sure that it can adequately demonstrate compliance with the applicable requirements.
Penalties for Noncompliance
A failure to properly document full-time status can expose employers to the employer mandate penalty. This penalty applies In 2015, and states that if an employer meets the 50 full-time employee threshold, the employer generally will be liable for an employer mandate penalty if:
(a) The employer does not offer health coverage or offers coverage to less than 95 percent of its full-time employees, and at least one of the full-time employees receives a premium tax credit to help pay for coverage on an Exchange; or
(b) The employer offers health coverage to at least 95 percent of its full-time employees, but at least one full-time employee receives a premium tax credit to help pay for coverage on an exchange, which may occur because the employer did not offer coverage to that employee or because the coverage the employer offered that employee was either unaffordable to the employee or did not provide minimum value.
For purposes of the penalty, each individual entity within a controlled group is independently responsible for the employer mandate penalty. Any penalty under this section is payable upon notice and demand in a similar manner to a tax.
Finally, please note that penalties assessed under the employer mandate are not tax deductible.
Frequently Asked Questions
Q1. Can the measurement period be 12 months, but the stability period is 6 months?
No. The IRS safe harbor specifically states that the measurement period cannot be longer than the stability period.
Q2. Do seasonal employees have to work varying hours in order for an employer to utilize this safe harbor?
IRS Notice 2012-58, provided rules for both variable and seasonal employees. In the guidance, the IRS clarified that variable hour employees are those employees that the employer cannot reasonably expect to average at least 30 hours per week. That same guidance also permitted the measurement and stability period safe harbor calculations to be extended to seasonal employees, even if the hours for the seasonal employees are known.
- IRS Notice 2011-36
- Prop. Treas. Reg. §54.4980H-1(a)(4)
- Shared Responsibility for Employers Regarding Health Coverage, 26 CFR Parts 1, 54, and 301, 78 Fed. Reg. 217, 222 (Jan. 2, 2013).