Determining Full-Time Employee Status
by Alice Helle >
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Employers of 50 or more full-time employees (including full-time equivalents) will be subject to the shared responsibility provisions of the Act beginning in 2014. For most covered employers, determining who is or is not a full-time (30 hour per week) employee will be fairly straightforward. That may not, however, be the case for employers with variable hour or seasonal employees.
In Notice 2012-58, the Internal Revenue Service (“IRS”) described safe harbor look-back methods that employers may use to determine whether variable hour or seasonal employees are full-time employees for purposes of the shared responsibility requirements. An employee is a “variable hour” employee if it cannot be determined whether the employee is reasonably expected to work on average at least 30 hours per week. The IRS left open the definition of “seasonal employee” in this context for future guidance, but provided that, in the meantime, employers may use a reasonable good-faith definition of that term. Employers are not required to use the safe harbor methods, but relying on the safe harbors where applicable is advisable, because the alternative is to make monthly eligibility determinations.
Identifying Full-Time Employees To Be Offered Coverage
A large employer must offer coverage to full-time employees in order to avoid the shared responsibility penalty. A “full-time” employee is an employee who works at least 30 hours per week on average. Note that the number of full-time employees may be different than the number used to determine large employer status. All examples in this article assume that the employer offers coverage only to full-time employees.
Example 1. ABC Co. has 40 employees who work at least 30 hours/week and 20 employees who work 25 hours/week (108.33 hours per month), which translates to 18 full-time equivalents. ABC has 58 employees including FTEs and is therefore a “large employer.” Only the 40 full-time employees, however, must be offered coverage in order to avoid the shared responsibility penalty.
Example 2. XYZ Corp. has no full time employees, but has 100 employees who work 25 hours per week. XYZ is considered a large employer, because it has more than 50 full-time equivalents. However, because there are no full-time employees, it has no obligation to offer coverage.
The Notice provides different look-back methods for determining full-time status for the following four categories:
- ongoing employees
- newly hired employees expected to work full-time
- newly hired variable or seasonal employees
- employees transitioning from newly-hired to ongoing status
Standard Measurement Period. An employer may determine full-time status by looking back over a “standard measurement period” of between 3 and 12 consecutive months. If an employee is determined to be a full-time employee during the standard measurement period, the employer must treat the employee is a full-time employee during a “stability period” of 6 to 12 months. The stability period may be no shorter than the standard measurement period. Employers must apply same look-back and stability periods for all employees in the same category. Permissible categories are: (1) collectively bargained/non-collectively bargained; (2) salaried/hourly; (3) employees of different entities; and (4) employees located in different states. The employer must treat the employee as a full-time employee during the stability period regardless of his or her actual hours, as long as he or she remains an employee. If the employee averages less than 30 hours per week during the standard measurement period, he will not be treated as a full-time employee during the stability period, regardless of his hours.
Example 3. ABC Co. chooses a 6 month standard measurement period, with the initial period beginning July 1, 2013 and a 6 month stability period. Employee X averages 29 hours per week. Employee X is not treated as a full-time employee during the stability period of January 1, 2014 through June 30, 2014.
Example 4. Same facts as Example 3, except that Employee X averages 30 hours per week during the measurement period. Employee X’s hours are reduced to ten hours per week beginning March 1. Employee X must be treated as an full-time employee through the entire stability period ending June 30, 2014.
Option to use administrative period. Employers may need time between the standard measurement period and the stability period to determine which ongoing employees are eligible and then to notify and enroll them. Because of this, the guidance permits employers to make time for such administrative steps by having the standard measurement period end before the associated stability period begins. This administrative period may last up to 90 days, but may neither reduce nor lengthen the measurement period or the stability period.
Example 5. ABC Co. chooses to use a 12-month stability period that begins January 1 and a 12-month standard measurement period that begins October 15, along with an administrative period between October 15 and December 31. Employee A worked full-time for the standard measurement period that ran from October 15, 2013 to October 14, 2014, but averaged less than 30 hours per week during the standard measurement period October 15, 2014 to October 14, 2015.
Because Employee A worked full-time during the October 15, 2013 through October 14, 2014 measurement period, he must be offered coverage for the stability period of January 1, 2014 through December 31, 2014 (including the administrative period of October 15, 2014 – December 31, 2014). Since he was not full-time during the October 15, 2014 – October 14, 2015 measurement period, however, ABC is not required to offer him coverage for the stability period of January 1, 2015 through December 31, 2015.
New Employees Reasonably Expected to Work Full-Time
If a newly-hired employee is reasonably expected to work an average of at least 30 hours/week, the employer must offer coverage that will begin on or before the conclusion of the employee’s initial 90 days of employment in order to avoid the shared responsibility penalty.
New Variable Hour and Seasonal Employees
For these employees, employers are permitted to determine full-time status using an “initial measurement period” of between 3 and 12 months. The stability period for these employees generally must be the same stability period the employer uses for ongoing employees. If a new variable hour or seasonal employee is determined to not be a full-time employee during the initial measurement period, the employer is permitted to treat the employee as not a full-time employee during the stability period following the initial measurement period. The stability period for such an employee must not be more than one month longer than the initial measurement period, however, and must not exceed the remainder of the standard measurement period (plus any associated administrative period) in which the initial measurement period ends. The IRS guidance includes the following example:
Example 6. ABC Inc. uses a 12-month initial measurement period that begins on the start date for new variable hour employees and applies an administrative period from the end of the initial measurement period through the end of the first calendar month beginning on or after the end of the initial measurement period. ABC hires Employee Y on May 10, 2014. His initial measurement period begins that date and ends on May 9, 2015. Employee Y works an average of 30 hours per week during this initial measurement period. ABC is required to offer coverage for a stability period that runs from July 1, 2015 through June 30, 2016.
The term “seasonal employee” is not defined for purposes of determining eligibility for coverage. This is one of the issues to be addressed in future guidance. In the meantime, through at least 2014, employers are permitted to use a “reasonable, good faith interpretation” of that term. The following is based upon an example in the guidance:
Example 7. Snow Co. uses a 12-month initial measurement period for new variable hour employees and seasonal employees that begins on the employee’s start date and applies an administrative period from the end of the initial measurement period through the end of the first calendar month beginning after the end of the initial measurement period. Snow Co. hires Employee X as a ski instructor on November 15, 2014, with an anticipated season running through March 15, 2015. Employee X works 60 hours per week during that season, but is not reasonably expected to average 30 hours per week during the 12-month initial measurement period. Accordingly Snow Co. does not treat Employee X as a full-time employee and does not offer coverage to Employee X. An offer of coverage is not required, because Snow Co. used an initial measurement period and administrative period that complied with the rules and treated Employee X as a seasonal employee based on a reasonable good faith interpretation of that term.
Transition from New Employee Rules to Ongoing Employee Rules
Once a new variable hour or seasonal employee who has completed an initial measurement period has also been employed for an entire standard measurement period, the employer must test the employee for full-time status and on the same basis as its other ongoing employees.
The latest guidance on determining full-time employee status is complex, but does contain some helpful clarifications and reliance for employers. Keep in mind that the safe harbors discussed above are just that. They are not mandatory, and they are relevant only to employers who have variable hour or seasonal employees. Please contact me or your BrownWinick attorney if you have any questions about the full-time employee rules or about healthcare reform in general.
Alice Eastman Helle is a member of BrownWinick and practices primarily in the areas of pensions and employee benefits. Alice can be reached at (515) 242-2407 or email@example.com.