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How to comply with ACA reporting requirements and identify full-time employees

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[See infographic: The 3 biggest misconceptions about the ACA]

Sometimes lost in the debate surrounding the Affordable Care Act (ACA) are practical details employers need to know: exactly how to report information required by the IRS and exactly how to identify full-time employees. Because the reporting requires identifying full-time employees, employers want to get that assessment right. The IRS uses the information reported to determine whether the employer owes a hefty excise tax of either $2,000 per full-time employee for not offering coverage to the required number of full-time employees (applies only if at least one full-time employee receives a premium tax credit from the federal government) or $3,000 per full-time employee who receives a premium tax credit from the federal government, for not offering coverage that meets certain standards. See What to do about health care coverage and excise taxes.

This article covers both what reporting the IRS requires and how to calculate whether an employee is full-time. The reporting applies to employers with 50 or more full-time plus full-time equivalent employees, who must report information for the first time for the calendar year 2015. The information is reported in a statement given to employees by Feb. 1, 2016  (the actual date Is Jan. 31, but it falls on a Sunday in 2016), and to the IRS no later than Feb. 29, 2016 (if filed on paper) or March 31, 2016 (if filed electronically).

What employers must provide employees and the IRS
Although coverage information must be reported annually to the IRS, the form submitted must indicate for each month whether the employee was covered under a health insurance plan, what level of coverage was offered and certain premium information. This level of detail means that employers should start collecting the data they need to submit.

Employers must give each full-time employee a Form 1095-C by Feb. 1, 2016, which indicates the premium and coverage information. If the health insurance plan is fully insured, the employee will get a Form 1095-B, listing additional information, from the insurance company.

The employer sends the IRS a 1094-C transmittal form with a copy of each employee’s 1095-C; a 1094-B transmittal form, from the insurance company, goes with a copy of each employee’s Form 1095-B. The actual filing deadline for these transmittal forms depends on whether an employer or an insurer files on paper (Feb. 29, 2016) or electronically (March 31, 2016). The transmittal form requires that an official of the employer attest that the information is “true, correct and complete” under penalties of perjury, so employers need to take the information reporting very seriously.

1095-C information
The form indicates whether the employee was covered for a month and the coverage level (employee only, dependents, spouse, etc.). If coverage wasn’t offered to the employee for a month, the form must indicate why, such as the employee wasn’t employed the entire year or wasn’t a full-time employee during a given month or was a new hire who had a waiting period before becoming eligible. The form must also indicate whether the employee was offered coverage even though the employee wasn't full-time for the month. The reporting of this information is accomplished through a series of codes that are contained in the instructions for the forms.

Premium information includes what an employee was charged for the lowest-cost self-only coverage for a month.

For the employer to avoid excise taxes, the employee portion of the premium for the lowest-cost self-only coverage cannot exceed 9.5% of his or her household income (regardless of whether the employee enrolled in the lowest-cost self-only plan). The IRS has created safe harbors that provide methods for calculating whether this requirement was satisfied, which are based solely on the employee’s compensation paid by the employer. The form must show whether the coverage satisfied one of these affordability safe harbors for the month.

1094-C transmittal form breakdown
The transmittal form the employer files with the IRS must contain basic information about the employer. Most important, it must contain month-by-month employee counts, including the total number of employees (counting both full- and part-time) and the total number of full-time employees. The months that coverage is offered to full-time employees, generally 12, are also indicated.

The IRS offers a break on the 1094-C for employers who meet two requirements: one, they are offering coverage to 98% of employees (counting both full- and part-time), and two, the premium payable by an employee for self-only coverage in the lowest-cost plan option is affordable (i.e., not more than 9.5% of compensation). An employer who meets both requirements can report the total number of employees without breaking the figure into full- and part-time employees on the form. An employer who chooses this option must issue a Form 1095-C to all employees, including those who are part-time.

1095-B information
Insurance companies issue Form 1095-B to employees for fully insured plans. This form includes a policy number, contact information, names and Social Security numbers for everyone covered (employee, spouse and dependents) and months of coverage. If the plan is self-insured by the employer, the employer reports this information on the Form 1095-C.

Calculating hours to identify full- and part-time employees
To deal with the nitty-gritty of the ACA requires that an employer make a lot of decisions about how to calculate whether an employee is full-time or part-time. In the simplest form, a full-time employee works an average of at least 30 hours per week. To determine that, an employer has to count an employee’s paid hours, including paid time off, and must count hours worked by the employee for any related employers. Unpaid hours don’t count, nor do hours worked outside the United States.

There are varied ways to determine if someone works more than, or less than, 30 hours. For hourly employees, an employer has to use actual hours. For nonhourly employees, the employer can count actual hours or use an “equivalency method.” To use actual hours would require a time-keeping system to track nonhourly employees. Most employers would find this cumbersome, unless they already have a system in place to keep track of employee hours for purposes like client billing.

Equivalency methods

There are two equivalency methods for nonhourly employees. The first is the weeks-worked equivalency method: In any week in which an employee works an hour or more, the employer counts the weekly total as 40 hours. The result of this method would be counting virtually all nonhourly workers as full-time — which is fine if most nonhourly employees work 30 hours or more a week anyway, meeting the full-time definition. Otherwise, this method may not be an attractive choice for many employers.

The second choice is a days-worked equivalency method: If an employee works an hour or more on a given day, that counts as eight hours. So if someone works an hour or more on Monday, that counts as eight hours; an hour or more on Tuesday counts as eight hours; the same on Wednesday; and so on.

 
HC IRS chart 1The table delineates part- and full-time employees under the days-worked method. Use eight hours for a person who works one day, 16 hours for two days and 24 hours for three days. The dividing line is four days, or 32 hours. Anyone coming to work three or fewer days a week isn’t full-time. Anyone working four or more days a week is full-time.


This is the preferred method for nonhourly employees who actually work less than 30 hours per week, because using the weeks-worked equivalency method for these employees will result in treating them as full-time, an unwanted result for nonhourly employees who work less than 30 hours per week and to whom an employer doesn’t want to offer coverage.

The IRS worries about abuse of the equivalency methods, so there is an overarching rule stating that an equivalency method cannot be used if it substantially understates hours. For example, the days-worked equivalency method can’t be used for an employee who works three days a week, 12 hours a day. The days-worked equivalency method would treat this employee as working 24 hours per week, which is below the 30-hour full-time employee threshold, when it is clear the employee actually works more than 30 hours per week.

Can you choose the method?
In a perfect scenario, an employer might like to choose which equivalency method to use on an employee- by-employee basis: the weeks-worked method for some and the days-worked method for others. The IRS doesn't allow this employee-by-employee approach, but is OK with using different methods for different groups of employees, as long as an employer demonstrates a reasonable and consistently applied classification: for example, one method for people in one department and a different method for people in another department. Any method the agency deems “reasonable and consistent” is fine.

Do you need to calculate hours?
You don’t have to worry about calculating hours to track full- and part-time workers if you know you meet three criteria:
  1. You’re confident you offer coverage to the required percentage of full-time employees and their dependents to avoid the $2,000 per full-time employee excise tax for not offering coverage (70% of full-time employees in 2015, 95% in 2016 and beyond). In other words, you know you meet the requirement without bothering to specifically identify full-time employees. For example, you offer coverage to 100% of your employees, regardless of full- or part-time status.
  2. The coverage meets minimum-value, affordability requirements, so that you don’t have to pay the excise tax for failing to offer adequate coverage to full-time employees who qualify for the premium tax credit from the federal government ($3,000 per full-time employee who qualifies for the credit). If this excise tax is applied, you’d have to know whether an employee was full-time, since the tax applies to full-time but not part-time employees.
  3. The coverage is offered to 98% or more of all (full- and part-time) employees. If you satisfy this requirement, you don’t have to indicate whether an employee is full- or part-time on the IRS reporting forms.
If you’re unsure about any of these three, you need to track hours.

Monthly measurement method
Assuming you need to track hours, you can identify and count each employee using a “monthly measurement method.” After the end of each month, you count each employee’s hours for the month and determine whether each employee worked an average of 130 or more hours.

You’re required to determine hours on a monthly basis because excise taxes for not offering coverage or for offering inadequate coverage are assessed on a monthly basis, with the amount dependent upon an employee’s full-time status for the month. Also, the IRS reporting requires you to break down information on a month-by-month basis.

From a practical perspective, an employer who is confident about an employee’s full-time status doesn’t really need to go to the trouble of counting that employee’s hours. If an employer isn’t confident about full-time status, however, he or she does need to count hours for the employee, using this measure: 130 or more hours per month equals full-time, regardless of the number of days in a month.

Many larger employers will probably count hours for all employees, even those who consistently work full-time, to avoid errors in determining full-time status. A smaller employer might feel more certain about who is consistently full-time, and limit counting hours to those employees for whom there is uncertainty as to their full-time status.

An employer may inadvertently get into trouble when employees have variable (i.e., unpredictable) hours. If the employer didn’t count a person as full-time, and therefore didn’t offer the person coverage, and found out at the end of the month that the person did work 30 or more hours a week during that month, the employer cannot avoid any consequent excise tax by offering coverage retroactively. If enough employees fit this category and weren’t offered coverage, a company could fail the 95% threshold test (70% in 2015) and trigger the $2,000-per-employee excise tax. Or, if the threshold test is met for the employee population as a whole, the lack of coverage would trigger the $3,000 excise tax for any full-time employee who received the premium tax credit.

An alternative: the look-back approach
If such a consequence is worrisome, an employer could use the look-back measurement method to calculate employee status. With this method, a company “looks back” to a prior period of employment to count a person’s hours. If, based on that count, an employee worked 30 or more hours a week, he or she is treated as full-time during every month in a future coverage period. The look-back measurement method employs three periods of time:
  • A “standard measurement period,” which is the prior period over which an employee’s actual hours are measured. This period can be three to 12 months, and it’s up to the employer to choose. The employee’s status (full- or part-time) during this measurement period will determine if the employee will be considered full-time for the upcoming “stability period.”
  • An “administrative period,” which is the period when the standard measurement period of employment is examined to see if an employee worked 30 or more hours a week. This period can’t exceed 90 days. This period typically includes the enrollment period for the upcoming plan year.
  • The “stability period,” which is the future coverage period during which the employee’s full- or part-time status is whatever the status was during the standard measurement period. There are rules on the length of the stability period, discussed later. As a practical matter, employers will generally align the stability period with the plan year. For example, an employer with a plan year that runs from Jan. 1 to Dec. 31 will use a stability period that starts and ends on the same dates.

HC IRS chart 2This example uses Oct. 3, 2013, to Oct. 2, 2014, as the standard measurement period and Oct. 3, 2014, to Dec. 31, 2014, as the administrative period, or the time spent calculating results from the standard measurement period (in this case, a prior year’s worth of data), to determine who will be considered full- and part-time for the stability period, or the future period of enrollment (Jan. 1, 2015, to Dec. 31, 2015), and enrolling the full-time employees for the upcoming plan year. Using this method, the employer knows before the plan year begins whether a person will be considered full- or part-time for enrollment purposes.

Why not use Oct. 1, 2013, to Sept. 30, 2014 as the standard measurement period? That would cause the administrative period to run from Oct. 1, 2014, to Dec. 31, 2014. The administrative period would then be more than 90 days, which isn’t allowed. It is the 90-day limitation on the administrative period that forces the odd dates for the standard measurement period in this example.

Ideally, an employer might like to use the monthly method for some employees (e.g., employees with nonvariable hours) and the look-back measurement method for other employees (e.g., employees with variable hours). Can an employer do this? The answer is no.

Employers are allowed to use the different methods only for salaried versus hourly employees, employees with a primary place of employment in one state versus employees in another state, collectively bargained employees versus those who are not collectively bargained, employees covered by one collective bargaining agreement versus those covered by another collective bargaining agreement, and employees of one related entity versus employees of another.

Monthly measurement details
When you use the monthly measurement method to calculate full-time employees for ACA requirements, you can use an entire calendar month (130 or more hours a month equals full-time). A calendar month may not align well with your data, such as payroll records, so you can choose an optional weekly rule that assigns certain weeks to each calendar month. A week is any period of seven consecutive days, such as Sunday to Saturday. If you use this approach, you have to attribute weeks to a calendar month, thus: The month contains either the week that includes the first day of the month or the week that contains the last day of the month, but not both. When you apply this rule, some calendar months will have four weeks and other months will have five weeks. You count an employee’s total hours during the four- or five-week period, and apply the following rules to determine their status for the month:
4 weeks: 120+ hours = full-time
5 weeks: 150+ hours = full-time.

Look-back method details
The look-back method also requires decisions about approach. The standard measurement, or prior, period can be three to 12 months, and you get to make the choice. It can be aligned with payroll periods, as long as your payroll is weekly, biweekly or semimonthly. There are two alternatives for aligning payroll periods with the standard measurement period:
  1. Include the entire payroll period in which the standard measurement period begins, and exclude the entire payroll period in which the standard measurement period ends.
  2. Exclude the entire payroll period in which the standard measurement period begins, and include the entire payroll period in which the standard measurement period ends.
For example, if you chose the first alternative for our earlier example of a standard measurement period that runs from Oct. 3, 2013, to Oct. 2, 2014, you would include the entire payroll period that includes Oct. 3, 2013, and exclude the entire payroll period that includes Oct. 2, 2014.

As noted, the administrative period cannot exceed 90 days, but you can choose to make it shorter than 90 days.

There are rules on how long the stability period can be, and they vary based on whether the employee is full-time during the standard measurement period.

The stability period — for those who are determined during the standard measurement period to be full-time — must be a minimum of six months (there is no maximum) but can be no shorter than the standard measurement period. Those who during the standard measurement period are deemed to be part-time can be counted as part-time for no longer than the length of the standard measurement period. (There is no minimum.)

The reason for these rules is simple: An employee’s hours during the standard measurement period seal the employee’s fate as to whether the employer must count the employee as full-time for the upcoming stability period (usually the upcoming plan year), and the government wants to favor employees in this situation. Therefore, if a person is determined to be full-time, an employer can make the stability period, or time during which the employee is treated as full-time, as long as it wants, because that means the employer has to treat the person as full-time for that length of time. Likewise, an employer can’t make the period too short (say, a month), but must treat the person as full-time for at least six months. On the other hand, if an employee is found to be part-time during the measurement period, he or she can’t be treated as part-time for too long — specifically, no longer than the standard measurement period. To keep things as simple as possible, an employer may want to use the same stability period for all employees, regardless of whether the employees were full- or part-time during the standard measurement period.

To achieve the same stability-period length for full- and part-time workers, an employer needs to use six months or more as the time for the standard measurement period.
HC IRS chart 3
An employer can choose to use a special rule for the stability period that begins in 2015. This rule allows an employer to use a shorter standard measurement period, and thus collect less data, without following the usual rules that limit the length of the stability period based on the length of the standard measurement period. If an employer chooses to use this rule, the standard measurement period for the stability period that begins in 2015 has to be at least six consecutive months, and must begin by July 1, 2014. It can’t be any longer than 12 consecutive months and has to end no later than 90 days before the first day of the plan year beginning on or after Jan. 1, 2015.

There are a few more important details regarding the various periods:
  • It is acceptable to choose different dates for the periods for different groups of employees. However, the groups for which the dates may vary are limited, and are the same as described earlier for using the monthly measurement method for some employees and the look-back method for others (e.g., salaried versus hourly employees).
  • There can’t be any gaps between the standard measurement period, administrative period and stability period. The administrative period must begin the day after the standard measurement period ends, and the stability period must begin the day after the administrative period ends.
  • Most employers will choose to align the stability period with the plan year. In this case, care should be taken in choosing the stability period, because the plan year cannot be changed in the future unless there is a valid business reason to do so.
  • There is an exception to the general rule that an employee’s hours during the standard measurement period seal the employee’s fate for the subsequent stability period. If an employee who was full-time during the standard measurement period transfers to a new position that is part-time, the employer can choose to switch that employee to the monthly measurement method. Since the employee is now part-time, that means the employee will no longer be treated as a full-time employee. The employee can’t be treated as part-time until the employee has worked less than 30 hours per week for three months following the change in position. In addition, the change to the monthly method isn’t permitted unless the employee was offered continuous coverage starting no later than the employee’s fourth month of employment.

When an employer calculates an employee’s average hours during the standard measurement period by dividing the total hours in the standard measurement period by the number of weeks in the standard measurement period, the number of weeks in the calculation must be reduced for certain periods of unpaid leave. These periods include unpaid leave under the Family and Medical Leave Act, the Uniformed Services Employment and Reemployment Rights Act and jury duty. This adjustment in the calculation prevents a reduction in an employee’s average hours during the standard measurement period. This rule doesn’t apply when a leave is long enough for an employee to be treated as a new hire. For information about rehired employees, see Special rules cover how to determine when new employees and rehires are considered full-time under the ACA.

Why use less than 12 months? Seasonal workers
When all is said and done, we think most employers will use 12 months as their standard measurement and stability periods. Using a full year as the standard measurement period provides the best measurement of an employee’s full- versus part-time status. Health care plan years are often a full year, so it makes sense to use a full 12 months for the stability period, given the benefit of aligning the plan year and stability period. However, an employer might consider using fewer months to manage costs by having a stability period that is shorter than 12 months, and thus, not offering coverage all year long, especially if employees’ hours fluctuate during the year — for example, in retail when hours may be full-time only leading up to and during the holiday season. An employer can save money by offering coverage only during that part of the year. The same may be true in fields such as agriculture or horticulture.

In such cases, we recommend that the employer use the monthly measurement method rather than a look-back method, because the look-back method may result in coverage during months when the employee isn’t working full-time, and a lack of coverage during months in which the employee is working full-time, because of the lag time between the look-back period and actual coverage.
HC IRS chart 4
The chart demonstrates why the look-back method wouldn't work well in situations where an employer hires seasonal summer workers: The employees in this example work 30 or more hours per week for the six-month period from April through September, and less than 30 hours for the six-month period from October through March. Thus, the employer uses two six-month standard measurement periods that align with these dates and two six-month stability periods, so that the employees aren't treated as full-time for six months during the year. Due to the lag time between the standard measurement period and the stability period, there's a significant mismatch between when employees are working full-time and when they have coverage. This will be very confusing to the employees, and simply won't make much business sense. By using the monthly measurement method, the employer can offer coverage during the months when the employees are actually working full-time.

New employees and rehired employees

There are special rules for determining the full- or part-time status of new employees and rehired employees. Special rules cover how to determine when new employees and rehires are considered full-time under the ACA discusses these rules

Going forward, ACA requirements will soon be a reality for most employers. The best way to handle the new rules is to know what you need to do, and when, and begin to collect data to make compliance as smooth as possible.

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