For Applicable Large Employers Cutting Back Hours Doesn't (Necessarily) Mean Cutting Off Coverage
One of the more challenging aspects of the Affordable Care Act (“ACA”) is the so-called “employer mandate.” This requires employers who employed at least 50 full-time and full-time equivalent employees in the prior year to offer coverage to their full-time employees and their dependent children or pay a penalty. These employers are called “applicable large employers.” But what happens when an applicable large employer has a full-time employee who becomes part-time in the middle of a year?
To answer that question, we have to explain a little about how the rules work. If an employee is truly full-time (working 30 hours or more per week), then he or she has to be offered coverage that takes effect not later than 91 days from his/her hire date. Coverage also has to be offered for every day of the month to avoid a penalty for that month. However, the mandate becomes more challenging when an employer has to determine if someone working a variable schedule, or who is nominally part-time or seasonal, might become full-time due to increased or unexpected workload.
The normal rule, called the “monthly measurement period,” requires an employer to measure hours for a month. If the employee averages 30 hours per week over that month (or 130 hours for the month as a whole), he or she has to be offered coverage as of the first day of that same month. This can be challenging, if not impossible, especially where the employee contributes to the cost of coverage. It is not always possible to get the employee’s election. With one very limited exception, the premiums could not be taken retroactively on a pre-tax basis under a cafeteria plan. It also requires constant vigilance to track employee hours. While there are some options (beyond the scope of this article) that make the monthly measurement period mildly more workable, these administrative issues still exist to a large degree.
To deal with this, the IRS allows employers to adopt lookback measurement periods. Under these lookback measurement periods, the employer measures an employee’s hours over a period of time, usually 12 months (although it can be as short as three months). If the employee averages at least 30 hours per week over that period, then he or she has to be offered coverage for a “stability period” following the measurement period (and, if the employer chooses, a buffer called an administrative period). Usually, the stability period is as long as the measurement period, but it cannot be less than six months. Unless the employee’s employment is terminated, or the employee fails to pay premiums after being given a 30-day grace period to pay, the employee is generally considered full-time during that entire stability period, even if his or her hours fluctuate.
If an employer chooses to use the lookback measurement period and stability period rules, then the concept of the stability period may apply even to employees that are clearly full-time. This is because the rules do not generally allow employers to distinguish between full-time and part-time employees for purposes of using the measurement period rules (other distinctions, such as union vs. non-union, salaried vs. hourly, and a few others are allowed). Practically, this means that an employee who was initially hired as full-time generally must be treated as full-time during any stability period.
But what happens if a full-time employee who has been employed for more than 12 months becomes a part-time employee during a stability period? In that case, the employer has three options to consider. The employer must apply the option they have chosen in a consistent and uniform way when addressing a change from full-time status to non-full time status among similarly-situated employees.
To make this easier to understand, assume Ed Employee is a full-time employee working 40 hours per week and has been with AL Employer, Inc. for 10 years. Ed was initially offered coverage after a short waiting period following his date of hire (e.g., first of the month after 30 days) and is currently enrolled in the plan. Ed is nearing retirement and wants to reduce his work schedule to 20 hours per week. AL Employer is willing to let Ed do this. However, under AL Employer’s plan rules, 20 hour per week employees are not eligible for health insurance. Assume AL Employer uses a measurement period that runs from each November 1 to the following October 31 and has a stability period that is the calendar year (January 1 to December 31). (The period between November 1 and December 31 is the administrative period.) Ed would like to go on his reduced schedule starting June 15. What does AL Employer do?
(Note that while this example assumes Ed wants to cut back, the results would be the same even if AL Employer was the one who wanted to cut Ed’s hours.)
Option 1: Stay Stable
The first option is the easiest – keep the coverage going. Under the regulations, once an employee is determined to be full-time during a measurement period, they have to be treated as full-time during the entire subsequent stability period regardless of how many hours the employee works. Ed worked full-time hours during the last measurement period (November-October). Under the rules, he should continue to be offered coverage through the end of this calendar year (the stability period). His cost of coverage would stay the same. Under this approach, AL Employer can only end Ed’s coverage if he fails to pay the premiums (assuming he stays employed). COBRA doesn’t apply because Ed is continuing to get coverage.
If AL Employer goes with this approach, it will need to make sure its measurement periods are it is reflected in both its medical plan and cafeteria plan document (hopefully, it already is). AL Employer may also want to confirm that its insurance carrier (or stop loss carrier, if AL Employer is self-funded) understands and agrees with this approach.
Option 2: Ed Exits the Plan
The second option is up to Ed (mostly). Under IRS guidance, AL Employer can allow Ed to drop coverage if Ed enrolls (or intends to enroll) in other coverage (such as through Ed’s spouse’s employer or if Ed chooses to enroll in individual coverage, as detailed below). The coverage has to be “minimum essential coverage,” which is basically major medical coverage. It cannot be, for example, a fixed indemnity, limited benefit plan, health FSA, or similar limited coverage.
If Ed enrolls in coverage through his spouse, for example, his enrollment in other coverage has to be effective no later than the first day of the second month following the date he drops coverage. In other words, if he drops coverage on June 15, the coverage has to be effective no later than August 1. Ed’s spouse and dependents who were enrolled in Ed’s coverage also have to enroll in the new coverage.
If Ed qualifies for a special enrollment period for individual coverage through an ACA Marketplace, then he can also drop AL Employer’s coverage and go on that individual coverage. (Note that if AL Employer had a non-calendar year plan, Ed might also be eligible to drop AL Employer’s coverage and enroll during the ACA Marketplace’s regular annual enrollment period.) Again, his dependents have to be enrolled too. Here, the coverage has to be effective no later than the day after his coverage through AL Employer ends.
COBRA does not need to be offered to Ed or his dependents. Ed would have continued to receive coverage, but for his decision to drop. While he did have a reduction in hours, that reduction in hours did not cause him to lose coverage; rather, his decision to drop caused his loss of coverage. Therefore, there is no qualifying event for COBRA purposes.
If AL Employer wants to allow this approach, it needs to make sure that its health plan and cafeteria plan allow election changes for these purposes. AL Employer is also allowed to rely on Ed’s representation that he (and his dependents, if applicable) intend to enroll in the other minimum essential coverage. Therefore, actual proof of the other coverage is not required.
Option 3: Downshift and Run Out
This option provides some flexibility, but with that comes some complexity. Under this rule, AL Employer will measure Ed’s hours for three calendar months after he changes to part-time. If Ed averages less than 30 hours per week over those three months, then AL Employer can drop Ed’s coverage at the end of that three-month period.
After that, AL Employer can use the monthly measurement period (discussed above) for Ed. This special rule allowed AL Employer to use the monthly measurement period for Ed (and those like him) even if AL Employer doesn’t use the monthly measurement period for anyone else. Normally, all similar employees have to have the same measurement period applied to them, but this is a special exception.
Since Ed is looking to throttle back his hours, it’s unlikely Ed would average 30 hours per week over that three month period. If that proves to be true, Ed’s coverage would end at the end of the three month period. Here, AL Employer would have to offer Ed COBRA since his reduction in hours resulted in his loss of coverage. However, plan amendments and carrier notification are likely not required, assuming the plan documents already reflect this eligibility rule.
While this appears attractive at first blush, it comes with some administrative hurdles. First, AL Employer has to track Ed’s hours closely for those three months (through the end of September, in our example, since Ed wants to cut back mid-month). During that three month period, if Ed has to consult with someone who is taking over part of his duties, or gets staffed on an emergency project that pushes him up over 30 hours per week, his coverage has to continue for the rest of the stability period.
Plus, even if Ed doesn’t average 30 hours or more for those three months, AL Employer has to keep an eye on Ed’s hours for every month after that for the rest of the year (Ed’s original stability period) because his hours would be measured under the monthly measurement period in that case. Even though Ed wants to work 20 hours per week, he may end up working more hours in some months and less in others. If Ed averages more than 30 hours/week in the prior month (or 130 hours in the prior month, if the employer uses that monthly equivalency), AL Employer has to offer coverage to Ed as of the first day of that same month to avoid an employer mandate penalty. This can create significant administrative issues, since as noted above, the monthly measurement period is difficult to administer.
While AL Employer (or any other applicable large employer) has choices when employees go from full-time to part-time, seasonal, or variable hour employees, there are complexities and risk with each choice. Employers that are subject to the ACA employer mandate should consider their options ahead of time and be prepared to communicate them to employees when the need arises. They should also make sure their plan documents reflect any necessary terms that are consistent with their desired approach.If you have any questions, please contact your FNA Advisor.