How to Determine Full-Time Employee Status Using the Look-Back Measurement Method and Evaluate Pay or Play Penalties

Author: Brian G. Muse, LeClairRyan

An applicable large employer (ALE) may be subject to an employer shared responsibility payment (also known as the pay or play penalty) if it does not offer minimum essential coverage (MEC) to its full-time employees and their dependent children up to age 26 or if the coverage offered to full-time employees does not meet the minimum value and affordability requirements under the Affordable Care Act (ACA). For this purpose, a full-time employee is an employee who works, on average, at least 30 hours of service per week or 130 hours of service in a calendar month. An employer must include actual hours worked and periods of time for which an employee is paid, such as vacation, illness, holiday, short- or long-term disability, jury duty, temporary leave of absence or military duty, in the hours of service calculation.

The determination as to whether an employee is full-time is done on a monthly basis. While an employer may track an employee's hours of service on a monthly basis, the Internal Revenue Service (IRS) also provides a safe harbor look-back measurement method that an employer may use to determine which employees are considered full-time employees. Under this approach, an employer uses hours of service credited during a measurement period (also known as a look-back period) to determine an employee's full-time (or part-time) status and then uses that determination prospectively for up to 12 months.

Final regulations, issued in February 2014, clarify whether certain types of employees are considered full-time for the purposes of the employer shared responsibility requirements.

  • Volunteers: Hours worked as a bona fide volunteer for a government or tax-exempt entity, such as volunteer firefighters and emergency responders, are not counted in determining full-time status.
  • Educational employees: Teachers and other educational employees are not considered part-time just because their school is closed or operates on a limited schedule during the summer.
  • Seasonal employees: Workers in positions for which the customary annual employment is six months or fewer are generally not considered full-time employees.
  • Students in work-study programs: Hours worked by a student under a federal- or state-sponsored work-study program are not counted in determining full-time status.
  • Adjunct faculty members: Employers must use a method of crediting adjunct faculty members' hours of service that is reasonable for the circumstances and consistent with the employer shared responsibility requirements. The final regulations expressly allow employers to credit adjunct faculty members with two and one-quarter hours of service per week for each hour of teaching or classroom time.

The following steps can help an employer determine full-time employee status by using the look-back measurement method and addresses how to determine whether an employee is properly categorized as full-time or part-time.

Step 1: Determine the Measurement Period

The measurement period is a period of time during which an employee's hours of service are measured to determine if the employee is a full-time employee.

There are two types of measurement periods:

  1. The Initial Measurement Period (IMP) is the measurement period applicable to new employees and is used to determine if a new variable hour or a new seasonal employee is a full-time employee. The IMP is selected by the employer and is at least three but no more than 12 consecutive months. The employer may select an IMP that begins on any date from the employee's date of hire to the first day of the calendar month following the employee's date of hire. Importantly, new employees who are reasonably expected to work full time must be offered health coverage by the first day of the fourth full calendar month of the employee otherwise becoming eligible for coverage.
  2. The Standard Measurement Period (SMP) is the measurement period applicable to ongoing (current) employees and is used to determine whether an ongoing employee is a full-time employee. The SMP is selected by the employer and is at least three but no more than 12 months.

Special rules allow the employer to adjust the beginning and the end date of the SMP, so as not to split up an employee's regular payroll period. As a result, the employer:

  • May exclude the payroll period that includes day one of the SMP, but then must include the entire payroll period that covers the last day of the SMP; or
  • May include the entire payroll period that includes day one of the SMP, but then must exclude the entire payroll period that covers the last day of the SMP.

An employer may establish different measurement periods for different categories of employees, including:

  • Each group of collectively bargained employees covered by a separate collective bargaining agreement;
  • Collectively bargained and non-collectively bargained employees;
  • Salaried and hourly employees; and
  • Employees located in different states.

The periods established within the categories must be applied uniformly to all employees within a category.

Step 2: Categorize an Employee As an Ongoing or New Employee

The IRS regulations provide different look-back methods to use for ongoing employees and new employees. An ongoing employee is defined as an employee who has been employed for at least one SMP. Alternatively, a new employee is any employee who has not been employed for at least one SMP.

An employee may be considered a new employee if he or she is rehired after termination or resumes service immediately after an absence of at least 13 consecutive weeks during which the employee was not credited with any hours of service. An employee of an educational organization may be treated as a new employee if resuming service immediately after an absence of at least 26 consecutive weeks during which the employee was not credited with any hours of service.

Step 3: Apply the Look-Back Method to Ongoing Employees

Under the look-back method, an ongoing employee's full-time (or part-time) status is determined by looking back at the hours credited over the SMP. If the employee is determined to be full-time (averaged at least 30 hours of service per week) during the SMP, then the employee must be treated as a full-time employee (and offered health care coverage) during the subsequent stability period, regardless of the actual number of hours of service during the stability period. The stability period is the period of time (selected by the employer) during which an employee who was determined to be full-time during the related SMP is treated as full-time for the purpose of assessing a penalty under the employer shared responsibility requirements. The stability period immediately follows an optional 90-day administrative period during which an employee may be enrolled in a health plan, and must run for at least six consecutive months, but cannot be shorter than the SMP.

The length of the stability period should be the same for all employees; however, an employer may apply different stability periods for the following categories of employees:

  1. Each group of collectively bargained employees covered by a separate collective bargaining agreement;
  2. Collectively bargained and non-collectively bargained employees;
  3. Salaried and hourly employees; and
  4. Employees located in different states.

If an employee is determined not to be full-time during the SMP, the employer may treat the employee as a part-time employee during the subsequent stability period, and there is no requirement to offer health care coverage during the stability period.

At the close of the SMP, an employer may need time to determine which ongoing employees are eligible for coverage and notify and enroll employees in health coverage. An employer may use an administrative period of up to 90 days (that runs between the end of the SMP and the start of the stability period) for this purpose. The administrative period cannot increase or decrease the length of the SMP or the stability period. To avoid any potential gaps in coverage, the administrative period will overlap with the prior stability period so that ongoing employees enrolled in coverage because of their status as full-time employees based on a prior standard measurement period will continue to be offered coverage during the administrative period.

Practical Example

George works a schedule of varying hours at Acme bar and grill. For its ongoing employees, Acme implements a 12-month SMP that runs from November 1 to October 31, followed by a two-month administrative period that ends December 31. Acme's 12-month stability period begins on January 1. Each year after the end of the SMP (October 31), Acme averages George's weekly hours for the past 12 months to determine whether he should be treated as a full-time employee during the subsequent stability period.

In November 2014, Acme determines that George averaged over 30 hours of service per week during the measurement period (November 1, 2013, through October 31, 2014). As a result, Acme should treat George as a full-time employee and offer him health care coverage during the stability period (January 1, 2015, through December 31, 2015), or be subject to the pay or play penalty.

George continues to work for Acme, and in November 2015, Acme determines that he did not average 30 hours per week during the measurement period that ran from November 1, 2014, through October 31, 2015. As a result, while George's coverage will remain in effect through December 31, 2015, Acme does not have to offer him coverage for the stability period that runs from January 1, 2016, through December 31, 2016, and will not be subject to the pay or play penalty.

Note that special rules apply to employees who return to work after a break in service.

  • If the employee returning to work after a break in service is treated as an ongoing employee, the employer should apply the measurement and stability period that would have applied if the employee had not had a break in service.
  • For employees that take special types of unpaid leave, such as leave under the Uniformed Services Employment and Reemployment Rights Act (USERRA), under the Family and Medical Leave Act (FMLA) or for jury duty, the employer must determine hours of service by either:
    • Determining the average hours of service per week during the measurement period, excluding the special unpaid leave time, and using that average for the entire measurement period; or
    • Crediting the employee with hours of service for the special unpaid leave at a rate equal to the average weekly rate at which the employee was credited with hours of service during the other weeks in the measurement period.

For information on how to apply the look-back measurement method when the measurement period applicable to an employee changes, please see Employee Benefits > Health Care Benefits > Look-Back Measurement Method When Measurement Period Changes.

Step 4: Apply the Look-Back Method to New Employees

A new employee is any employee who has not been employed for at least one SMP. A new employee is considered a full-time employee if he or she is reasonably expected to be employed, on average, at least 30 hours per week. Alternatively, a new employee would be considered a variable hour employee if, at the start date, it cannot be determined that the employee is reasonably expected to work, on average, at least 30 hours per week.

An employee is typically considered a seasonal employee if he or she is hired to perform services on a seasonal basis, such as an individual hired for the holiday season. Final regulations, issued in February 2014, define seasonal employee as one who works in a position for which the customary annual employment is six months or fewer.

Applying the look-back method to a new employee depends on whether the new employee is a full-time employee or a variable hour/seasonal employee.

New full-time employees - An employer must offer a new full-time employee coverage by the first day of the fourth full calendar month of the employee becoming eligible for coverage. The measurement and stability period concepts do not apply to new full-time employees at the beginning of their employment.

New variable hour/seasonal employees - Under the look-back method, a new variable hour or seasonal employee's full-time (or part-time) status is determined by analyzing the employee's hours over the IMP. If the employee is determined to be a full-time employee (averaged at least 30 hours of service per week) during the IMP, then the employee must be treated as a full-time employee (and offered health coverage) during the subsequent stability period (as long as the employee remains employed), regardless of the actual number of hours of service during the stability period.

The stability period is the period of time (selected by the employer) during which an employee who was determined to be full-time during the related measurement period is treated as full-time for the purpose of assessing a penalty under the employer shared responsibility requirements. The length of the stability period depends on whether the employee is determined to be a full-time employee during the IMP. If the employee is determined to be a full-time employee during the measurement period, the stability period is the greater of:

  • Six months; or
  • The length of the IMP.

Alternatively, if the employee is determined not to be a full-time employee during the IMP, the length of the stability period cannot exceed the IMP by more than one month and cannot exceed the remainder of the SMP and any related administrative period during which time the IMP ends. In other words, the employee should be re-measured at the end of the SMP if that period overlaps with the employee's IMP.

The stability period must commence immediately after the IMP and any related administrative period.

Practical Example

For new variable hour employees, Acme Financial Services uses a 12-month IMP that begins on the employee's date of hire and applies an administrative period that runs from the end of the IMP through the end of the first calendar month beginning on or after the end of the IMP. The stability period (during which 12 months of coverage is offered) begins on the first day of the second calendar month on or after the employee's one-year anniversary.

Acme hires Steve on May 10, 2014. Steve's IMP runs from May 10, 2014, through May 9, 2015, during which he averages over 30 hours of service per week. Acme offers coverage to Steve for a stability period that runs from July 1, 2015, through June 30, 2016.

Special Rules for a Change in Status. If a new variable hour/seasonal employee has a change in employment status during the IMP, he or she is treated as a full-time employee as of the first day of the fourth month following the change in employment status. If the employee averages more than 30 hours of service during the IMP, coverage must be offered as of the first day of the first month following the end of the IMP.

For information on how to apply the look-back measurement method when the measurement period applicable to an employee changes, please see Employee Benefits > Health Care Benefits > Look-Back Measurement Method When Measurement Period Changes.

Step 5: Evaluate the Pay or Play Penalties

The pay or play penalties are triggered only if a full-time employee receives subsidized coverage through the health insurance marketplace. If a full-time employee is not eligible for subsidized coverage through the marketplace, the penalty does not apply. ALEs may incur one of two penalties.

1. No Coverage Penalty. If an ALE fails to offer its full-time employees (and their dependent children to age 26) the chance to enroll in MEC, the employer will incur a "no coverage" penalty if at least one full-time employee receives subsidized coverage through the marketplace.

The law calls for an annual no coverage penalty of $2,000, multiplied by the number of full-time employees (excluding the first 30 employees). In 2015 only, an employer may exclude the first 80 employees. The penalty, which is adjusted for inflation, is $2,080 for 2015 and $2,160 for 2016.

Practical Example

Acme Insurance Company employs 75 full-time employees for calendar year 2016. Acme does not offer MEC to its full-time employees, and seven full-time employees receive subsidized coverage through the marketplace. In this case, the penalty is applied to each full-time employee in excess of 30. For Acme, the number of full-time employees on which the penalty is calculated is 45 (75 - 30), and the total annual penalty is $97,200 (45 x $2,160).

The penalty is assessed monthly. If an ALE fails to provide coverage for part of the year, then the penalty is calculated for each month that coverage was not offered.

Practical Example

Acme Insurance Company does not offer coverage for a three-month period beginning in April 2016. Acme employs 75 full-time employees in April, 75 full-time employees in May and 95 full-time employees in June. The number of full-time employees on which the penalty is calculated would vary by month, as follows:

Month

Number of full-time employees

Number of full-time employees on which the penalty is assessed (Number of full-time employees less 30)

Amount of monthly penalty per full-time employee

Total penalty for the month

April

75

45

$180.00

$8,100.00

May

75

45

$180.00

$8,100.00

June

95

65

$180.00

$11,700.00

Total penalty for three months

 

 

 

$27,900.00

2. Unaffordable/Inadequate Coverage Penalty. If an ALE offers the opportunity to enroll in MEC to its full-time employees (and their dependent children to age 26), the employer may still incur an "unaffordable/inadequate" coverage penalty if it offers coverage that is not affordable or offers coverage that does not provide minimum value, and at least one full-time employee receives subsidized coverage through the marketplace. Note that the final regulations include a transition period for compliance. An employer with 100 or more employees must offer coverage to at least 70 percent of its full-time employees during the 2015 plan year, and to at least 95 percent of full-time employees beginning with the 2016 plan year, and beyond. An employer with 50-99 employees must offer coverage to at least 95 percent of full-time employees beginning with the 2016 plan year, and must also certify that they have not reduced their workforce below the 100-employee threshold.

The law calls for an unaffordable/inadequate coverage penalty of $3,000 for each full-time employee receiving subsidized coverage through the marketplace, not to exceed the "no coverage" penalty. The penalty, which is adjusted for inflation, is $3,120 for 2015 and $3,240 for 2016. The penalty is assessed monthly. The rationale for this cap is that an employer will not be subject to a larger penalty for providing coverage that is unaffordable than it would if it chose not to offer any coverage.

Practical Example

Acme Insurance Company offers MEC to its full-time employees, but that coverage is not affordable for some employees. In April, May and June of 2016, one, five and seven full-time employees respectively received subsidized coverage through the health insurance marketplace. The penalty is applied to each full-time employee receiving subsidized coverage. For Acme, the penalty equals $3,510, calculated as follows:

Month

Number of full-time employees receiving subsidized coverage

Amount of monthly penalty per full-time employee

Total penalty for the month

April

1

$270.00

$270.00

May

5

$270.00

$1,350.00

June

7

$270.00

$1,890.00

Total penalty for three months

 

 

$3,510.00

The determination of ALE status is made by aggregating, or totaling, the total number of employees among affiliated businesses within a controlled group (parent-subsidiaries or otherwise affiliated companies). This aggregation rule does not apply for purposes of determining whether an employer owes a penalty or the amount of any such penalty.

For example, a business within a controlled group of companies would not be subject to a penalty if it offers coverage that satisfies the ACA's requirements, even if other companies within the same controlled group do not satisfy these requirements.

After the end of each calendar year, the IRS will notify the employer if any of the employer's employees received subsidized coverage through the health insurance marketplace and allow the employer time to respond prior to assessing any fine. If the IRS determines the business is responsible for paying a penalty, it will send the employer a notice and an invoice for the fine.