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Safe harbor protects employers from free-rider penalties

by on
in Office Management,Payroll Management

Under the Affordable Care Act (ACA) health care reform law, employers of 50 or more full-time em­ployees during the preceding year will pay free-rider penalties if they don’t offer full-time em­­ployees (i.e., those who work at least 30 hours a week) affordable health benefits.

How you determine full-time status is the subject of new IRS guidance. Key: Under an optional safe harbor, Payroll must set up tracking periods, called look-back periods, for employees who work variable hours. Heads up: For decisions regarding benefit eligibility in 2014, you’ll need to start these tracking periods soon. (Notice 2012-58, Notice 2012-59, IRB 2012-41)

Current employees

To determine whether ­current employees work full time or part time, you may use the new look-back/stability safe harbor.

There are three components to the safe harbor:

• A look-back period, also called a standard measurement period, during which employees’ hours are tracked. This period can stretch from three to 12 consecutive months. It may be a calendar year, a plan year or a different 12-month period (e.g., the 12 months ending shortly before open enrollment). This period must be the same for employees in the same category. Permissible categories: union vs. nonunion employees, salaried vs. hourly employees, employees of different entities and employees in different states.

• An administrative period may last for up to 90 days after the end of the look-back period and before the beginning of the stability period. This time can be used to notify employees of their status, distribute enrollment applications, etc.

• A stability period, which lasts for at least six consecutive months, and can’t be shorter than the look-back period. Employees who worked at least 30 hours a week during the look-back period must be offered benefits for the entire stability period. Flip side: Employees determined to work part time need not be offered benefits during this period. Stability periods may also vary by employee category. Watch out: Part-time employees may toggle between insured and uninsured status, which increases the risk of penalties.

Example: Mega’s 12-month stability period begins on Jan. 1, its 12-month look-back period runs from Oct. 15 through Oct. 14 of the next year and its administrative period runs from Oct. 15 through Dec. 31.

New employees

New full-time employees may be subject to a 90-day waiting period. The IRS has clarified that you won’t be liable for penalties if new full-time employees who don’t have access to benefits during their waiting periods obtain benefits through the individual exchange.

The process for determining the status of new employees who are anticipated to work variable hours (e.g., restaurant workers or retail salespersons) is similar to determining the status of current employees. You may use an initial measurement period, between three and 12 months, beginning with the first day of work (or the first day of the next calendar month). Thus, each new hire’s initial period will differ.

The initial measurement period and any administrative period can’t last longer than 13 months. New hires need not be offered benefits during this time. Warning: You will pay penalties if new hires obtain coverage through the individual exchange and qualify for premium tax credits because they weren’t offered coverage during any initial or administrative period. The stability period is the same length as the stability period for current employees.

New hires who work through their initial periods become current employees and, along with other employees, must be tested again for full-time status. The initial and look-back periods can overlap, if, say, a new hire’s initial period runs from Feb. 12 (the date of hire), through Feb. 11 of the next year, and the look-back period is the calendar year. This employee would be tested again using the standard look-back period beginning Jan. 1 of that next year. Employees must be treated as full time or part time for the entire associated stability period.

• SAFE HARBOR RELIANCE: You may rely on this safe harbor through measurement periods that begin in 2013 or 2014 and their associated stability periods, which may extend into 2014, 2015 or 2016.

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