Employers commonly hire “hourly” (non-salary) employees to support their organizations. Hourly employees sometimes have variable schedules – that is, their scheduled hours differ week-to-week depending on business demand, staffing, and the like. These variable-hour employees can be of concern to employers with regard to benefits eligibility and more.
Applicable Large Employers (ALEs) must offer affordable coverage to all full-time (FT) employees (and at least Minimum Essential Coverage [MEC] to their dependents) to satisfy the Affordable Care Act (ACA) employer mandate. Employers with such variable-hour, hourly employees may have a hard time determining whether these employees are FT or part-time (PT) – and therefore eligible or ineligible for benefits under the ACA.
It is important ALEs not automatically or mistakenly place variable-hour employees in the PT category, without properly calculating PT-status according to ACA standards. A mistake could result in an Employer Shared Responsibility Payment for violation of the ACA’s employer mandate. Tracking and recordkeeping are vital for IRS reporting and documentation.
Lookback Measurement Period
An ALE in this circumstance should use what’s called a “Look Back Measurement” (LBM) period if the employer cannot reasonably tell on the date of hire (DOH) whether a variable hour employee will be FT (eligible for employer-sponsored coverage) or PT (ineligible for employer-sponsored coverage). Essentially, when using this method (called an “initial measurement period” for new hires), the employer tracks the variable-hour new-hire employee’s hours of service for a period of time selected by the employer (between 3-12 months, per IRS rules). The employer then makes a determination of FT/PT status and benefit eligibility based on those hours of service provided during the pre-determined LBM period.
The LBM period can start at DOH, first of the month following the DOH, or any date between DOH and the first of the month following DOH. Many employers opt to use the first of the month following DOH because it’s easier to calculate an employee’s hours in full-month segments. It also lessens the administrative burden on employers by grouping new hires into a maximum of twelve LBM groups.
ALEs are permitted to apply different LBM periods to four classes of employees: salaried and hourly employees, employees whose primary places of employment are in different states, collectively bargained and non-collectively bargained employees, and each group of collectively bargained employees covered by a separate collective bargaining arrangement.
When using an LBM period, the employer must also implement a “stability period” for those deemed FT at the conclusion of the LBM period. The stability period is a period that follows the LBM – which must be equal to the length of the LBM period but no less than six months – where the newly-determined FT employee will maintain eligibility for benefits, even if his/her hours fluctuate below FT during this stability period. The exception to this rule, of course, is if the employee terminates employment with the employer (either voluntarily or involuntarily), or if the employer drops group health coverage altogether.
For example, if an employer uses a three month LBM period and determines an employee is FT, the employer must offer coverage to that employee for no less than six months – even if his/her FT status changes to PT status within that six month stability period. Many employers use 12-month measurement and stability periods to minimize recordkeeping requirements, and because it allows for a longer period to average hours – which may be advantageous to the employer and employee.
Many employers, of course, need time to calculate a new variable-hour-employee’s status following the conclusion of a LBM period. Because of this, the IRS allows employers to implement up-to a 90-day “administration period” between the LBM and stability periods to make this calculation. However, any time that passes between the variable-hour employee’s DOH and the start of his/her LBM period must be added to the employee’s administrative period. This is important for employers with a LBM period beginning the first of the month following DOH, as it will cut into an employee’s maximum 90-day administrative period. Essentially, when combined, the amount of days between the DOH and the beginning of the LBM period and the elective administration period must not exceed 90 days for variable hour employees.
The only exception to this 90-day administration period is for ALEs that select either an 11-month or 12-month LBM period. Coverage for employees with FT hours of service based on an 11- or 12-month LBM period must be offered no later than the first calendar month beginning on or after the first anniversary of the employee’s start date.
These measurement periods can also be used for new seasonal employees.
LBM Period for Existing Variable Hour Employees
For existing, non-new-hire employees, called “ongoing employees” in the IRS rules, a similar approach should be used. If the ongoing employee’s hours continue to fluctuate, another measurement period – the “standard measurement period” (SMP) – must be enacted. This SMP is a period selected by the employer (3-12 months), which is used to review an ongoing employee’s hours on a continuing basis. The SMP must also have a resulting “stability period” that also must be equal to the length of the LBM period but no less than six months. The administration period is also allowed for ongoing employees, just like new-hire employees.
The tracking required for new-hire and ongoing variable-hour employees can be very challenging. An online system or payroll service is recommended for accurate tracking.
It’s imperative for an employer to document its measurement, stability, and administrative periods and practices in its ERISA plan documents, which detail eligibility information for employees and govern the employer’s plan(s). These procedures for eligibility determination should also be explained in an employer’s Employee Handbook.
For more help with the ACA’s measurement periods, stability periods, or any other compliance topic in the employee benefits world, consult your dedicated WBCompliance Team; call 866-375-2039 or send an email to ComplianceSupport@wordandbrown.com.