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IRS Provides Important Guidance on Full-Time Employees and the Play-or-Pay Penalties

Beginning in 2014, employers may be subject to the play-or-pay penalties under health care reform if they fail to offer health coverage to full-time employees, so it will be important to understand which employees are considered "full time" under those rules. In general, "full time" means working an average of 30 or more hours per week. 

In some cases it will be clear that an employee is (or is not) a full-time employee. But in other cases, an employee's work hours may be expected to vary over time, making it difficult to know whether the employee will be working an average of 30 or more hours per week.

It would be an administrative nightmare to determine a variable-hour employee's eligibility for health plan coverage on a weekly or even monthly basis, depending on the hours worked by the employee during that period. This would also be largely impractical, since it often would not be known until the end of a period whether the employee worked enough hours during that period to have been eligible for coverage.

Recognizing this, IRS Notice 2012-58 provides a framework for employers to make eligibility determinations for variable-hour employees over longer periods (up to 12 months) and rely on those determinations for a specified future period without regard to actual hours worked. These determinations will be respected both for purposes of plan eligibility and for purposes of applying the play-or-pay penalties. In other words, by following the framework established in Notice 2012-58, employers can better quantify which employees will and will not count against them for purposes of the play-or-pay penalties.

The guidance in Notice 2012-58 is detailed, and it will take some time to fully digest it and consider all of its ramifications, but here are some highlights:

  • New Variable-Hour Employees. Employers will be allowed to establish regular "measurement periods," "administrative periods," and "stability periods" to assist in determining whether variable-hour employees qualify as full-time employees. An employee's hours worked will be examined during the measurement period, and if the employee is "full time" based on hours worked during the measurement period, the employee will be treated as full time for a following stability period, without regard to the hours actually worked during the stability period. A brief administrative period may be inserted between the measurement period and the stability period to give the employer time to make the eligibility determination and, if necessary, enroll the employee. For example, an employer may decide that eligibility for newly hired variable-hour employees will be determined over an initial 12-month period, beginning on the date of hire, with any employees who are determined to be full time during that period becoming eligible for coverage for a 12-month stability period beginning on the first day of the 13th month after the date of hire.
  • New Full-Time Employees. For employees who are clearly full time when hired, they generally must become covered under the plan by the end of three full calendar months after the date of hire or they will count against the employer for penalty purposes. This will also satisfy the 90-day-waiting-period requirement.
  • Ongoing Employees. On an ongoing basis, employers may follow standard measurement and stability periods for purposes of determining plan eligibility. Ongoing employees essentially must be tested during each standard measurement period to see if they qualify as full time. If they do, they must be covered during the following standard stability period or they will count against the employer for penalty purposes.
  • Seasonal Employees. A special rule applies for bona fide seasonal employees who will be working full time upon hire but may not be considered full time when their hours worked are averaged over a longer period (e.g., 12 months). Those employees may be treated as variable-hour employees and held out of plan coverage until the initial measurement period is completed and it can be determined whether the 30-hour threshold is met.

In addition to these general rules, there are specific guidelines for how long or short the measurement, administrative, and stability periods may be.

Although complex in some respects, this new guidance is a welcome first step for employers that are concerned about structuring their health coverage to avoid application of the play-or-pay penalties.


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Don Berner, the Labor Law, OSHA, & Immigration Law Guy
Boyd Byers Image
Boyd Byers, the General Employment Law Guy
Jason Lacey Image
Jason Lacey, the Employee Benefits Guy
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