Note: This is one in a series of posts addressing new rules from the IRS that may be used to determine which employees are full-time employees for purposes of applying the play-or-pay penalties under health care reform. Although the penalties do not become effective until 2014, it may be necessary to begin collecting data on employees soon, so it's a good time to begin thinking about these rules.
Background. The play-or-pay penalties essentially penalize applicable large employers that do not provide adequate, affordable group health coverage to full-time employees. So for employers that want to either ensure they avoid penalty exposure or assess their potential exposure to penalties, a critical issue is determining which employees are full-time employees.
The law generally defines "full time" for this purpose as working an average of 30 or more hours per week. Guidance from the IRS indicates that this may be determined on a monthly basis, in which case employees working an average of 130 or more hours per month are treated as full time.
Month-by-Month Determination. The structure of the penalty rules contemplates a month-by-month determination and calculation. An employer that decides to "pay" rather than "play" must calculate for each month in the year the number of full-time employees it had for that month and the corresponding penalty amount that is due.
But for employers that intend to offer group health coverage to employees so they can avoid most or all of the penalties, making a month-by-month determination is largely impractical. This could literally result in the need to make monthly enrollments in, and disenrollments from, the health plan. And, worse, in many cases it would not be known until after a month ended whether a particular employee worked enough hours that month to be treated as full time, making it either too late to comply for that month or else requiring an awkward system of retroactive enrollment and coverage.
More Certainty and Continuity. The IRS has recognized this problem and agrees that a month-by-month approach does not work very well for employers that are attempting to "play" in a way that avoids penalties. So in a recent notice (Notice 2012-58), the IRS laid out an alternative framework that allows for more continuity and stability.
The rules get a little complicated as you get into the details. But the basic idea is this: For employers that want to do so, they generally will be able to determine which employees are full-time using data that is already available, and then have those determinations remain in place for a specified period of time without regard to what actually happens during that period, thereby avoiding the need to make monthly determinations about eligibility and enrollment. This will provide employers more certainty about which employees are full time and must be offered coverage to avoid penalties.
Next - Part 2: Measurement Periods.