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.
As we have already seen, an employer may use a measurement period to determine whether an employee is a full-time employee, and any such full-time employee must be offered health-plan coverage during the following stability period, if the employer wants to avoid an automatic penalty for that employee. But, of course, enrollment can take some time. The employee may have multiple coverage options to consider and enrollment forms to fill out. And the employer will almost certainly need time to calculate the employee's hours of service during the measurement period. So it wouldn't work very well if the stability period had to begin immediately after the measurement period.
A Time For Transition. Recognizing this, the IRS’s guidance allows employers to use an "administrative period" in connection with their measurement and stability periods. This allows for a reasonable transition period between the measurement and stability periods. It also allows the initial measurement period to begin at a convenient time, such as at the beginning of a month or payroll cycle.
Ground Rules. Like the measurement and stability periods, employers have flexibility in defining the administrative period, but there are some ground rules.
- General Limit. An administrative period may in no case exceed 90 days.
- Rules for New Hires. In the case of a newly hired employee, the initial measurement period plus the administrative period may not extend beyond the last day of the first month beginning on or after the first anniversary of the date of hire. In other words, the total period from date of hire to date of coverage may not exceed 13 months, plus a fraction. Also, the administrative period is defined as any period of time from the date of hire to the date of coverage, other than the initial measurement period. So if the employer uses an administrative period both before and after the measurement period, the two periods must collectively satisfy the 90-day limit and the 13-month-plus-a-fraction limit.
- Rules for Ongoing Employees. For ongoing employees, the administrative period may not reduce or lengthen the measurement period or stability period. The administrative period also must overlap with the prior stability period, so that anyone treated as a full-time employee for that stability period will continue to have coverage for all of that stability period.
Maybe an example or two will help.
Example 1 - New Hire. Assume an employer uses a 12-month initial measurement period, beginning on the date of hire. An employee hired on November 20, 2014 will have an initial measurement period that ends November 19, 2015. The employer could then allow for an administrative period between November 19, 2015 and January 1, 2016. This would be within the 90-day maximum. And the initial measurement period plus the administrative period would not extend more than 13 months and a fraction after the date of hire.
Example 2 - New Hire. Assume an employer uses a 12-month initial measurement period beginning on the first day of the month after date of hire. An employee hired on November 20, 2014 will have an initial measurement period that begins December 1, 2014 and ends November 30, 2015. The employer could then allow for an administrative period between November 30, 2015 and January 1, 2016. This again would satisfy the 90-day maximum, even taking into account the administrative period between November 20, 2014 (the date of hire) and December 1, 2014 (the beginning of the initial measurement period). It would also satisfy the 13-month rule, because the period between the date of hire (November 20, 2014) and the date of coverage (January 1, 2016) does not exceed 13 months plus a fraction.
Example 3 - Ongoing Employee. Assume an employer uses a 12-month standard measurement period beginning October 15 each year and a 12-month standard stability period beginning January 1 each year, with an administrative period between October 15 and January 1. Now let's say an employee is determined to be a full-time employee for the measurement period ending October 14, 2014 and so is offered coverage during the stability period beginning January 1, 2015, but then is determined not to be a full-time employee during the measurement period ending October 14, 2015. During the administrative period that begins October 15, 2015, this employee will continue to have coverage, because the administrative period overlaps with the 12-month stability period that began January 1, 2015. The employee will no longer have coverage beginning January 1, 2016.
There are many different examples of possible scenarios, but these illustrate the basic ideas. How an employer chooses to define its administrative period will depend in large part on what fits best with the employer's existing systems for tracking hours of service and processing health plan enrollments.
Next - Part 5: New Hires
Part 1: The Problem
Part 2: Measurement Periods
Part 3: Stability Periods