Compliance Q&A: Look-Back Measurement Method – Reduction of Hours

Summary

If an employee who is initially hired as full-time sees a reduction in hours before completing a standard measurement period, the employer is allowed under the Affordable Care Act (ACA) to use the monthly measurement method until the employee completes a full standard measurement period. This will likely result in a termination of benefits if the employee continues to work part-time hours. However, an employer can choose to adopt a more generous ACA Eligibility Policy and allow an employee to remain eligible.

Detail

An Applicable Large Employer (ALE) is subject to the ACA’s Employer Shared Responsibility mandate (ESR), also known as “Pay or Play.”¹ This means the employer must make certain offers of health insurance coverage to its full-time employees and their dependents or risk potential tax penalties.

An employee is classified as “full-time” if they have at least 130 hours of service a month (or 30 hours per week).² The IRS allows an employer two ways to determine the fulltime status of its employees: the monthly and/or look-back measurement methods.³

An ALE may only use different measurement methods for certain categories of employees: hourly and salaried employees; collectively bargained and non-collectively bargained employees; different groups of collectively bargained employees covered by a separate bargaining agreement; or employees whose primary places of employment are in different states.

The monthly measurement method counts an employee’s actual hours of service each month. If an employee works full-time hours, the employee is classified as full time and must be offered coverage by the first day of the fourth month after hire to avoid potential tax penalties.⁴ If an ALE is using the monthly measurement method, then a reduction of hours will likely make an employee ineligible for coverage.⁵ The monthly measurement method is the default method for determining employee status.

Under the look-back measurement method, an employee is treated as full time for a specified stability period if the employee averaged 130 or more hours of service per month during the applicable measurement period preceding the stability period. ALEs who utilize the lookback measurement method will use an initial measurement period to measure new variable-hour, seasonal, or parttime employees.⁶ A standard measurement period is used to measure “ongoing employees,” i.e., employees who have been employed for at least one standard measurement period.

If a new full-time employee experiences a reduction in hours before completing a standard measurement period, the ACA allows the employer to use the monthly measurement method until the employee completes a full standard measurement period.⁷ The monthly measurement method would allow the employer to terminate the employee’s benefits for any month in which they did not work at least 130 hours. The employer would then measure the employee’s hours at the end of the first standard measurement period to determine if the employee averaged 130 hours per month in order to qualify for coverage for the subsequent stability period.

Some employers will choose to draft a more generous ACA Eligibility Policy, allowing employees who are hired as full-time to retain their full-time status until the beginning of the stability period following completion of the first full standard measurement period, even if the employee sees a reduction in hours. Many employers will choose to adopt this more generous policy simply due to the difficulties in applying the monthly measurement method, under which an employer will not know if someone qualifies for coverage until the month is over.

If an employee has been with the company for at least one standard measurement period, the LBMM rules state that the employee will remain eligible for the remainder of the stability period. If an employer chooses to define eligibility in a different way, the employer is at risk of potential IRS penalties.

While the IRS does not require ALEs to document their measurement method, maintaining a description of the selected measurement method and administration choices are essential. A written ACA Eligibility Policy will help plan sponsors administer plans consistently and can help an employer demonstrate compliance with the ESR mandate. It is also helpful to provide the ACA Eligibility Policy to carriers to make sure they’re on the same page as the employer in determining employee eligibility status.

The IRS recognized there may be a monetary hardship caused by continued eligibility for employees if hours of service drop but coverage is not lost due to a stability period. In that case, the employee may want to revoke an election. If the employee’s premiums for coverage are being taken out on a pre-tax basis, the employer will have to consider the IRS Section 125 cafeteria plan rules. A cafeteria plan generally has an irrevocable election of coverage. A reduction of hours without a corresponding loss of coverage would ordinarily not be a qualifying event that would allow an employee to drop coverage mid-year.

Under the ACA, however, a cafeteria plan may allow an employee to prospectively revoke an election of coverage under a group health plan if both of the following conditions are met:

1. An employee who was reasonably expected to average at least 30 hours of service per week has a change in employment status so that the employee will reasonably be expected to average less than 30 hours of service per week after the change (even if that reduction does not result in the loss of the employee’s eligibility under the group health plan).
2. The revocation of the election of coverage under the group health plan corresponds to the intended enrollment of the employee (and any related individuals who cease coverage due to the revocation) in another plan that provides at least minimum essential coverage. The new coverage must be effective no later than the first day of the second month after the month in which the original coverage is revoked.⁸ An employer’s cafeteria plan would need to be amended to include this qualifying event to allow a mid-year election change and allow the employee to drop coverage during the stability period.

Conclusion

If an employer is using the look-back measurement method, and a full-time employee drops to part-time status, there are special rules to consider depending on how long the employee has been with the company. ALEs using the look-back measurement method should consider whether they want to draft their ACA Eligibility Policy to reflect the standard rules, or to be more generous and allow an employee who drops to part-time status to remain eligible for the remainder of the stability period.