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IRS Proposes New Approach to Determine Employee’s Status for Employer Mandate Purposes

IRS has proposed an approach to the application of the look-back measurement method, which is a method that may be used to determine if an employee is a full-time employee for purposes of the Affordable Care Act’s (ACA’s) employer shared responsibility provisions under Code Sec. 4980H, in situations in which the measurement period applicable to an employee changes. Taxpayers may rely on the proposed approach until further guidance is issued, and in any case, through the end of the 2016 calendar year. ( Notice 2014-49, 2014-40 IRB )

Background—employer mandate in general.

For months beginning after December 31, 2013, an “applicable large employer” (an ALE, which generally means, for a calendar year, an employer that employed on average at least 50 full-time employees during the preceding calendar year) is liable for an annual assessable payment if the employer:

1. fails to offer to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage (MEC, see below) under an eligible employer-sponsored plan (Code Sec. 4980H(a) liability); or
2. offers its full-time employees (and their dependents) the opportunity to enroll in MEC and at least one full-time employee is certified to receive a premium tax credit or cost-sharing reduction (Code Sec. 4980H(b) liability).

In July of 2013, IRS delayed the employer mandate until 2015 and provided transition relief for 2014 from certain related reporting requirements (see Pension and Benefits Week ¶  1  07/15/2013). IRS subsequently issued final regs on the employer mandate (see Pension and Benefits Week ¶  1  02/18/2014, Pension and Benefits Week ¶  2  02/18/2014, and Pension and Benefits Week ¶  3  02/18/2014).

Background—identification of “full-time employees.”

Under Code Sec. 4980H(c)(4), a “full-time employee” for any month is an employee who is employed on average at least 30 hours of service per week. The final regs provide two alternative methods for determining if an employee is a full-time employee for purposes of Code Sec. 4980H: (1) the monthly measurement method, and (2) the look-back measurement method.

Under the monthly measurement method, an employee generally is treated as a full-time employee for any calendar month in which the employee averages 30 or more hours of service per week. (Reg. § 54.4980H-3(c)(1)) Under the look-back measurement method, an employee generally is treated as a full-time employee for any month within a stability period if the employee averaged 30 or more hours of service per week during the applicable measurement period preceding the stability period. (Reg. § 54.4980H-3(d)(1))

An employer that uses the look-back measurement method sets the starting date and length of two separate measurement periods: (1) the standard measurement period, which is used for ongoing employees (generally, all employees who have been employed for at least one full standard measurement period), and (2) the initial measurement period, which is used for new variable hour, seasonal, or part-time employees. Each ALE member, defined as a separate entity within a group of entities that constitutes a single ALE, may: (i) establish different measurement methods, or use measurement periods that differ in duration or that start on a different date (i.e., methods or periods that are different from those used by the other ALE members of the group), and (ii) use measurement methods or periods that differ in duration, or that start on a different date for certain specified categories of its own employees (i.e., methods or periods for those categories of employees that differ from those used for other employees). (Reg. § 54.4980H-3(d)(1)(v))

Proposed approach.

In Notice 2014-49, IRS proposes an approach for applying the look-back measurement method if the measurement period applicable to a particular employee changes, specifically in situations where: (i) an employee transfers from one position to another within the same ALE (or ALE member) and the employer uses a different measurement period for each position, and (ii) the employer changes the measurement period or method applicable to one or more categories of employees.

Employee transfers.

In the first situation, following a transfer, an employer includes hours of service earned in the first position either by (1) counting the hours of service using the method applied to the employee in the first position, or (2) recalculating the hours of service earned in the first position using the method applied to the employee in the second position, provided that the employer treats all similarly situated employees consistently.

Then, beginning on the transfer date, the proposed approach to the look-back measurement method is applied as follows:

If an employee is (or is deemed to be) in a stability period applicable to the first position as of the date of transfer, the employee’s status as a full-time or non-full-time employee (“status”) for the first position remains in effect until the end of that stability period. At the end of the stability period during which the transfer occurs, the employee assumes the status that he would have under the look-back measurement method applicable to the second position, but including hours of service in the first position when applying that measurement method.

If an employee is not in a stability period, then the employee’s status is determined solely under the look-back measurement method applicable to the second position as of the date of transfer, including all hours of service in the first position.

In all other respects, the rules generally applicable to the look-back measurement method under Reg. § 54.4980H-3(d) continue to apply. However, a transfer of a new variable hour, part-time, or seasonal employee from the first position to the second position may be a change in employment status described in Reg. § 54.4980H-3(d)(3)(vii) if, after the transfer, the employee is reasonably expected to average at least 30 hours of service per week in the second position.

As provided in the final regs, a new employee who is not a variable hour or seasonal employee, and who is reasonably expected to average at least 30 hours of service per week at the time of hire (and so is expected to be a full-time employee) is not subject to an initial measurement period. His status is instead determined on the basis of hours of service in each month (Reg. § 54.4980H-3(d)(2)(i)), and he will never be in a stability period for purposes of the above rules. Until this employee has been employed for a full standard measurement period applicable to the second position (including service in the first position), the employee’s status under Code Sec. 4980H will continue to be determined on the basis of hours of service in each calendar month. If such an employee has been employed for a full standard measurement period applicable to the second position but not the first position as of the date of transfer, the employee’s status is determined on the basis of the employee’s average hours of service during that standard measurement period for the second position (but counting the hours of service accumulated during that standard measurement period for the first position), as applied starting on the first day of the first month following the date of transfer and continuing through the end of the associated stability period.

Employer-initiated changes in measurement methods.

Although the final regs address how to determine the status of employees who transfer from a category to which the monthly measurement method applies to a category to which the look-back measurement method applies (or vice versa), they do not address whether, or under what conditions, an employer that uses a measurement method for a category of employees may later change that measurement method. IRS clarified in Notice 2014-49 that an employer may change the measurement method applicable to a category of employees, provided that the transition rules for employees who change between the monthly and look-back measurement methods due to such a change apply to all employees impacted by the change for a transition period after the effective date of the change in method. For a change from the look-back measurement method to the monthly measurement method (or vice versa), the status of each affected employee as of the date of the change is determined in accordance with Reg. § 54.4980H-3(f)(2) as if, on the date of the change, each of those employees had transferred from a position to which the original measurement method applied, to a position to which the revised measurement method applied.

The status of any employee whose applicable measurement period under the look-back measurement method is changed by the employer is determined as if the employee had transferred from a position to which the original measurement method applies to a position to which the revised measurement method applies as of the effective date of the change. Thus, if an employer changes the duration or start date of the measurement period under the look-back measurement method for a category of employees, the status of each employee in that category after the date of the change is determined in accordance with Notice 2014-49 as if, on the date of the change, each employee in the category had transferred from a position to which the original measurement method applied to a position to which the revised measurement method applied.

Reliance and request for comments.

IRS requested comments on the proposed approach in general, and specifically on the potential application of it in the context of certain corporate transactions, but specified that although it anticipates issuing further guidance after considering all comments received, taxpayers may rely on the approach described above until such guidance is issued, and in any case, through the end of calendar year 2016.

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