Applicable Large Employer Loophole

While reading the proposed regulations related to the Shared Responsibility for Employers Regarding Health Coverage, I was struck by what appears to be a large loophole for an employer when determining if it is an applicable large employer (ALE).  If the loophole is used properly, employers can avoid being ALEs by manipulating their full-time equivalent employee count.  This will prevent an employer from being subject to the Play or Pay Mandate.
 
To determine if an employer is an ALE the employer uses the actual hours of service for its employees from the preceding year.  The first step in determining if an employer is an ALE is to count the number of full-time employees it employs each month.  An employee is considered a full-time employee for a month if the employee has 130 hours of service in that particular month. 
 
The second step in determining if an employer is an ALE is to tally its full-time equivalent employees for each month.  An employee cannot have more than 120 full-time equivalent hours of service for any month.  For example if an employee has 125 hours of service in a month, the employee will not be a full-time employee because the employee falls short of the 130 hours of service threshold to be considered a full-time employee.  However, assuming the employee is not a full-time employee for any month in the preceding year, the employee will only have 120 of the 125 hours of service counted towards the monthly total of full-time equivalent hours of service.  The hours of service of full-time equivalent employees are added together and divided by 120 to give the employer the number of full-time equivalent employees for the month.
 
The third step requires an employer to add the totals for each applicable month from step one and step two.  After the third step, the employer should have a yearly (or six month in the case of 2013 if the employer elects) total of full-time employees and full-time equivalent employees.  The final step involves the employer averaging over a 12 month period, or six months in the case of 2013 if the employer elects, to determine if the employer has 50 or more employees.  If the employer has 50 or more employees, it will be an ALE for that year and subject to the Play or Pay Mandate.
 
The loophole is found in language in the preamble and proposed regulations regarding how full-time equivalent employees are calculated.  The preamble states:
 
“The proposed regulations apply this provision using the calculation method for FTEs that was included in Notice 2011-36.  Under that method, all employees (including seasonal workers) who were not full-time employees for any month in the preceding calendar year are included in calculating the employer’s FTEs for that month…”
 
The proposed regulations further support the statement above by saying:
 
“In determining whether an employer is an applicable lager employer, the number of FTEs it employed during the preceding calendar year are taken into account.  All employees (including seasonal workers) who were not employed on average at least 30 hours of service per week for a calendar month in the preceding calendar year are included in calculating the employer’s FTEs for that calendar month.”
 
In other words, by being a full-time employee for just one month, the employee cannot have full-time equivalent hours of service for the rest of the year.  The planning opportunity for an employer who is a borderline ALE with a few full-time equivalent employees is to make all the potential full-time equivalent employees a full-time employee for one month and have them work less than 130 hours per month the other 11 months.  As a result, that particular employee will only count as 1/12 of an employee towards an employer’s ALE calculation despite the fact the employee could have worked more than 1400 hours for the employer in the previous year.
 
To me the rule is not logical, but I have combed over the Shared Responsibility for Employers Regarding Health Coverage proposed regulations countless times and cannot find a sentence that prevents the result above.  As I am sure most of you are aware, a lot of the ACA does not make sense.  When the rules of the game allow a certain result favorable to employers, I suggest taking advantage.  Please feel free to contact me to discuss the matter further.