The Forgotten Employees

The Forgotten Employees – How a Treasury Oversight Will Impact Employers Wishing to Utilize the Look-Back Measurement Method
 
An employer planning to use the look-back measurement method (which was discussed extensively in The Affordable Care Act Creates a New High Stakes Game of Counting Hours and Days publication) should already be measuring the hours of service of its workforce.  However, with the delay in the Play or Pay Mandate until 2015 there will be no consequences for not accurately tracking an employee’s hours of service in 2014.  For reasons explained in detail below, it is critical for employers to begin measuring their workforce’s hours of service in 2013 so they can fully utilize the look-back measurement method for all employees in 2015.
 
The Affordable Care Act defines a full-time employee as an employee who averages at least 30 hours of service per week with an employer.  For purposes of the look-back measurement method there can be three types of employees with respect to the full-time employee definition.  The first type of employee is an employee the employer knows will work 30 or more hours per week.  The second type of employee is an employee that may or may not work 30 hours per week during the pertinent time period.  The proposed shared responsibility regulations explain how the rules apply to the first two types of employees.  The third type of employee is an employee the employer knows will not work 30 or more hours per week and thus will not meet the requirements for being a full-time employee.  The third type of employee will be prevalent in certain industries (restaurants, hotels, low-skilled manufacturing, etc.) to minimize an employer’s exposure to the Play or Pay Mandate.  Despite being prevalent, the third type of employee has all but been forgotten by the proposed regulations.  The legality of the third type of employee has been called into question by a number of people, an issue explored in How the Affordable Care Act, ERISA Section 510, and FLSA Section 18C Interact, but there is also uncertainty with these employees with regard to the look-back measurement method. 
 
The issue that is unclear is whether an employer can have a segment of its workforce average 29 hours of service during the initial measurement period with no employee accumulating 30 or more hours of service during the initial measurement period.  If an employer is able to use the look-back measurement method for this segment of its workforce despite no single employee being classified as a full-time employee during the initial measurement period, the employer would gain value by being able to adjust an employee’s hours to match changes in demand throughout the year.
 
Consider the following example.  Holly’s Ice Cream Shop (the Shop), an applicable large employer, is an ice cream chain located throughout the United States.  The Shop remains open year round, but requires more staffing in the summer months.  The Shop has decided it cannot afford full-time employees as its profit margin was slim before the enactment of the ACA.  Therefore, it has decided to implement a strategy of using all employees for 29 hours of service or less per week.  If Holly’s Ice Cream Shop is able to use the look-back measurement method for its workforce, the Shop will be able to meet its summer scheduling demands while classifying none of its workforce as full-time employees.  For example, Stanley, an employee at the Shop, could work 40 hours per week for the 16 weeks in the summer busy season and 25 hours a week for the rest of the year.  With this schedule, Stanley would not be classified as a full-time employee.  The risk is the IRS will not allow the Shop to use the look-back measurement method for Stanley as he transitions to an ongoing employee.  If that is the case, Holly’s Ice Cream Shop would be responsible for the Play or Pay Mandate with respect to Stanley for four months.
 
The proposed shared responsibility regulations define a variable hour employee as an employee if, based on the facts and circumstances at the employee’s start date, the employer cannot determine whether the employee is reasonably expected to accumulate 30 or more hours of service during the initial measurement period.  Only variable hour employees (and seasonal employees who are not applicable to this publication) are allowed to use the initial measurement period.  If an employer is having a large segment of its workforce accumulate less than 30 hours a week during the initial measurement period and no employee in that segment accumulates 30 or more hours a week during the initial measurement period the employer could not say it “cannot determine whether the employee is reasonably expected” to accumulate 30 or more hours of service during the initial measurement period.  For this large segment of the workforce, the employer knows each employee will accumulate less than 30 hours of service during the initial measurement period.  Therefore, under a strict reading of the proposed regulations these employees cannot be classified as variable hour employees and cannot use the initial measurement period.  It appears the initial measurement period can only be used for the second type of employee.
 
The standard measurement period is not as exclusive compared to the initial measurement period.  The standard measurement period can be used to determine an ongoing employee’s full-time status.  An ongoing employee is defined as an employee who has been employed by an employer for at least one standard measurement period.  Thus, the use of the standard measurement period is not predicated on an employer being unable to determine if an employee will accumulate 30 or more hours of service during the standard measurement period.  It appears the standard measurement period can be used for all three types of employees. 
 
The problem for an employer will be transitioning its existing workforce to ongoing employees without having the employees subject to the Play or Pay Mandate.  During the first standard measurement period, no employee will satisfy the ongoing employee definition.  Consequently, if an employer is going to use the look-back measurement method for its existing workforce, initially the employee must either be a variable hour employee or a seasonal employee.  Fortunately, the delay of the Play or Pay Mandate until 2015 provides an opportunity for an employer to transition its existing workforce to ongoing employees at no cost.
 
To take advantage of the delay, an employer should begin measuring its workforce’s hours of service using the look-back measurement method in October 2013.  An employer should adopt a six month standard measurement period for the 2014 calendar year.  The two standard measurement periods will run from October 15, 2013 until April 14, 2014 and April 15, 2014 until October 14, 2014.  The beauty of the six month standard measurement period is the existing workforce will all be ongoing employees for the April 15, 2014 until October 14, 2014 standard measurement period as they will all have been employed for at least one standard measurement period (October 15, 1013 until April 14, 2014).  Thus, the proposed regulations will allow the employer to use the look-back measurement method for this segment of the workforce.  Additionally, there is no penalty associated with the Play or Pay Mandate for 2014.   Therefore, if the look-back measurement method cannot be used for these employees, there will be no penalty for the corresponding stability period from July 1, 2014 until December 31, 2014.
 
For 2015 and all subsequent years the employer can amend the standard measurement period to be 12 months from October 15 of year one until October 14 of year two.  The 12 month measurement period will provide the employer more flexibility with its scheduling needs. 
 
If an employer does not take advantage of the delay, the employer will have to keep an employee under the 30 hour per week threshold until the employee can be treated as an ongoing employee.  Depending on the employee’s start date and the length of the employer’s standard measurement period, an employer could be limited to using an employee for less than 30 hours per week for 23 months.
 
I am skeptical that the Treasury Department intended to create this discrepancy between the employees that can be included in the initial measurement period and the standard measurement period.  Hopefully, the final regulations address this issue and make it clear that employees the employer knows will accumulate less than 30 hours of service per week during the initial measurement period can still utilize the look-back measurement method after the employee is hired and not just when the employee becomes an ongoing employee.

(see my blog post with some additional thoughts)Legal Consent

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