IRS Proposes Changes to Play-or-Pay Measurement Periods

Under the Affordable Care Act (ACA), large employers (as defined under the act) risk a penalty if they don’t offer affordable, “minimum essential” health care coverage to their full-time employees. This is the concept popularly known as “play or pay.”

In September, the IRS released Notice 2014-49 to propose approaches for identifying those full-time employees in situations where the measurement period applicable to an employee changes.

Available methods

Under the final play-or-pay regulations, applicable large employers may identify full-time employees using either of two methods:

1. The look-back method. Here, hours are tracked during a measurement period of up to 12 months starting on a date selected by the employer. The hours are counted during an optional administrative period immediately after the measurement period, and they’re used to “lock in” full-time or part-time status during a “stability period” of up to 12 calendar months.

2. The monthly method. Under this approach, employers identify full-time employees each calendar month by counting hours only during that month. 

The employer can choose different measurement periods — and different methods — for specified categories of employees (such as salaried and hourly). Notice 2014-49 looks at changes in the duration or start date of measurement periods under the look-back method, and it addresses an employer’s election to change from the look-back method to the monthly method (or vice versa). The Notice also provides examples to illustrate the rules.

Measurement period changes

The proposed rules apply when the measurement period changes because an individual employee transfers positions within the same applicable large employer. Also, employer-initiated changes to the measurement period for a category of employees will be treated as if those employees had transferred to new positions as of the effective date of the change. Notice 2014-49 categorizes employee transfers under two circumstances:

1. The employee is in a stability period. Employees in a stability period at the time of transfer will retain their full-time or part-time status for the remainder of that stability period. At the end of that period, the employees’ status will be based on hours during the measurement period for their second position and will be locked in for the associated stability period.

To the extent the measurement period for the second position overlaps the measurement period for the first position, the employer would count all hours during the second position’s measurement period — including those overlapping hours that were credited during the first position’s measurement period. If an employee’s status in the second position cannot be determined under the measurement period applicable to that position (as could happen for a new variable-hour employee not yet employed for a full initial measurement period applicable to the second position), the rules for an employee who isn’t in a stability period apply.

2. The employee isn’t in a stability period. At the time of transfer, if an employee isn’t in a stability period for the first position, the employee’s status will be determined solely under the second position’s measurement period. The employer will take into account all hours credited during the second position’s measurement period, including hours that overlap with the first position’s measurement period.

The Notice emphasizes that this special rule doesn’t override general principles under the look-back method. For instance, still applicable is the requirement that new employees who are reasonably expected, as of their start date, to work full-time hours generally will have full-time status determined under the monthly method until they complete one full standard measurement period. Notice 2014-49 explains the application of these rules when new full-time employees transfer to a position for which they have already completed a standard measurement period. 

Employer-initiated method changes

Generally, the ACA’s rules for method changes, which are included in the final regulations, require a transition period intended to protect employees who have earned full-time status. But the final regulations don’t address whether, or under what conditions, an employer can initiate a switch between the look-back and monthly methods.

Notice 2014-49 states that employers may switch between methods provided that they adhere to the same transition rules that apply when individual employees have a method change due to a change in employment status. 

Comments requested

Until further guidance is issued, and at least through December 31, 2016, employers can rely on Notice 2014-49.

The IRS has, however, requested comments on the proposed approaches — particularly as they might apply to mergers and acquisitions where the parties to the transaction use different measurement periods or methods. Until then, employers involved in a corporate transaction may rely on the approaches described in the Notice. Comments can be submitted until Dec. 29, 2014.

Utmost importance

With the first stability periods under the look-back method slated to start Jan. 1, 2015, Notice 2014-49 fills some important gaps in the existing guidance. Correctly identifying full-time employees is of utmost importance because, as mentioned, a full-time employee’s receipt of subsidized coverage on a Health Insurance Marketplace may trigger an employer penalty. Furthermore, large employers will soon become subject to an ACA-mandated reporting requirement regarding information about the coverage offered to full-time employees.

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