Over the past few years, our ACA Compliance team has received many questions around ACA compliance and most of the time, we are able to answer them quickly based on clear guidance given by the IRS, legislative information and/or court rulings.
However, there have been questions that are harder to answer, for example: “How is eligibility affected when a designated full-time employee transitions to variable hour part-time status and we use the lookback measurement method for variable-hour employees?”
That answer is not as straight forward for reasons we’ll get into later. The basic answer is: The employer should re-test that employee from the most recently completed measurement period to determine eligibility for that employee. If the employee did not work sufficient hours during the most recently completed measurement period, the employer is no longer required to continue coverage under the employer-sponsored plan and should offer to extend coverage to the employee under COBRA. However, if the employee worked sufficient hours during the measurement period, the employer should honor the full-time eligibility status until the end of the stability period. At the end of the current measurement period, the employer should test the employee again based on hours worked during the current measurement period.
The caveat to this answer is that the IRS has not provided definitive guidance in this area. As a result, we recommend that employers err on the side of caution in this situation, aka to the benefit of employees, in order to avoid potential litigation and penalties for non-compliance. We believe that should the IRS give guidance in this area, they would require employers to honor the eligibility status as though the employee had been tested with other variable-hour employees during the most recent administrative period.
The justification for this approach is that the employer is required to measure variable-hour employees to determine whether they are a “full-time” employee. If the employee is determined to be full-time, they must extend an offer of coverage. The regulations do not clearly differentiate between a “designated full-time employee” and an employee “determined” to be full-time based on hours worked during the measurement period. Notice 2014-49 describes related scenarios surrounding changes to employees that may result in a different measurement period for the employee. In this notice, it’s clear that when the IRS refers to a “full-time” employee they are referring to an employee determined to be full-time based on hours worked during the measurement period. In addition, the IRS made clear in the “Identifying Full-time Employees” information that the definition of a full-time employee is as follows:
For purposes of the employer shared responsibility provisions, a full-time employee is, for a calendar month, an employee employed on average at least 30 hours of service per week, or 130 hours of service per month.
There are two methods for determining full-time employee eligibility status:
The monthly measurement method, and
The look-back measurement method
These definitions of full-time employees are then considered when applying the employee eligibility status that applies during a stability period. Thus, the employer may not retract an offer of coverage until the employee is no longer “determined” to be full-time in a measurement period.
We understand that the 2018 instructions for form 1095-C cover situations where an employee is offered COBRA due to a “reduction in hours” that may appear to be contrary to the answer provided. The example on page 11 of the instructions discusses a situation where an employer may terminate existing coverage due to a reduction in hours in middle of a stability period. However, the example does not clarify whether the employee averaged more than 30 hours per week during the measurement period. In our understanding, this example covers the situation where an employee would not have been determined to be full-time during the previous measurement period.
In addition, this example expressly states that the reduction in hours resulted in “a loss of eligibility for coverage under the plan.” This then implies that it’s possible for a reduction in hours to not affect the eligibility status of an employee. The onus is on the employer to make that eligibility determination in context with the reduction in hours event.
Finally, 26 CFR VII Section 10 of the Federal Register details out the requirement to maintain eligibility as determined in the prior measurement period.
To further this justification, let’s assume we have two employees that have worked for the organization for several years. Employee FULLTIME was a designated full-time employee during that time working a regular schedule of 40 hours per week. Employee PARTTIME was determined to be full-time as a result of working on average over 30 hours per week during each year’s lookback measurement period.
On January 1st for our calendar year plan, both employees enroll into the employer-sponsored plan. On June 1st both employees experience a reduction in hours to 25 hours/week. It is widely accepted that the employer may not terminate coverage under the employer-sponsored plan for employee PARTTIME. Therefore, it would be equally inappropriate to terminate coverage for employee FULLTIME.
There are exceptions to this generalized rule. In 26 CFR VII Section 10 of the Federal Register, there is an allowance to classify a group of employees under the monthly measurement method which would allow the employer to terminate coverage once the employee completes 3 months of service after the change in status assuming that the employee does not work at least 130 hours per month during this time. This classification as monthly or lookback must be applied to all employees within the classification group on a uniform basis. In addition, 26 CFR VII Section 10 of the Federal Register makes allowance for employees in an initial measurement period such that they may be reclassified as variable-hour and the employer may terminate coverage and offer continued coverage under COBRA when the reduction in hours occurs. Additional clarification can be found on pages 9-11 of Notice 2014-49.