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Employers Following Pre-ACA Break In Service Rules Leaving Themselves Exposed to Section 4980H Penalties

January 30, 2019


Recently I have been contacted in private practice by several employers who inadvertently failed to offer coverage to employees who needed to be offered coverage. As a result of the inadvertent errors, the employers will have to complete the Forms 1095-C for certain employees with 1H on line 14 and line 16 left blank. This code combination is concerning as the employee could trigger the section 4980H penalties for that particular month. And, as many employers have learned the IRS is serious about the enforcement of the section 4980H penalties through the Letter 226J. In the worst case scenario, the inadvertent errors cause the employer to drop below the 95 percent threshold for certain months. This results in any exposure under section 4980H being under the exponentially more costly section 4980H(a) penalty. This paper examines a common error with the break in service rules due to the way things were handled in the pre-ACA landscape.

To refresh your recollection, the Affordable Care Act (ACA) determines whether a break in service occurs by examining the number of weeks for which an employee has not accumulated an hour of service. The rule in its simplest form states that if an employee resumes services with the employer after a period in which the employee was not credited with an hour of service for a period of 13 (or more) consecutive weeks, the employee will be treated as having been rehired as a new employee. The term week is also clearly defined in the final regulations. Week, as it is used in the final regulations, means any period of seven consecutive calendar days applied consistently by the employer. Therefore, a week can be viewed as a seven day block. For the purposes of this paper let’s assume the employer has elected its weeks to begin on Sunday and end on Saturday.

The regulations also discuss the rule of parity, but for simplicity we elected not to discuss the rule of parity in this article. However, the concepts discussed in this article would also apply if an employer has elected to use the rule of parity in addition to the 13 week rule (note the 13 week rule is mandatory whereas the rule of parity is optional). If an employer has elected the rule of parity, it is imperative that its service provider automates its review process as the amount of data to compute the rule of parity would almost assuredly be misapplied with human computation particularly if the employer has a large workforce. In fact, almost all of the errors that are leading employers to inadvertently not offer coverage in a timely fashion can be solved by automation.

Applying the 13 week rule there are two scenarios. In the first scenario the employer has a break in service that is 13 weeks or longer. Consider the following example illustrating the first scenario:

McGee is hired as a variable hour employee for ABC Inc. on June 1, 2015. Beginning on October 3, 2015 ABC Inc. no longer has work to offer McGee. McGee is not credited with an hour of service with ABC Inc. until June 3, 2016. As a result of McGee not being credited with an hour of service for 34 weeks, McGee would be treated as a new employee when he resumes employment with ABC Inc. on June 3, 2016. Therefore, if McGee is rehired as a variable hour employee, he could be placed into a new initial measurement period. Alternatively, if McGee is rehired as a full-time employee, the employer would have until the first day of the fourth calendar month, in this case October 1, 2016, to offer McGee coverage in a timely fashion.

The second scenario occurs when the break in service falls short of 13 consecutive weeks. This is where pre-ACA practices are creating problems. Consider the follow example illustrating the second scenario:

Stanley has continuously worked for ABC Inc. since his start date on December 12, 2012. Stanley accumulated more than the requisite 1,560 hours of service during the 12 month standard measurement period to be offered coverage for the 2015 stability period of January 1, 2015 through December 31, 2015. Stanley accepted the offer of coverage and was enrolled in the plan. Beginning on March 3, 2015 ABC Inc. no longer had work to offer Stanley. Stanley is not credited with an hour of service with ABC Inc. until May 8, 2015. Stanley is not credited with an hour of service for eight weeks, therefore the 13 week rule would treat Stanley as a continuing employee when he resumes employment with ABC Inc. on May 8, 2015.

The final regulations are clear that Stanley needs to be treated as a continuing employee when he resumes services with ABC Inc. Therefore, Stanley would still be an ongoing employee when he resumes services with ABC Inc. based on the fact that he has been employed for one standard measurement period. The government understood that it would be impossible for an employer to insure Stanley the day he began accumulating hours of service again for ABC Inc. Consequently, the final regulations adopted a standard that the employer must offer coverage upon a resumption of service “as soon as administratively practicable.” The regulations clarifying that offering coverage by or before the first day of the calendar month following an employee resuming services would be deemed to be as soon as administratively practicable.

Therefore, in the example above when Stanley resumes services on May 8, 2015 ABC Inc. will have fulfilled its obligation to Stanley and will eliminate its exposure to a section 4980H penalty with respect to Stanley if coverage is offered and effective by or before June 1, 2015. If ABC Inc. does not offer Stanley the opportunity to enroll in coverage by or before June 1, 2015, ABC Inc. will have to prove that it was not “administratively practicable” to onboard Stanley before the date Stanley was offered coverage. This could cause problems and leave an employer in a situation where the employer has to code certain months for Stanley's Form 1095-C with 1H on line 14 with line 16 left blank.

Under pre-ACA practices an employer would treat Stanley as a new hire and require him to gain access to health insurance in the same manner as any new hire. This could be requiring the employee to wait 60 days and only then would the employee have the opportunity to enroll in coverage that would begin the first day of the month following 60 days. If an employer required Stanley to wait 60 days before allowing him to enroll in coverage, ABC Inc. would not offer Stanley coverage until August 1, 2016 which would be problematic. In this scenario June and July would need to be coded with 1H on line 14 and line 16 left blank. This would leave ABC Inc. exposed to potential section 4980H penalties for those months with respect to Stanley.

Unfortunately some employers are making an even more egregious error. Suppose instead of placing Stanley in a new 60 day waiting period ABC Inc. places Stanley back into a 12 month initial measurement period that would run from June 1, 2015 through May 31, 2016 because ABC Inc. incorrectly classifies Stanley as a variable hour employee instead of treating him as an ongoing employee when he resumes services with ABC Inc. ABC Inc. would not be offering Stanley coverage in 2015 for the months of June through December which would leave it exposed to section 4980H penalties for those months with respect to Stanley. Remember it was previously determined Stanley accumulated more than the requisite 1,560 hour of service during the 12 month standard measurement period to be offered coverage for the 2015 stability period of January 1, 2015 through December 31, 2015. Therefore, coverage needs to be offered for each 2015 calendar month after Stanley resumes performing services for ABC Inc. unless ABC Inc. can prove that this is not administratively practicable for certain months.

To determine if Stanley needs to be offered coverage in 2016 an employer would need to look at the standard measurement period corresponding to the stability period that runs along with the 2016 calendar year. In this example let’s assume that ABC’s standard measurement period runs from November 1, 2014 through October 31, 2015. It is important to recall Stanley’s period for which no hours of service were credited, the weeks of March 8, 2015 through April 26, 2015, would be included when calculating Stanley’s standard measurement period unless the special unpaid leave rules apply. This would make it less likely Stanley would need to be offered coverage in 2016. However, if Stanley accumulated 1,560 or more hours of service during the standard measurement period, ABC Inc. would be required to offer Stanley coverage for the entire 2016 calendar year. If ABC Inc. places Stanley back into a 12 month initial measurement period when he resumes working for ABC Inc. on May 8, 2015, it would have exposure to section 4980H penalties for not only the months of June through December in 2015 but also the months of January through June in 2016. Furthermore, ABC Inc. could have exposure to section 4980H penalties for the months of July through December in 2016 if Stanley is not offered coverage for those months as a result of not accumulating 1,560 hours of service during the initial measurement period Stanley never should have been placed into upon resuming services for ABC Inc.

Finally, assume the exact same facts as above that Stanley has continuously worked for ABC Inc. since his start date on December 12, 2012 and Stanley accumulated more than the requisite 1,560 hours of service during the 12 month standard measurement period to be offered coverage for the 2015 stability period of January 1, 2015 through December 31, 2015. However, in this example assume Stanley rejected the offer of coverage. Beginning on March 3, 2015 ABC Inc. no longer had work to offer Stanley. Stanley is not credited with an hour of service with ABC Inc. until May 8, 2015. Stanley is not credited with an hour of service for eight weeks, therefore the 13 week rule would treat Stanley as a continuing employee when he resumes employment with ABC Inc. on May 8, 2015. ABC Inc. would not be obligated to offer Stanley coverage again when he resumes employment with ABC Inc. ABC Inc. should treat Stanley as an ongoing employee when he resumes services with ABC Inc. and Stanley’s period for which no hours of service were credited, the weeks of March 8, 2015 through April 26, 2015, would be included when calculating Stanley’s standard measurement period unless the special unpaid leave rules apply.

The ACA rules are complex and clash with past practices of many employers. It is critical employers understand and apply the rules correctly. If rules are ignored and pre-ACA practices are continued to be implemented, an employer could have enormous section 4980H exposure. Automated systems like Accord Systems can help simplify this complicated new landscape. Please contact us if you need assistance tracking the hours of service of your workforce or have questions regarding the filing of the Forms 1094-C and 1095-C.


About the author – Ryan Moulder serves as General Counsel at Accord Systems, LLC and is a Partner at Health Care Attorneys P.C. Ryan received his LL.M. from Georgetown University Law Center and his J.D. from Saint Louis University School of Law. He has distinguished himself as a leader in the Affordable Care Act arena and has written and spoken on a variety of ACA topics as it relates to compliance for companies.


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