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Rescinding Coverage from a Full-Time Employee during a Stability Period: Legal, but Fraught with Danger

December 6, 2016


We recently worked with an employer who was utilizing the look back measurement method to the fullest extent. The employer had the intention of rescinding coverage to certain ongoing full-time employees. While this strategy is certainly possible, there are many hoops an employer executing this strategy must jump through to accomplish this task. This article explains how an employer can execute this strategy, but explains why it is not worth the cost for all but the largest of employers.

First, let us review the basics of the standard measurement period. In general, an employee who accumulates the requisite number of hours will be offered coverage for the entire corresponding stability periods so long as the employee remains employed. Therefore, under a generic look back measurement method, it does not matter if an employee’s hours are reduced during the stability period. The employee would still be entitled to remain on coverage for the entire stability period. Language explaining this arrangement has been used by many employers who have adopted the look back measurement method.

Consider the following example to illustrate how most employers are handling the standard measurement period. Suppose ABC Inc. has elected to use the look back measurement method to determine who is a full-time employee for purposes of offering coverage. ABC’s standard measurement period is November 1, 2014 through October 31, 2015. The administrative period runs from November 1, 2015 through December 31, 2015 and the stability period runs from January 1, 2016 through December 31, 2016. McGee has worked at ABC for 10 years and has consistently worked 40 hours a week. McGee has been enrolled in coverage since the first day of the calendar month following his start date and has continued to enroll in coverage during open enrollment periods. From November 1, 2014 through October 31, 2015 McGee accumulated 2,080 hours of service. However, in February 2016 McGee decides to take a path to ease into retirement and transfers to a part-time position at ABC that will only require 15 hours of service per week. Under the general rule, McGee would still be eligible to participate in the plan for the entire stability period (January 1, 2016 through December 31, 2016) so long as he remains employed by ABC.

It is important that an employer, in this case ABC, document its look back measurement method. The eligibility conditions of an employer’s plan must be in the summary plan description (see ERISA section 2520.102-3(j)(2)). If an employer elects to use the look back measurement method, these eligibility conditions should explain the nuances of the look back measurement method and the specific dates the employer elects to use. Many SPDs from “reputable” providers are falling woefully short of this standard which will be problematic in the event of an audit or a dispute regarding plan eligibility.

For most employers the example above illustrates the policy an employer should adopt for an employee who has a reduction in hours of service below the 30 hours of service per week threshold during a stability period associated with the standard measurement period. However, an employer using the look back measurement method and wishing to use all of the bells and whistles presented by the final regulations can determine an employee’s status using the monthly measurement method on the first day of the fourth calendar month following the change in employment status with regard to that employee so long as the following three conditions are satisfied:

  1. If the employee had started in this position, the employee would have been classified as part-time;
  2. The employee was offered minimum value coverage by the first day of the fourth calendar month following the employee’s start date with the employer and is continuously offered coverage through the calendar month in which the change of employment takes place; and
  3. The employee does not accumulate 130 or more hours of service in any of the three calendar months before the employer begins using the monthly measurement method (so for three calendar months after the change in employment the employee would have to accumulate less than 130 hours of service).

For the three months the employer is determining if it can transfer an employee to the monthly measurement method, the employee should continue to be treated as a full-time time employee under the stability period.

Consider the following example to illustrate this optional look back measurement method device. Suppose ABC Inc. has elected to use the look back measurement method to determine who is a full-time employee for purposes of offering coverage. ABC’s standard measurement period is the same as the first example in this article and it has adopted the rule allowing it to use the monthly measurement method on the first day of the fourth calendar month following the change in employment status so long as the three conditions discussed above are satisfied. McGee has worked at ABC for 10 years and has consistently worked 40 hours a week. McGee has been enrolled in coverage that provided minimum value (or at least since the time minimum value was a defined term) since the first day of the calendar month following his start date and has continued to enroll in coverage during open enrollment periods. From November 1, 2014 through October 31, 2015 McGee accumulated 2,080 hours of service. However, on February 1, 2016 McGee decides to take a path to ease into retirement and transfers to a part-time position at ABC that will only require 15 hours of service per week. For the months of February, March, and April McGee accumulates less than 130 hours of service per month.

In this case, the first condition is satisfied because McGee is accumulating 15 hours of service per week. Therefore, the position could clearly be classified as part-time. McGee was also offered coverage by the first day of the calendar month following his start date with ABC which is even more generous than the demands of the second requirement. Finally, McGee did not accumulate 130 or more hours of service in any of the three calendar months following the change in positions, in this case the months of February, March, and April. As a result of all three conditions being satisfied, ABC could use the monthly measurement method to classify McGee beginning in May 2016.

For most employers this strategy is too complicated to apply and is not worth the hassle. If the strategy is not applied correctly or one of the three conditions is not met, it is easy to envision an employer incorrectly rescinding coverage from a full-time employee which could lead to a section 4980H penalty. The reason the strategy is worth exploring for a select number of employers is it could reduce the cost of health coverage for an employer because an employee’s coverage could be terminated before the end of the stability period so long as the three conditions discussed above are satisfied. The cost of implementing this strategy, in terms of attention to detail as well as the human resource/employee morale cost of kicking people off coverage, is high. Consequently, the strategy is only worth pursuing after a careful examination as to whether there are enough employees who meet the three conditions so that the health plan savings exceed the costs. If an employer pursues the strategy, it should document the details in the eligibility conditions of the plan.

In a rare circumstance, an employer who has adopted the look back measurement method can apply the monthly measurement method and terminate an ongoing employee’s coverage before the conclusion of the stability period. However, three conditions need to be satisfied and the strategy must be discussed in the plan’s eligibility conditions. Accord’s software can help verify if the three conditions are satisfied should an employer wish to pursue this option. For most employers, a simpler look back measurement method is more practical. Should you have any additional questions, please feel free to contact us.


About the author – Ryan Moulder serves as General Counsel at Accord Systems, LLC and is a Partner at Health Care Attorney's 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 newly created 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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