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The Look Back Measurement Method – Part-Time, Variable Hour, and Seasonal Employees

September 18, 2016


This is part two of a three part series. Please use the links below to view the other parts of the series. Part OnePart TwoPart Three


Despite almost being two years into the Play or Pay provision of the Affordable Care Act (ACA) there is still confusion surrounding some aspects of the complex provision. The ACA provides an employer the option to offer 95 percent of its full-time employees minimum essential coverage or risk paying a section 4980H penalty. For section 4980H purposes, a full-time employee is an employee who averages at least 30 hours of service per week. An employer can treat 130 hours of service as the monthly equivalent of 30 hours per week. Additionally, an employer has the option to adopt the look back measurement method. The logical choice for almost every employer is to adopt the optional look back measurement method to track its employees’ hours of service.

If the look back measurement method is adopted, an employee can be classified as a full-time employee, a part-time employee, a variable hour employee, a seasonal employee, or an ongoing employee. The remainder of this publication reviews the rules of the look back measurement method as it relates to part-time, variable hour, and seasonal employees and some basic features of the look back measurement method. This publication is the second part of a three part series. All of the points, such as documenting the look back measurement method and counting hours of service, discussed in first part of the three part series are relevant for the second part. A future publication will detail the rules for the last category, ongoing employees.

Before we get into the details for the rules for part-time, variable hour, and seasonal employees it is best that we review the rules for how a new employee should be classified. A new employee is defined in the regulations as any employee who has been employed for less than one complete standard measurement period (a term that will make more sense after the third publication is released). If an employee is a new employee, he/she can be classified as a full-time employee, a part-time employee, a variable hour employee, or a seasonal employee.

A new employee will be classified as a seasonal employee only if the employee is hired into a position for which the customary annual employment is six months or less. Customary means that by the nature of the position an employee in this position typically works for a period of six months or less and that period should begin each calendar year in approximately the same part of the year, such as summer or winter. It is important to recognize that a seasonal employee’s hours of service do not impact his/her classification. Theoretically, a seasonal employee could work every hour of the week, 168 hours, and still be classified as a seasonal employee so long as the position typically lasts six months or less and starts in the same part of the calendar year.

The employer will look at the following factors to determine if an employee should be classified as a part-time, a variable hour, or a full-time employee:

  1. Whether the employee is replacing an employee who was or was not working 30 hours per week;

  2. The extent to which employees in the same or comparable positions are or are not working 30 hours per week;

  3. Whether the job was advertised, or otherwise communicated to the employee or otherwise documented (for example, through a contract or job description), as requiring hours of service that would average 30 or more hours of service per week or less than 30 hours of service per week;

These factors are only relevant for a new employee if the employer has no reason to anticipate that the facts and circumstances related to the new employee will be different. Under no circumstances can the employer take into account the likelihood that the employee may terminate employment before the end of the initial measurement period when classifying an employee.

The three factors discussed above are not an exhaustive list but are the factors that are included in the final regulations. If an employer is a staffing company, there are four additional factors that are included in the final regulations that should be used to determine if a new employee should be classified as a full-time, part-time, or variable hour employee:

  1. Whether other employees in the same position of employment with the employer retain the right to reject staffing opportunities;

  2. Whether other employees in the same position of employment with the employer typically have periods during which no offer of temporary placement is made;

  3. Whether other employees in the same position of employment with the employer typically are offered placements for different periods of time; and

  4. Whether other employees in the same position of employment with the employer typically are offered temporary placements that do not extend beyond 13 weeks.

If a new employee is not a seasonal employee, he/she must be a full-time employee, a part-time employee, or a variable hour employee. As discussed in part one of this series, a full-time employee is a new employee who the employer reasonably expects to accumulate an average of at least 30 hours of service per week at his/her start date. A part-time employee is a new employee who the employer reasonably expects to be employed on average less than 30 hours of service per week during the initial measurement period, based on the facts and circumstances at the employee’s start date. A variable hour employee is a new employee who the employer cannot reasonably determine at the employee’s start date whether the employee will be employed on average at least 30 hours of service per week during the initial measurement period. All new employee’s must fall into one of these four categories (full-time, part-time, variable hour, or seasonal).

Properly classifying a new employee is the most important step for any employer who adopts the look back measurement method. If an employer misclassifies an employee, it could lead to a penalty under section 4980H. Unfortunately, the government has already stated there is no corrections procedure for misclassifying an employee. This could cause a problem if an employer should have been classified as a full-time employee and is instead classified as a part-time, variable hour, or seasonal employee. Therefore, erring on the side of a full-time employee is a good rule of thumb when classifying a new employee.

Part one of this series discussed the rules for new employees who are classified as full-time employees. In part two of this series we discuss the rules for new employees classified as a part-time employee, a variable hour employees, or a seasonal employee. The great news is regardless of whether a new employee is a part-time employee, a variable hour employee, or a seasonal employee, the employee will be placed into an initial measurement period. There are three types of time periods that make up the initial measurement period (and the standard measurement period covered in part three of this series). The first period, referred to as the measurement period, is a time period chosen by the employer of at least three, but not more than 12 consecutive months. The employer will look back at an employee’s total hours of service during this time in order to determine whether the employee averaged at least 30 hours of service per week in order to be classified as a full-time employee.

The second period associated with the initial measurement period (and the standard measurement period) is referred to as the stability period. A stability period is a period of time that follows the measurement period and any administrative period (see below). If the employer determines that an employee is a full-time employee during a measurement period, the employee will be considered a full-time employee for the entire corresponding stability period regardless of the employee’s hours of service so long as the employee remains employed. In general, if the employer determines that an employee is not a full-time employee during a measurement period, the employer will not treat the employee as a full-time employee for the entire corresponding stability period regardless of the employee’s hours of service during the stability period. Please note that the stability period cannot be shorter than the length of the corresponding measurement period and if the employee is determined to be full-time during the corresponding measurement period the stability period must be at least six calendar months.

The third period that an employer can utilize with an initial measurement period is called the administrative period. The administrative period may last up to 90 days, but may neither reduce nor lengthen a measurement period or a stability period. To prevent gaps in coverage an administrative period may overlap with the prior stability period (although this is really only seen with the standard measurement period which will be discussed in part three of this series).

The following paragraph describes a common initial measurement period created by many employers. The initial measurement period will typically begin with an administrative period that begins on the employee’s start date and last until the last day of the month following the employee’s start date. The next period will be the initial measurement period which must be no less than three consecutive months and no more than 12 consecutive months. The initial measurement period will typically be followed by another administrative period. Combined the administrative periods before and after the initial measurement period cannot exceed 90 days. Additionally, the administrative period plus the initial measurement period cannot extend beyond the 13th calendar month after the employee’s start date. Following the second potential administrative period the initial stability period will begin. The initial stability period must be the same length as the standard stability period.

Let’s review a couple examples to illustrate the concepts discussed in the second publication of this three part series.

Example 1 – ABC Inc. elects to utilize the look back measurement method which it documents in a policy created by the company. The policy creates an initial measurement period that lasts for 12 months beginning on the first day of the calendar month after the employee’s start date or on the employee’s start date, if, and only if, the employee’s start date occurs on the first day of the calendar month. The corresponding stability period lasts 12 months and begins on the first day of the 14th calendar month following the employee’s start date. The time between the employee’s start date and the beginning of the initial measurement period and the end of the initial measurement period and the beginning of the stability period will be included as an administrative period. The administrative period will last at most a partial calendar month (from the employee’s start date until the first day of the calendar month following the employee’s start date, if any) plus a full calendar month following the end of the initial measurement period and the beginning of the stability period.

McGee is hired on July 12, 2016 and is properly classified as a variable hour employee. McGee’s initial measurement period would begin on August 1, 2016 and end on July 31, 2017. During that period McGee accumulates 1,604 hours of service with ABC Inc. (an average of 30.85 hours of service per week during the initial measurement period). Therefore, ABC Inc. offers McGee coverage in early August 2017 that would last from September 1, 2017 until August 31, 2018. McGee accepts the offer of coverage. The plan offered by ABC Inc. meets the minimum essential coverage threshold and provides minimum value at an affordable price.

An employee who averaged who averaged at least 30 hours of service during the initial measurement period will be included in the initial measurement period limited non-assessment period so long as the employee is otherwise eligible for an offer of coverage and the employee is offered coverage by the employer no later than the first day of the corresponding stability period if the employee is still employed. Therefore, if the requirements in the preceding sentence are satisfied, the employee would be excluded from the 95 percent rule calculation.

The common themes of the limited non-assessment period can be seen in this scenario as the employee must satisfy the “otherwise eligible” test and, again, the ex post facto nature of the 95 percent rule rears its ugly head. It is important to review in detail a portion of the language explaining the “otherwise eligible” test as it is currently impossible to comply with under a strict reading of the regulations. The final regulations state that the only requirement that can be holding up an employee’s eligibility is “…a waiting period, within the meaning of section 54.9801-2…” That section references section 54.9815-2708(b) for the definition of waiting period which defines the phrase as “the period that must pass before coverage for an individual who is otherwise eligible to enroll under the terms of a group health plan can become effective.”

The problem is the exception for variable hour employees allowing for a 12 month grace period to measure an employee’s hours of service (technically 13 months plus a partial calendar month) to offer coverage and not violate the 90-day waiting period is listed under a regulation subparagraph heading “Other conditions for eligibility.” The government could ignore the inconsistent language and make an exception to the “otherwise eligible” test for variable hour employees. However, if that is the case, why would a subdivision in the same subparagraph, the 1,200 cumulative hours-of-service exception, be treated differently from the variable hour employees? It does not make sense. Dropping or clarifying the “otherwise eligible” language is a course of action the government should strongly consider for all of the non-assessment periods to simplify the process.

Returning to the example, there are a couple of things to point out about this example that are important. First, for the 2016 calendar year ABC Inc. would not need to file a Form 1095-C for McGee because for the entire year he is either not employed or in a limited non-assessment period. For purposes of the Form 1095-C an employee in a limited non-assessment period is not a full-time employee. Second, so long as McGee remains employed by ABC Inc. during his stability period, September 1, 2017 through August 31, 2018, McGee will have to remain enrolled in coverage. In an extreme hypothetical McGee could be working one hour per week but would have to remain eligible for coverage under the rules of the look back measurement method.

Example 2 – Assume that ABC Inc. has the exact same look back measurement method setup as example 1. ABC Inc. hires Champ on May 1, 2016 and he is properly classified as a variable hour employee. Champ’s initial measurement period would begin on May 1, 2016 and end on April 30, 2017. During that period Champ accumulates 1,580 hours of service with ABC Inc. (an average of 30.38 hours of service per week during the initial measurement period). Under the policy Champ should be offered coverage by June 1, 2017. However, ABC Inc. does not offer Champ coverage until August 1, 2017 at which time Champ declines the ABC Inc. plan that meets the minimum essential coverage threshold and provides minimum value at an affordable price.

As a result of minimum essential coverage providing minimum value not being offered to Champ by June 1, 2017, no section 4980H(b) limited non-assessment period would apply from May 1, 2016 through August 1, 2017. Therefore, Champ could trigger a section 4980H penalty for that time period. Additionally, by not timely offering Champ coverage by or before June 1, 2017, ABC Inc. would have to file a Form 1095-C for Champ in 2016. ABC Inc. was under the assumption a timely offer of coverage would be made so it would not have filed a Form 1095-C for Champ in 2016. The Form 1094-C would also need to be amended because the “total number of forms 1095-C filed by the ALE member” and the “full-time employee count for the ALE member” would change in 2016 which are both listed as items that must be corrected on the Form 1094-C.

Not timely offering coverage to an employee who accumulates an average of at least 30 hours of service during an initial measurement period will be a costly, cumbersome process. Automated software that provides reminders of who and when coverage needs to be offered is essential and will easily provide value to an employer of any size. Accord’s cutting edge technology can provide these necessary reminders to assist an employer.

Example 3 - Assume that ABC Inc. has the exact same look back measurement method setup as example 1. ABC Inc. hires Ernie on June 2, 2016 and he is properly classified as a variable hour employee. Ernie’s initial measurement period would begin on July 1, 2016 and end on June 30, 2017. During that period Ernie accumulates 1,450 hours of service with ABC Inc. (an average of 27.88 hours of service per week during the initial measurement period). Therefore, ABC Inc. would not have to offer Ernie coverage in August 2017. The earliest ABC Inc. would have to offer Ernie coverage is the first day of the stability period associated with the standard measurement period should Ernie average at least 30 hours a week during the standard measurement period. No Form 1095-C would be required for Ernie in 2016.

The rules for the part-time, variable hour, and seasonal employees are more complicated than the rules for full-time employees. However, it is convenient that the same set of rules apply for part-time, variable hour, and seasonal employees. An employer must understand who is in an initial measurement period and when that person may need to be offered coverage. Not timely offering coverage to a person who accumulates an average of 30 hours of service during the initial measurement period could subject the employer to a section 4980H penalty and cause the need for a corrected Form 1094-C and an additional 1095-C. Accord has sophisticated, automated software that can be integrated with various third-party platforms and can process any look back measurement method that complies with the rules of the final regulations. Should you have any questions regarding this article or the look back measurement method please don’t hesitate 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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