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Look-Back Rules Can Mitigate the "Pay or Play" Penalties Under the ACA

It may feel like old news by now but the Affordable Care Act (ACA) is only in the early stages of a long rollout. When it comes to “play or pay” penalties, you may be at the beginning of your decision-making process.

As you know, the ACA imposes a non-deductible penalty on those applicable large employers that fail to provide affordable, minimum value health coverage to their full-time employees starting in 2015. If you’re like many employers, you are still examining your health plans and procedures so as to make any necessary changes before 2015 penalties accrue.

Some employers have very stable workforces for which the full-time employee count rarely changes. Others, however, have a large number of variable-hour employees or seasonal employees. If you fall into this latter group of employers—those with a variable workforce—you might want to consider whether use of the look-back rules might help you.

The problem in a nutshell: Variable hours
Beginning in 2015, the “play or pay” penalties will be effective for large employers. Those penalties will be assessed on a monthly basis. A large employer (defined as having 50 or more full-time and full-time equivalent employees - although there is a transition rule for 2015 exempting in some cases employers with between 50 and 99 full-time and full-time equivalent employees from any penalties-will need to know which employees are full-time and which are not each month. For some employers, this may be problematic. The IRS acknowledges this in the tax regulations: “This problem is particularly acute if employees have varying hours or employment schedules. A month-by-month determination may also result in employees moving in and out of employer coverage (and potentially Exchange coverage) as frequently as monthly.”

One solution: Look-back rules
What relief has been provided to employers with variable-hour or seasonal employees? The answer is the optional look-back measurement rules. In essence, these rules allow you to “look back,” determine an employee’s status (either full-time or not), and then use that status for a defined period going forward. The look-back rules provide you with some consistency to the situation on a year-by-year basis instead of on a month-by-month basis.

The look-back rules allow you to use a formal measurement period (MP), followed by an optional administrative period (AP), capped off by a subsequent stability period (SP). The rules on how long the periods can be and what populations of employees can be measured are exceedingly complex. Following is an example of use of a full 12-month measurement and stability period for ongoing employees:

Calendar-Year Plan Example – Optional Look-Back Rule
MP = 10/01/2013–09/30/2014 12 mo.
AP = 10/01/2014–12/31/2014 3 mo.
SP = 01/01/2015–12/31/2015 12 mo. (coverage year)

 

 

 

 

The administrative period would typically be the health plan’s open enrollment period. Based on the above, any employee that was determined to be full-time in the measurement period (2013-2014) would be treated as such for the entire stability period (2015). The same would be true for employees measured to be less than full-time. Thus, the employer would know on October 1, 2014, exactly which of its current employees were required to be covered in 2015. This could be very helpful if you have a changing workforce.

What about new employees?
Of course, there aren’t any look-back periods available when new employees are hired. The optional look-back rules provide a solution for this situation. For new variable-hour employees (including seasonal employees), you may establish separate measurement, administrative, and stability periods to determine full-time employee status. That helps. Of course, new full-time employees must be offered coverage ignoring the look-back rules.

Start measuring hours now
One of the most important points about the look-back rules is the potential need to start measuring now. The determination of full-time status for penalty purposes under the ACA is based upon hours worked. Large employers must currently have or create a system that accurately measures hours.

Keep in mind that while these rules can be a benefit to you, they are complex, and you will want to talk to a tax advisor well versed in the rules. If you are interested in using the look-back rules, now is the time to consult with a tax expert and plan on how to gather the information you need.

 

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