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IRS notice gives employers clarity on definition of 'full time'

IRS notice gives employers clarity on definition of 'full time'

A notice issued by the Internal Revenue Service late last month gives employers a bit more flexibility than had been expected in determining which of their employees must be offered coverage under the federal health care reform law, experts say.

Under the notice, which will remain in effect at least through 2014, employers can use a retrospective measurement period lasting between three and 12 months to determine whether an employee's hours meet the definition of “full time” under the Patient Protection and Affordable Care Act.

Under PPACA, if just one full-time employee is not offered coverage and receives a federal premium subsidy to purchase coverage in an exchange, an employer faces a $2,000 penalty for each full-time employee.

If an employee works an average of 30 or more hours per week during the measurement period, then the employer will be required to offer the employee health benefits after a waiting period not lasting more than 90 days.

That means employers that hire many temporary and seasonal employees may not be required to offer health benefits to many of those employees, particularly if they use a 12-month measurement period, benefit consultants say.

However, there is a catch: Employers will be required to keep any employees deemed full time in their health plans for a period of time equal to the measurement period chosen, which could be as long as a year for employers that select a 12-month retrospective measurement period.


“It's good, because it gives the employer of variable-hour and seasonal employees significant flexibility to determine who are and are not full time for pay-or-play purposes,” said Ed Fensholt, senior vice president and director of compliance services at Lockton Cos. L.L.C. in Kansas City, Mo.

“It's doubly good because it's even better than the guidance we thought we were going to get, where employers would get at least a three-month or maybe a six-month free pass. With this, they can get up to a 12-month free pass.”

The IRS guidance also gives employers the flexibility to use different measurement periods for different classifications of workers, said Ben Lupin, director of compliance at Corporate Synergies in Mount Laurel, N.J.

“You can change it for various groups: hourly, salaried, collective bargaining,” which can work to the employer's advantage in some cases, “depending on the type of company you have,” he said.

The types of employers that will benefit most from the flexibility allowed in the guidance are those that have mostly seasonal employees, such as ski resorts, amusement parks and other types of businesses that hire temporary staff when business peaks, said Pat Haraden, a principal at Longfellow Benefits in Boston.

“Retail is the best example of this because of the Christmas season,” he said.

“But tax preparers and accountants may hire people to work as many as 60 hours a week from January to April 15.”


The rule also is good news for employers that lay off workers after those peak seasons and rehire them the next year, Mr. Fensholt said.

“The other bit of good news that was a bit of a surprise was that the agency didn't deal with rules for employers that rehire. Say they're here for three to six months, then they get laid off until next season. There's nothing in the guidance that says you have to treat a rehired employee, as if they have never been gone. At some point, the IRS might tighten that up and disregard the breaks in service, but for now, those employers are safe,” he said.

“The regulators recognized that it would be burdensome to implement (coverage) month by month. The essence of this notice is what happens if you hire somebody part time and have no clue whether they are going to end up being full time,” said Alden J. Bianchi, a member of the Boston-based law firm of Mintz Levin Cohn Ferris Glovsky and Popeo P.C.

To avoid the possibility that employees who work full time for less than six months become eligible for health benefits, most benefit consultants are recommending that employers use a 12-month measurement period.

“The employer gets to pick the period, which can be between three and 12 months,” said Karen Vines, vice president of employee benefits at broker IMA Inc. in Wichita, Kan.

“Let's say they pick 12 months and they capture the hours worked per week or per month,'' Ms. Vines said.


“If an employee averaged 30 or more hours a week, then they are deemed benefits-eligible. The employer is not required to offer coverage retrospectively, but the employer is required to offer that coverage for an equivalent period of time as the measurement period, but not less than six months,” she said.

If an employer uses a 12-month period, an employee “could feasibly go an entire year without coverage,” said Wade Symons, senior attorney and compliance consultant at Mercer L.L.C. in Portland, Ore.

“But in so doing, you also have to have this stability period that goes with it. The way it works is, say this person averages 30 hours per week over the past 12 months, then you have to keep them on the plan for the next 12 months regardless of how many hours they work, unless they terminate employment,” he said.

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