Pay or Play Penalty: When to Begin Tracking Employee Hours
Pay or Play Penalty: When to Begin Tracking Employee Hours

Pay or Play Penalty: When to Begin Tracking Employee Hours

From the health care reform experts at Accelerated Benefits

The Affordable Care Act (ACA) imposes a penalty on applicable large employers (ALEs) that do not offer health insurance coverage to substantially all full-time employees and dependents. Penalties also may be imposed if coverage is offered but is unaffordable or does not provide minimum value. The ACA’s employer penalty rules are often referred to as “employer shared responsibility” or “pay or play” rules.

On February 12, 2014, the IRS published final regulations on the employer shared responsibility rules. These regulations finalize provisions in proposed regulations released January 2, 2013. The final regulations state:

* ALEs that have fewer than 100 full-time employees (including full-time equivalents, or FTEs) generally will have an additional year, until 2016, to comply with the pay or play rules.
* ALEs with 100 or more full-time employees (including FTEs) must comply with the pay or play rules starting in 2015.

The pay or play rules will take effect for most ALEs beginning January 1, 2015. To prepare for compliance, employers that intend to use the look-back measurement method for determining full-time status for 2015 will need to begin tracking their employees’ hours of service in 2014 to have corresponding stability periods for 2015.

Identifying full-time employees

A full-time employee is an employee who was employed on average at least 30 hours of service per week. The final rules treat 130 hours of service in a calendar month as the monthly equivalent of 30 hours of service per week.

The final regulations provide two methods for determining full-time employee status—the monthly measurement method and the look-back measurement method. These methods provide minimum standards for identifying employees as full-time. Employers may decide to treat additional employees as eligible for coverage, or otherwise offer coverage more expansively than would be required to avoid a pay or play penalty.

Monthly measurement method

The monthly measurement method involves a month-to-month analysis in which full-time employees are identified based on their hours of service for each calendar month. This method is not based on averaging hours of service over a prior measurement period. This month-to-month measuring may cause practical difficulties for employers, particularly if there are employees with varying hours or employment schedules, and could result in employees moving in and out of employer coverage on a monthly basis.

Look-back measurement method

The look-back measurement method is an optional safe harbor method for determining full-time status that is intended to give employers flexible and workable options and greater predictability for determining full-time employee status. The look-back measurement method involves:
* A measurement period for counting hours of service
* A stability period when coverage may need to be provided, depending on an employee’s average hours of service during the measurement period
* An administrative period that allows time for enrollment and disenrollment

Employers that intend to use the look-back measurement method for determining full-time status for 2015 will need to begin their measurement periods in 2014 to have corresponding stability periods for 2015. However, employers intending to adopt a 12-month measurement period (and, in turn, a 12-month stability period) will face time constraints in doing so.

Consequently, as transition relief, the final regulations allow employers to use shorter measurement periods for stability periods starting in 2015 under the look-back measurement method. For 2015, employers can determine full-time status by reference to a transition measurement period in 2014 that meets the following requirements:

* Is shorter than 12 consecutive months, but not less than six consecutive months long
* Begins no later than July 1, 2014, and ends no earlier than 90 days before the first day of the first plan year beginning on or after January 1, 2015

When to begin tracking employee hours

Calendar year plans

An ALE that wants to use the look-back measurement method may need to start measuring hours of service as early as April 3, 2014. This date would apply if the employer wants to use a 12-month stability period beginning on January 1, 2015, and take advantage of the maximum 90-day administrative period. It can be helpful to work backward to determine the applicable dates.

In this scenario...

* The stability period would run for the entire 2015 calendar year to coincide with the plan year
* A full 90-day administrative period would run from October 3, 2014, through December 31, 2014
* The minimum permissible transition measurement period of six consecutive months would begin on April 3, 2014

Employers may want to set up the measurement, administrative and stability periods to begin on the first day of the month for administrative ease. This can be accomplished by using a shorter administrative period. Employers would then not have to begin measuring hours of service so early. For example, an employer with a calendar year plan may use the following timelines:

* A transition measurement period from May 1 through October 31, 2014 (six months)
* A 61-day administrative period (the months of November and December) ending on December 31, 2014
* A full 12-month stability period from January 1 through December 31, 2015

However, all ALEs that want to take advantage of the shorter transition measurement period in 2014 must begin tracking employee hours no later than July 1, 2014. For a calendar year plan, this would allow for a six-month transition measurement period (running from July 1, 2014, through December 31, 2014), but no administrative period.

Non-calendar year plans

In general, the ACA’s pay or play penalty goes into effect on January 1, 2015, for both ALEs with calendar year plans and ALEs with non-calendar year plans. However, the final regulations include transition relief that provides ALEs that have non-calendar year plans with additional time to comply, if certain conditions are met.

Thus, employers that have non-calendar year plans may have some additional time before they need to begin tracking employees’ hours of service. For example, an employer with a plan year beginning April 1 that is using a 90-day administrative period may use a measurement period from July 1, 2014, through December 31, 2014 (six months), followed by an administrative period ending March 31, 2015.

However, an employer with a plan year beginning July 1 may not use a six-month transition measurement period. Instead, the employer must use a measurement period that is longer than six months to comply with the requirement that the measurement period begin no later than July 1, 2014, and end no earlier than 90 days before the stability period. For example, the employer may have a 10-month measurement period from June 15, 2014, through April 14, 2015, followed by an administrative period from April 15, 2015, through June 30, 2015.

Want to learn more about how the ACA could affect your organization? Join Tom Wagoner of Accelerated Benefits for a free webinar.

Please contact Accelerated Benefits for more information, as well as additional resources to help track your employees’ hours of service. Get in touch with Paycor to learn how our solutions simplify ACA time tracking.

Source: ZyWave, Inc.

This content is intended for educational purposes only and should not be considered legal advice.

subscribe to Paycor's Resource Center

Subscribe to Our Resource Center Digest

Enter your email below to receive a weekly recap of the latest articles from Paycor's Resource Center.

Check your inbox for an email confirming your subscription. Enjoy!

More to Discover

Managing Contractor Payroll: What You’ll Need to Know

Managing Contractor Payroll: What You’ll Need to Know

As a business owner, it’s a given that you’re expected to pay your employees accurately and on time. But something almost as important is making sure you don’t pay your contract or freelance workers the same way you pay employees. Let’s clarify. Independent contractors are not classified as employees by the Internal Revenue Service (IRS), so instead of being paid through your payroll system, they’re paid separately as a business expense. When your business requires hiring both employees and independent contractors, it’s important that you understand the distinctions between the two. Why? Three letters: IRS. FLSA – How to Classify Employees and Independent Contractors The IRS looks at the business relationship your company has with a...

Case Study: FRG

Case Study: FRG

A poor implementation experience, a lack of consistent customer service and a time-consuming payroll process led FRG to find a more dependable HR & payroll partner. Now with Paycor, FRG can track critical documents for each brand and employee, receive notifications when documents are set to expire and store them within one, accessible system. Explore the case study and learn how Paycor helped FRG save 15+ hours processing payroll each pay period with a streamlined process and enhanced user experience.

Webinar: EEO Reporting Review

Webinar: EEO Reporting Review

Are you ready for the September 30, 2019, EEOC filing deadline? Don’t worry, Paycor has you covered. Join our team of experts as we review the new EEOC requirements, walk you through Paycor’s Revised EEO-1 report and provide a readiness plan for meeting the filing deadline.

Case Study: Gerber Poultry

Case Study: Gerber Poultry

Two years of repeated payroll system errors and poor customer service led Gerber Poultry to seek a new provider. Enter Paycor. Now, processing payroll is seamless and HR administrators aren’t spending time reviewing taxes and deductions. Moving to Paycor’s Onboarding solution has eliminated duplicate entry and manual processes, saving HR more than an hour per new hire. Read the case study below and learn how Paycor has given the Gerber team time back in their day to focus on what matters most—delivering excellence in quality and service for customers.