Guidance OKs Employer-Initiated Measurement Period Changes

The Internal Revenue Service recently released Affordable Care Act (ACA) guidance addressing how to determine full-time status when an employee’s measurement period changes. The guidance, IRS Notice 2014-49, introduces a proposed method for applying the look-back measurement period in two scenarios:

• The first scenario involves a transfer of employment within the same applicable large employer (ALE) between two positions with different look-back measurement periods.

• In the second scenario, the employer changes the applicable look-back measurement period for an entire employee classification group.

The final regulations previously released addressed movement from a look-back measurement period method to the monthly measurement method (and vice versa), but did not clarify how to apply the look-back measurement period methodology in either of these two cases.

As a recap, the look-back measurement period is one of two ways to identify full-time employees for purposes of determining whether an ALE is subject to an employer shared responsibility payment. Employers may use the monthly measurement period that confers full-time status when an employee averages 30 or more hours of service each week. Alternatively, employers may use the look-back measurement period that awards full-time status during the subsequent stability period when an employee averages 30 or more hours each week during the measurement period.

Keep in mind that the look-back measurement period precedes the stability period; it helps employers determine full-time status for purposes of offering coverage during the subsequent stability period. The look-back method is not available to determine whether an employer is an ALE subject to the ACA.

Each ALE member within a single ALE controlled group may set its own measurement periods and may create different measurement periods for certain categories of employees (e.g., hourly, salaried, collectively bargained, etc.). When using the look-back method, ALE members also may set different measurement periods for ongoing employees who have been employed for a full measurement period (“standard measurement period”) and variable hour, seasonal, or part-time employees.

The applicable measurement period for the latter group is the “initial measurement period.” Ongoing employees generally already have either full-time or non-full-time status due to their tenure throughout the measurement period and, if full-time, should have received a coverage offer for the ensuing stability period (if the employer intends to comply with the pay-or-play rules by providing coverage rather than paying a penalty). Variable hour, seasonal, and part-time employees employed for a full initial measurement period also have stability periods with an assigned full-time or non-full-time status.

Employment Transfer Triggers Measurement Period Change

The stability period distinction (whether an employee is in a stability period on the date of transfer) is important when applying the rule outlined in the new guidance. For employment transfers within the same ALE group, the guidance proposes separate approaches for employees in stability periods and those not in stability periods. It reiterates that employees are in stability periods if the employer assigned full-time or non-full-time status as a result of having completed a standard measurement period (ongoing employees) or initial measurement period (variable hour, seasonal, or part-time employees).

1. Employees in stability periods on transfer date retain pre-transfer status.

For an employee who transfers between positions with different measurement periods (e.g., measurement periods with different start dates, duration, etc.), the guidance explains that the employee retains the same pre-transfer status (full-time or non-full-time) through the end of the stability period that includes the transfer date.

For new employees in an administrative period immediately after completing their initial measurement period, hours worked during the prior initial measurement period for the first position count toward determining the new employee’s status as of the start of the stability period that is associated with that prior initial measurement period. Moreover, at the end of the associated stability period, employees assume the status they would have earned under the measurement period that applies to the second position, counting hours worked in the first position when applying the measurement period for the second position.

In other words, full-time status for the next succeeding stability period (i.e., the first stability period for the second position) will be determined by counting hours worked in the first position using the measurement period for the second position.

If full-time status in the second position cannot be determined because, for example, the employee did not complete the measurement period applicable to the second position, then the approach discussed next for employees not in stability periods applies.

2. Employees not in stability periods on transfer date receive status applicable to period for second position.

If an employee is not in a stability or administrative period on the transfer date (for example, because the employee did not complete a measurement period), then full-time status turns on whether the employee averaged 30 hours under the look-back period for the second position, counting hours in the first position. An employer’s reasonable expectations at the time of hire govern whether new employees are variable hour, part-time, or seasonal employees. The status of new employees who have not been employed for a full measurement period (but who reasonably are expected to average more than 30 hours per week) depends on hours of service worked each month.

If an employee remains employed for a full measurement period applicable to the second position but does not complete the measurement period for the first position as of the transfer date, full-time status depends on the hours worked during the period applicable to the second position counting hours worked in the first position. Those hours apply starting the first day of the month after transfer and continue through the end of the associated stability period. Keep in mind that, regarding any change in status (e.g., from part-time to full-time), the change in status rules set out in Treasury Regulations section 54.4980H-3(d)(3)(vii) continue to apply.

Employer Institutes Group-Wide Look-Back Measurement Period Change

When changing between the monthly measurement period method and the look-back method, the guidance confirms that employers may change the measurement period for an entire category of employees if (at least, for an interim period after the change) the employer applies the same transition rules to every affected employee in the group. Those rules generally require the employer to determine full-time status as if, on the change date, those employees had transferred from a position to which the original measurement period applied to a position in which the revised measurement period applies. This is consistent with the methodology set out in Treasury Regulations section 54.4980H-3(f)(2).

The guidance provides a similar rule for group-wide changes between two different look-back measurement periods. If there is a change to the duration or start date of a look-back measurement period for an entire group of employees, the employer must determine the status of employees in the group as if each employee had transferred from a position to which the original look-back measurement period applied to a position in which the revised look-back measurement period applies.

Christina M. Crockettis an associate in the Washington D.C. office of Ogletree Deakins. © 2014 Ogletree Deakins. All rights reserved. Reposted with permission.​