If you or someone you know has been hit with IRS Letter 226J, you know that it is no laughing matter. The IRS is currently issuing these ACA penalty assessments to employers identified as having failed to comply with the ACA’s Employer Mandate for the 2020 tax year.
Under the ACA’s Employer Mandate, Applicable Large Employers (ALEs), or employers with 50 or more full-time employees and full-time equivalent employees. ALEs must:
- Offer Minimum Essential Coverage (MEC) to at least 95% of their full-time workforce (and their dependents) whereby such coverage meets Minimum Value (MV)
- Ensure that the coverage for the full-time employee is affordable based on one of the IRS-approved methods for calculating affordability
Failure to adhere to these two requirements could subject your organization to Internal Revenue Code (IRC) Section 4980H penalties via Letter 226J.
But sometimes it’s difficult to identify which employees require an offer of coverage. Implementing one of the applicable ACA measurement methods is one of the most important ways to determine this.
The first step in determining which measurement method is best for your organization is to evaluate the nature of your workforce. Organizations made up primarily of variable-hour employees, should implement the Look-Back Measurement Method. If your workforce has mostly full-time employees, the Monthly Measurement Method may be most effective.
The Look-Back Measurement Method
The Look-Back Measurement Method typically works best for workforces that have a significant number of part-time employees.
With the Look-Back Measurement Method, employers can monitor and track their employees’ hours of service to determine if they are full-time or not under the ACA. This method allows employers to accurately determine if and when an employee requires an offer of health coverage. The Look-Back Measurement Method consists of three parts:
- The measurement period
- The administrative period
- The stability period
Each employee’s hours are tracked and averaged over the measurement period, which can be as short as three months to as long as 12 months. The longer the measurement period, the better it provides a more accurate representation of each employee’s status.
Following the measurement period, an optional administration period may be applied. Although there is a maximum allowable administration period of 90 days, as a practical matter, employers typically choose between 30 to 60 days. This administrative period is typically used for gathering and collecting all the paperwork necessary to ensure that an offer is made on time.
After the optional administration period comes the stability period. The beginning of the stability period should align with the beginning of the offered coverage effective date. The stability period is the period in which the treatment of the employee’s classification is either full-time or not full-time as determined by the results of the preceding measurement period.
During this stability period, regardless of the hours they are currently working, employees are locked in as either full-time or not full-time. If the employee is “locked” into a non-full-time position, employers can still extend offers of coverage.
The Monthly Measurement Method
The Monthly Measurement Method is a way of tracking employees designed for organizations that have primarily full-time workforces. This method captures an employee’s status at face value. Their employment classification is based on whether they provide a minimum of 130 hours of service a month or 30 hours a week.
Under the Monthly Measurement Method, an employee can fluctuate between full-time and non-full-time as there are no stability or measurement periods. Each month, employees’ hours of service are averaged. Again, if your organization has a lot of variable-hour employees, this method may not be suitable for you.
It is important to note that you cannot switch back and forth during the timeframe of the selected measurement method.
Determining which measurement method to use can be difficult. Consulting with an outside ACA expert can help ensure your organization chooses the right measurement method for your situation. As part of our full-service ACA Complete solution, we will help your organization select and implement the right measurement method.
If you need assistance understanding the ins and outs of the ACA’s Employer Mandate, check out our online guide below.
To gain invaluable insights on penalty amounts, affordability percentages, filing deadlines, expert tips for responding to penalty notices, and proven strategies for minimizing IRS penalty risk, download the ACA 101 Toolkit.