The ACA Monthly Measurement Method: A Few Examples
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When trying to determine whether employees are considered to be full-time under the Affordable Care Act, employers must use one of two measurement methods mandated by the IRS: the Monthly Measurement Method or the Look-Back Measurement Method.
Determining the accurate full-time employee count during a calendar year is important for ACA compliance. Classifying employees incorrectly can lead to inaccurate information being submitted to the IRS in annual information filings. This can result in receiving an ACA penalty notice from the IRS.
Under the ACA’s Employer Mandate, employers with 50 or more full-time employees and full-time equivalent employees are required to offer Minimum Essential Coverage (MEC) to at least 95% of their full-time workforce (and their dependents) whereby such coverage meets Minimum Value (MV) and is Affordable for the employee or be subject to Internal Revenue Code (IRC) Section 4980H(a) penalties.
Section 4980H penalties are assessed by the IRS using Letter 226J penalty notices. The tax agency is currently issuing these penalty notices to employers identified as having failed to comply with the ACA for the 2017 tax year.
A good place to start with minimizing ACA penalty risk starts with implementation of the best suited measurement method. If your workforce is primarily comprised of full-time employees, the Monthly Measurement Method will be the best measurement method to use for ACA compliance.
Under the Monthly Measurement Method, an offer of health coverage must be extended to full-time employees no later than 90 days from their date of hire. An employee’s employment status under the ACA is based on whether or not they provided a minimum of 130 hours of service a month or 30 hours a week. If they work those hours at a minimum, they are considered to be a full-time employee under the ACA.
Using the Monthly Measurement Method, an employee’s hours of service are captured and recorded at face value. Each month, the hours are averaged and the status of employment is recorded. If the employee totals 130 or more hours of service in a single month, they are considered to be a full-time employee under the ACA. If an employee averages less than 130 hours of service a month, they are determined not to be full-time under the ACA.
Here is an example:
Johnny Joe Smith works at Bucky’s Office Supplies for 160 hours each month. As a result, each month Johnny is recorded as full-time employee under the ACA. Johnny regularly works a 40-hour week, as do the majority of the employees at Bucky’s. Because there is a stable, full-time workforce working at Bucky’s, the Monthly Measurement Method makes sense.
Like many businesses, Bucky’s does employ a few employees part-time. Those workers’ hours need to be tracked monthly because, depending on the hours they work, they may or may not be eligible to receive health coverage under the ACA.
Here is an example:
During most of 2019, Edie works part-time as a bookkeeper at Bucky’s, working about 80 hours a month. However, when one of the full-time employees takes a two-month leave of absence, Edie increases her hours in September and October to 160 hours a month. With this change of hours, Edie must now be considered a full-time employee under the ACA and be offered health coverage for those two months. When Edie goes back to her usual schedule of 80 hours a month in November, Bucky’s does not have to continue offering her health coverage.
Because Edie is an exception to the working hours of a stable workforce, the Monthly Measurement Method makes sense for Bucky’s to use for ACA compliance.
It can be difficult to determine full-time employee status when a majority of the workforce has hours that fluctuate weekly. This is why the Monthly Measurement Method can be difficult to use for employers that have workforces with a significant mix of full-time and part-time employees, the hours constantly fluctuate. Having to determine each month if someone is full-time and then offering and rescinding offers of coverage based on their status can be time consuming and inaccurate.
Employers with a significant mix of full-time and part-time employees may find the Look-Back Measurement Method to be more efficient in determining an employee’s full-time status under the ACA. I’ll cover the Look-Back Measurement Method in a future post.
To learn more about ACA compliance for the 2019 tax year, click here.
For ACA reporting deadlines in 2020 for the 2019 tax year, organizations should review this link for important dates and requirements.
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