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The Coronavirus (Covid-19) is putting a strain on all aspects of life in the United States right now. For businesses, they are struggling with closures, decreased demand, work from home policies, furloughs, reduced hours, temporary layoffs and more.
While it may not be at the forefront of employers’ minds as they gear up to meet the 1095-C electronic filing deadline of March 31, 2020, one challenge that they should be aware of is how the Covid-19 Pandemic, and the resulting furloughs and temporary layoffs, can affect their Affordable Care Act (ACA) reporting compliance.
As a reminder to employers in conjunction with the Employer Shared Responsibility Payment (ESRP), 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.
Determining the accurate full-time employee count during a calendar year can be a challenge for employers even under normal circumstances. With the Covid-19 Pandemic, this challenge can be astronomical. In addition, furloughs and short term layoffs can create havoc in an employer’s ability to accurately determine when offers need to be made to qualifying associates.
Classifying employees incorrectly can lead to inaccurate information being submitted to the IRS in annual information filings. These errors can result in overcounting or undercounting of full-time employees, either of which can result in significant ACA penalties from the IRS.
When trying to determine whether employees are considered to be full-time under the ACA, employers must use one of two measurement methods sanctioned by the IRS: the Monthly Measurement Method or the Look-Back Measurement Method.
To minimize ACA penalty risk, companies may need to rethink which measurement method they are using in the current environment. If your workforce is primarily comprised of variable-hour workers, the Look-Back Measurement Method will be the best measurement method to use for ACA compliance.
Many employers who had previously used the Monthly Measurement Method, may want to rethink their approach if their workforce and their hours of service start to fluctuate with the Pandemic. For those who already use the Look-Back Measurement Method, accurately tracking hours just became that much more important for accurate compliance.
When determining an employee’s eligibility for an offer of coverage, an important rule to keep in mind is the Rule of Parity.
The Rule of Parity, as cited from the IRS regulations, is as follows: “For purposes of determining the period after which an employee may be treated as having terminated employment and having been rehired, an Applicable Large Employer may choose a period, measured in weeks, of at least four consecutive weeks during which the employee was not credited with any hours of service that exceeds the number of weeks of that employee’s period of employment with the Applicable Large Employer immediately preceding the period that is shorter than 13 weeks (for an employee of an educational organization employer, a period that is shorter than 26 weeks).”
Employers should note that in order for the Rule of Parity to be used, the following needs to be true:
• The break should be at least 4 consecutive weeks.
• The break should not be more than 13 weeks (for an employee of an educational organization employer, the break should not be more than 26 weeks).
• The break should be more than the period of employment immediately preceding the break.
Example of when an employee furloughed due to COVID-19 might need an offer:
John Doe works as a dishwasher with a variable-hour schedule at a local restaurant. He has been employed by the restaurant for three years. He was determined to be full-time during his measurement period under the Look-Back Measurement Method, and was receiving health benefits from his employer during his corresponding stability period. Due to restrictions put in place during Covid-19 Pandemic he was temporarily terminated by the restaurant. He returned to the restaurant after 5 weeks.
How does the Rule of Parity reset an employee’s measurement?
Because his prior term of employment exceeded the term of the break, the Rule of Parity does not apply and the restaurant is required to extend him an offer of health coverage for the remainder of his prior stability period because John was counted as a full-time employee as measured during the previously discussed measurement period.
Now comes the tricky part, if John is terminated again 5 weeks later and returns a second time, the Rule of Parity comes into effect. His employer is no longer required to treat him as a full-time employee. Instead, the restaurant may treat him as a new hire and start measuring his initial measurement period under the ACA as allowed by the Rule of Parity.
If John had returned to the restaurant before 5 weeks, his employer would have had to extend him an offer of health coverage for the remainder of his prior stability period because John was counted as a full-time employee as measured during his prior measurement period.
In this case, the Rule of Parity relieves the restaurant from having to continue to pay John’s health insurance as a full-time employee by taking into account the length of time John was not working at the restaurant.
An added wrinkle to the application of the rule is that if either of John’s breaks in employment lasted longer than 13 weeks, it does not matter how long he was employed prior to the break, his employer is allowed to treat him as a new hire and start a new initial measurement period.
Whether you’re running a restaurant, staffing agency, healthcare facility or some other organization, complying with the ACA on your own can be difficult, especially if administering the Look-Back Measurement Method. Consider outsourcing a third-party expert who specializes in ACA compliance, data consolidation and analytics to avoid the headache and focus your resources on bettering your business.
Your organization will want to get it right to avoid ACA penalties being issued by the IRS. Currently, the agency is issuing Letter 226J penalty notices to organizations identified as having failed to comply with the ACA’s Employer Mandate for the 2017 tax year. If you received one, learn how to respond with this helpful guide.
For information on ACA penalty amounts, affordability percentages, important filing deadlines, steps for responding to penalty notices, and best practices for minimizing IRS penalty risk, download the ACA 101 Toolkit.