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As businesses across the country are shutting their doors to comply with various state or local Stay at Home orders to combat the spread of the COVID-19 Pandemic, employers should understand how the dramatic changes to the work hours and size of their workforce can impact their ongoing ACA compliance .
We already discussed how the Rule of Parity can affect an employee’s eligibility for an offer of coverage during this Pandemic. As employers gear up for the March 31, 2020 1095-C & 1094-C electronic filing deadline, many employers should be thinking about something even more basic than the Rule of Parity, an accurate full-time count.
Stay at Home orders across the country have caused employers to either temporarily shutter their doors, or trim down to essential staff. Massive temporary layoffs, furloughs, and hours reductions will cause a massive shift in the full-time count of even the most stable employer.
You may ask, why does this matter?
Getting this full-time employee count right matters under the ACA because it determines ALE status and full-time employee counts.
The distinction of ALE status is important. If your organization is classified as an ALE, or Applicable Large Employer, you will be subject to the ACA’s Employer Mandate. This requires ALEs 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 IRC Section 4980H penalties. For a given year, an ALE is defined under the ACA as an employer that employs at least 50 full-time employees, including full-time equivalent employees, for more than 120 days during the preceding calendar year.
For purposes of ALE status determination, a full-time employee works at least 120 hours per month. (Once the ALE status is established, for purposes of determining whether and to what extent the ACA Employer Mandate penalties are triggered, the full-time employee count is based on 130 hours per month.)
The full-time equivalent employee count is trickier to determine and only applies to the ALE status determination. The monthly count of full-time equivalent employees is determined by taking the total hours for a month of all non full-time employees and dividing by 120. The result is your full-time equivalent count for that month. Add these to your monthly full-time employee count. If an employer’s average monthly count of total full-time and full-time equivalent employee count for the year is at least 50, then that employer is an ALE.
You can learn more about determining ALE status by visiting this IRS link.
How does this apply to Tommy Joe’s Restaurant during the COVID-19 Pandemic?
Let’s say Tommy Joes has 40 employees who work 160 hours per month and the remaining 20 part-time employees work 100 hours per month for each month of 2019 in addition to January, February, and March of 2020. Divide the monthly total of 2,000 hours for the part-time employees by 120, and the net result is 16.67 full-time equivalent employees for 2019 and January through March 2020. 40 plus 16.67 equivalent employees equals 56.67.
That means Tommy Joe’s Restaurant is an ALE for 2020 because it has at least 50 full-time and full-time equivalent employees in 2019.
Due to the Stay at Home orders to slow the spread of the COVID-19 Pandemic, let’s say that Tommy Joe’s Restaurant has to reduce staff starting on April 1, 2020. Suppose 10 of part-time employees are laid off and 20 of the previously identified 40 full-time employees have their hours reduced to 100 hours a month, making them now part time employees. Let’s say that this workforce remains the same for the rest of 2020. For ALE status purposes, starting from April 1, 2020, Tommy Joe’s Restaurant would have 20 full-time employees and 30 part-time employees, each working 100 hours per month, for a total of 3,000 hours. Divide the monthly total of 3,000 hours for the part-time employees by 120, and the net result is 25 full-time equivalent employees, for a total of 45 full-time and full-time equivalents for the remainder of 2020. This would translate to a monthly total full-time employee (including full-time equivalent employee) count of 56.67 for the months of January through March 2020 and 45 for the months of April through December 2020. This translates to an average of 47.92 full-time employees (including full-time equivalent employees) in 2020. In other words, for 2021, Tommy Joe’s Restaurant would not be an ALE for 2021.
Significant changes in workforce size and hours will be common with businesses like restaurants and retail shops responding to the COVID-19 Pandemic stay at home orders. This can make a former ALE into a non-ALE.
Additionally, such significant changes in workforce size and hours require an ALE to ensure that it is correctly classifying employees as full-time versus not full-time, e.g., part-time. To make sure your employees are classified correctly as full-time, you must use one of two IRS approved measurement methods. These methods let employers identify their full-time workers to whom they need to extend an offer of coverage and when that offer needs to be made.
The two different IRS approved measurement methods for determining ACA full-time employees are the Look-Back Measurement Method and the Monthly Measurement Method.
The Look-Back Measurement Method typically works best for variable-hour workforces that have a mix of full-time and part-time employees. The Look-Back Measurement Method allows employers to monitor and track their employee’s hours of service to determine if they are full-time before extending an offer of coverage. In the case of Tommy Joe’s Restaurant, the employer would measure their employees’ hours of service over a pre-determined amount of time. This is called the measurement period. Tommy Joe’s would use the hours of service tracked during the measurement period to categorize their employees as full-time. After the measurement period was complete, Tommy Joe’s would analyze the employee hours data to determine which employees it was required to extend offers of coverage. This is called the administrative period. Finally, Tommy Joe’s can extend offers of coverage over a pre-determined amount of time without worrying about variable fluctuations in an individual employee’s monthly hours. This is called the stability period. If Tommy Joe’s has a workforce consisting mainly of high variable-hour workers, the Look-Back is ideal because it captures the average hours of service and applies them over a subsequent predetermined time frame.
The Monthly Measurement Method is designed for organizations that have primarily full-time workforces. An employee’s status is taken at face value, based on whether or not they provided a minimum of 130 hours of service a month or 30 hours a week. In Tommy Joe’s case, the Monthly Measurement method would be difficult to use if the majority of their workforce consists of variable-hour employees and on any given week an employee’s hours of service can fluctuate between part-time and full-time.
You can learn more about the two measurement methods and calculating ACA full-time status by clicking here.
Bottom line, calculating the accurate full-time status of their employees and correspondingly whether an employer is an ALE and subject to the employer mandate has always been critical first step for employers if they want to minimize their potential penalty exposure from the IRS. Stay at home orders, temporary furloughs, layoffs, and reduced working hours just made the calculation more challenging.
To learn more about compliance with the ACA, visit our ACA Resource Center by clicking here.
