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Home ACA Compliance Breaking down the complexity of ACA’s Rule of Parity

Breaking down the complexity of ACA’s Rule of Parity

5 minute read
by Robert Sheen
Breaking down the complexity of ACA’s Rule of Parity

While the Affordable Care Act’s Employer Mandate is likely very well known (if not well loved) by employers, many are unaware of the ACA’s Rule of Parity, which offers some relief from the Employer Mandate by providing an important exception.

The Affordable Care Act, also known as the “ACA” or “Obamacare,” has helped millions of Americans gain access to health insurance, which is an undeniable benefit of the program as well as its stated purpose. At the same time, much of the burden of facilitating this impressive expansion in coverage falls on employers.

What is the Employer Mandate?

The key element of the ACA in this respect is what’s known as the Employer Mandate. Under the ACA’s Employer Mandate, employers with 50 or more full-time employees or full-time equivalent employees, known as Applicable Large Employers (ALEs) must:

  • Offer Minimum Essential Coverage (MEC) to at least 95% of their full-time employees (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.

Employers who fail to meet their obligations under the Employer Mandate could face penalties under  Internal Revenue Code (IRC) Section 4980H.

While a two-part mandate might not seem particularly onerous, the devil is in the details. Take the first bullet point, for example. Compliance with that one bullet point requires employers to understand what Minimum Essential Coverage is, understand what Minimum Value is and how to calculate Minimum Value. Additionally, employers need to know how many full-time employees they have in order to ensure they’ve offered compliant coverage to at least 95 percent of them.

This may seem like the easiest part of the entire equation, but it’s not as straightforward as most people think, due to the way the ACA calculates full-time employees. More on that below.

In short, ACA compliance is a significant burden for employers, particularly smaller businesses that may be just over the 50-full-time-employee threshold. They’re large enough to be required to comply with the Employer Mandate, but often too small to have sophisticated compliance teams to help understand what exactly they need to do. It can be an overwhelming task, even for larger companies, without the right tools. 

Compliance is especially complicated in industries which rely on employing large numbers of variable-hour employees, such as restaurants, staffing organizations, and home healthcare facilities. Again, this gets messy due to how the ACA calculates full-time employees.

Calculating Full-Time Employees

As noted above, it’s not as easy as many people would expect to determine the number of full-time employees employed by an organization. Under the ACA, a full-time employee is one who works, on average, 30 hours per week or 130 hours per month. So, right away, we’re looking at a larger group of workers than those working 40+ hours per week, which is where many people without some background in employment laws would draw the line between part-time and full-time.

Still, for most employers, basing a full-time designation on an employee working 30 hours per week (or 130 hours per month) instead of 40 hours per week is fairly straightforward, all else being equal. But where it gets particularly tricky are in employment relationships that are less steady, or less permanent than our stereotypical image of full-time employment. Again, we’re talking about the kinds of employment relationships mentioned above: variable hour workers and seasonal or periodic staffing arrangements where staff may end and restart employment over the course of a year.

Look-Back Method

Companies that have variable workforces as described above tend to use the IRS’s “Look-Back Measurement Method” for determining full-time status. The Look-Back Measure Method relies on three time periods to help determine employment status: the measurement period, the administrative period, and the stability period.

  • The measurement period is the period of time in which employers measure an employee’s hours of service and averages those hours across the duration of the measurement period. The measurement period can be anywhere from three to twelve months.
  • The administrative period is an optional period of time following the measurement period in which employers can organize the information gathered during the measurement period for purposes of determining which employees to offer coverage to. The administrative period typically ranges from 30 to 60 days but can be as long as 90 under the regulations.
  • The stability period is the period of time during which an employee may be classified as part-time or full-time. Importantly, the hours worked by the employee during the stability period aren’t used to determine coverage eligibility; rather the hours worked during the measurement period are used.

Fortunately, the IRS provides some additional help for companies to minimize their risks of running afoul of the Employer Mandate and triggering potentially costly penalties. In this post, we’ll discuss one in particular: the Rule of Parity.

What is the Rule of Parity?

The ACA’s Rule of Parity is an exception to the Employer Mandate that allows employers to avoid the need to reoffer coverage to applicable employees who leave and return within a short time frame. The rule’s text is a bit convoluted, so let’s start there and then expand on the meaning and how the Rule of Parity works in practice.

IRS regulations state the ACA’s Rule of Parity is: “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).”

That’s a mouthful, but the application of the rule is fairly simple in practice. Consider a hypothetical seasonal business, Salah’s School Supplies. Salah is very busy in the weeks just before the start of the school year and moderately busy through the year, but his business is very slow in late spring and early to mid-summer, due to the timing of summer vacation. Salah employs Mary and Pablo, both students at a local university, full-time for most of the year, but this summer, Mary went back home for ten weeks and Pablo for 14 weeks. Both returned to Salah’s School Supplies after their summer break, and both were previously offered coverage by Salah. To whom would Salah now be required to re-offer coverage to? Only Mary, because her period of absence is less than the 13-week threshold for the Rule of Parity. 

Maximizing ACA Compliance

The ACA has created administrative challenges for applicable large employers, and navigating the rules on when insurance coverage must be offered and to whom can be a compliance mess for many companies. Nevertheless, complying with the ACA’s Employer Mandate is essential for avoiding potentially costly regulatory penalties.

If you’re looking for more information on how to navigate compliance with the ACA Rule of Parity, don’t hesitate to contact the ACA experts at Trusaic. Our team can help ensure you’re meeting all requirements and taking the right steps to stay compliant with the law. Contact us today! 

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Get to Know the ACA’s Rule of Parity
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Get to Know the ACA’s Rule of Parity
Employers that administer the look-back measurement method or have been impacted by COVID-19 should familiarize themselves with the ACA’s Rule of Parity, it could help you cut costs.
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The ACA Times
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