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Home ACA Compliance Get to Know the ACA’s Rule of Parity

Get to Know the ACA’s Rule of Parity

4 minute read
by Robert Sheen

Without the proper tools or subject matter expertise, tackling the responsibilities of the ACA’s Employer Mandate on your own can be overwhelming. 

This is especially true if you are an employer in an industry which relies on employing large numbers of variable-hour employees, such as restaurants, staffing organizations, and home healthcare facilities. 

Under the ACA’s Employer Mandate, employers with 50 or more full-time employees and 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

Failure to meet these two requirements could subject ALEs to Internal Revenue Code (IRC) Section 4980H penalties.

Luckily, the IRS has methods for helping organizations minimize IRS penalty risk. In this post, we’ll be taking a look at one of those methods; the Rule of Parity.

What is the Rule of Parity?

The Rule of Parity is an exception that employers can leverage for not having to reoffer coverage to applicable employees who leave and return to work over a short window of time.

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).”

Employers should note that to claim the Rule of Parity, the period of absence must exceed the duration of the employee’s period of employment immediately before the break in service. In other words, the employee must have worked longer than the period they are not working.

Which organizations benefit from the Rule of Parity?

If you are an ALE with a predominately variable-hour workforce, you’ve likely been directed to use the IRS’s Look-Back Measurement Method to determine which of your employees are ACA full-time. 

Under the Look-Back Measurement Method, employers can monitor and track their employees’ hours of service for as little as three months and as long as 12 months to determine full-time or part-time status. This extra time allows the organization to determine who is required an offer of health coverage and by when. Remember, under the ACA, a full-time employee works on average at least 30 hours of service a week, or 130 hours of service a month.

ALEs that use the Look-Back Measurement Method and or have experienced furloughs, layoffs, and reductions in hours of service for employees because of the COVID-19 pandemic have the most to gain from the Rule of Parity.

Rule of Parity example

Jack Doe works as a dishwasher with a variable-hour schedule at a local restaurant. He has been employed by the restaurant for three years. Under the Look-Back Measurement Method, Jack is ACA full-time receiving health benefits from his employer during his corresponding stability period. 

He left the restaurant to pursue a job as a house painter during that stability period. He returned to the restaurant after 16 weeks. 

When Jack returned, his employer no longer treated him as a full-time employee. Instead, the restaurant treated him as a new hire and started measuring his initial measurement period under the ACA as allowed by the Rule of Parity.

If Jack had returned to the restaurant within 13 weeks, rather than waiting to return until after 13 weeks (and in his case 16 weeks), his employer would have to extend him an offer of health coverage for the remainder of his prior stability period because Jack was a full-time employee as determined during his prior measurement period. 

But, because Jack left his employment at the restaurant for more than 13 weeks, the restaurant may consider him a new hire under the Rule of Parity, despite his three years of previous employment.

In this case, the Rule of Parity relieves the restaurant from having to continue to offer Jack’s health insurance as a full-time employee by taking into account the length of time Jack was not working at the restaurant.

Maximizing ACA compliance

Whether you’re running a restaurant, staffing agency, healthcare facility, or any other type of 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. Our ACA compliance services have helped our clients prevent over $1 billion in ACA penalty assessments. Focus your resources on bettering your business and leave the ACA to us.

If you’re unsure if your organization should be leveraging the Rule of Parity or the Look-Back Measurement Method, get your ACA Vitals score. The interactive tool will identify details within your organization that pose IRS penalty risk and subsequently help ensure your ACA compliance process is a sound one.

Get: ACA Vitals Score

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.

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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