Determining the accurate full-time employee count during a calendar year is important for ACA compliance. Getting it wrong can lead to inaccurate annual information filings with the IRS and subsequently lead to penalty assessments from the agency.
When determining if employees are full-time under the ACA, employers must use one of two measurement methods mandated by the IRS: the Monthly Measurement Method or the Look-Back Measurement Method.
Under the ACA’s Employer Mandate, Applicable Large Employers, or employers with 50 or more full-time employees and full-time equivalent employees must:
- Offer Minimum Essential Coverage to at least 95% of their full-time employees (and their dependents) whereby such coverage meets the Minimum Value
- Ensure that the coverage for the full-time employee is affordable based on one of the IRS-approved methods for calculating affordability
Failing to comply with these requirements can result in ACA penalties under Section 4980H, currently being assessed via IRS Letter 226J.
The tax agency is currently issuing these penalty notices to employers identified as having failed to comply with the ACA for the 2019 tax year, as well as previous reporting years.
A good place to start with minimizing ACA penalty risk starts with the implementation of the best-suited measurement method. If your workforce is primarily composed of variable-hour workers, with fluctuating hours of service, the Look-Back Measurement Method will be the best option to use for managing ACA compliance requirements.
What is the Look-Back Measurement Method?
The Look-Back Measurement Method allows employers to monitor and measure their employee’s hours of service over time to find out if they are ACA full-time. Using this method, employers gain more time to extend an offer of coverage to employees determined full-time under the ACA. The Look-Back Measurement Method includes three parts:
- The measurement period
- The administrative period
- The stability period
Under the Look-Back Measurement Method, employers measure and average individual employees’ hours of service during the measurement period. Depending on if the employee is a new hire or tenured, the measurement period will either be initial or standard. New hires are tracked under the initial measurement period, and tenured employees, who have already completed their initial measurement period, are tracked under the standard measurement period.
The measurement period can be as short as three months or as long as 12 months. The longer the measurement period, the more accurate the calculation of each employee’s status.
Following the measurement period, organizations can apply an optional administration period. Although there is a maximum allowable administration period of 90 days, as a practical matter, employers most often choose an administrative period between 30 to 60 days.
This administrative period is typically used for gathering and collecting all the paperwork necessary to ensure that an offer can be made on time.
Next is the stability period. The beginning of the stability period should align with the beginning of the offer coverage effective date. The stability period is the time frame in which the application of the employee’s classification is either full-time or part-time as determined by the results of the preceding measurement period.
During this stability period, regardless of the hours an employee is currently working, employees are locked in as either full-time or not full-time. Of course, even if the employee is locked into a non-full-time position, that doesn’t mean that the employer can’t offer coverage.
Look-Back Measurement Method example
Johnny Sprite has been working at the pizzeria for almost one year. During that time, his hours fluctuated on a weekly basis. Some weeks he worked 15 hours and other weeks he worked over 50 hours. Johnny’s manager was unsure if he was full-time under the ACA because of his irregular hours.
Luckily, his manager started recording his hours under the Look-Back Measurement Method from his first day of work.
As it turns out, during Johnny’s initial measurement period, Johnny averaged 142 hours a month. As Johnny’s one year at the pizzeria approached, the manager reviewed his 12-month initial measurement period. The manager determined he was full-time due to his averaging 142 hours a month over the 12-month initial measurement period.
The manager took the next 30 days to prepare and coordinate Johnny’s offer of health coverage. This 30-day window is the initial administration period.
Johnny received an offer of coverage with an effective start date at the expiration of the administrative period. Because the pizzeria leveraged the Look-Back Measurement Method, it can’t be assessed any penalties for the period of his employment prior to his offer of coverage because Johnny was “in measurement.” This scenario is called a Limited non-Assessment Period.
Once Johnny’s stability period started, and he received his offer of coverage, he started working fewer hours. In fact, after measuring his new hours, he averaged only 12 hours a week, most weeks.
Despite the drastic cut in hours, because Johnny averaged 142 hours a month during his initial measurement period, his subsequent 12-month stability period has him “locked” in as an ACA full-time employee. Therefore, the pizzeria should not rescind the offer of coverage because Johnny is currently working part-time hours.
Managing ACA compliance
You see, the Look-Back Measurement Method was specifically designed to help organizations that employ high-variable hour employees manage ACA compliance requirements without over-extending offers of coverage.
The method may seem straightforward, but measuring employees consistently over time can be challenging. And getting it wrong can result in significant penalty assessments from the IRS. For assistance in establishing the Look-Back Measurement Method or the monthly measurement method, contact us to learn about ACA Complete.
Our full-service comprehensive solution will implement the process, measure employee hours monthly, monitor upcoming offers, document enrollment and declinations, and complete year-end filling for you. With your ACA responsibilities managed, you can be confident you’re 100% ACA compliant.
For more information on administering the Look-Back Measurement Method or another Employer Mandate-related responsibility, download the 2022 ACA Essential Guides for Employers below.
To gain invaluable insights on penalty amounts, affordability percentages, filing deadlines, expert tips for responding to penalty notices, and proven strategies for minimizing IRS penalty risk, download the ACA 101 Toolkit.