The Look-Back Measurement Method Can Help Prevent ACA Penalties
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Determining the accurate full-time employee count during a calendar year is important for Affordable Care Act compliance. Classifying employees incorrectly can lead to inaccurate information being submitted to the IRS in annual information filings. This can result in receiving an ACA penalty notice 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 mandated by the IRS: the Monthly Measurement Method or the Look-Back Measurement Method.
Under 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.
Section 4980H penalties are assessed by the IRS using Letter 226J penalty notices. The tax agency is currently issuing these penalty notices to employers identified as having failed to comply with the ACA for the 2017 tax year.
A good place to start with minimizing ACA penalty risk starts with implementation of the best suited measurement method. If your workforce is primarily comprised of variable-hour workers with fluctuating hours of service, the Look-Back Measurement Method will be the best measurement method to use for ACA compliance.
The Look-Back Measurement Method allows employers to monitor and track their employee’s hours of service in the past to determine if they are full-time or not under the ACA. This informs employers on when to extend an offer of coverage to employees who are considered to be full-time under the ACA. The Look-Back Measurement Method has three parts:
- The measurement period
- The administrative period
- The stability period
Each employee’s hours are tracked and averaged over the measurement period, which can be as short as three months to as long as 12 months. The longer the measurement period, the better it provides a more accurate representation of each employee’s status.
Following the measurement period, an optional administration period may be applied. Although there is a maximum allowable administration period of 90 days, as a practical matter, employers typically choose 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 period in which the treatment of the employee’s classification as either full-time or not full-time as determined by the results of the preceding measurement period. During this stability period, regardless of the hours they are 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 must not offer coverage.
Here’s an 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 utilizing 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 approaches, 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 Look-Back Measurement Method was used, the pizzeria 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. You can learn more about them by clicking here.
Following Johnny’s offer of coverage, his hours are cut significantly and he ends up only working 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 stability period has him “locked” in as an ACA full-time employee for the next 12 months. Therefore, the pizzeria should not rescind the offer of coverage because Johnny is working part-time hours.
The bottom line is that understanding the Look-Back Measurement Method can be difficult. Some third-party organizations will implement this process and monitor upcoming offers as a part of their ACA compliance process.
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.
To learn more about ACA compliance for the 2019 tax year, click here.
For ACA reporting deadlines in 2020 for the 2019 tax year, organizations should review this link for important dates and requirements.
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