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Home ACA Compliance Workforce Management, ACA Compliance and the COVID-19 Pandemic

Workforce Management, ACA Compliance and the COVID-19 Pandemic

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by Maxfield Marquardt

13 minute read:

Compliance with the various employer provisions of the Affordable Care Act (ACA) can be complicated under normal employment conditions. As employers face the incredibly difficult business climate created by the COVID-19 Pandemic and use the various workforce management tools at their disposal to keep their businesses alive during this crisis, it is important to understand how this may affect your current and ongoing ACA compliance.

In three prior articles we discussed the potential impacts the COVID-19 Pandemic could have on an employer’s ACA compliance obligations, namely how the COVID-19 Pandemic could impact an employer’s ALE status in 2021, how the Rule of Parity can affect offers of coverage during temporary layoffs, and the different questions employers should ask themselves as they are considering workforce management solutions.

As employers put the March 31, 2020Workforce Management Tools:

The workforce management tools that many employers are considering, or currently implementing, include temporary layoffs, furloughs, terminations, hours reductions, and salary reductions. How and to what extent an employer uses these tools can have an impact on their ongoing and future obligations under the ACA.

Furlough:

A furlough usually refers to a temporary unpaid leave. The employee still technically works for the employer but is not accruing hours of service. Employers should consider the following when evaluating the impact on their ACA compliance.

• How does this affect their tracking of hours of service and an employee’s status as full or part-time
• Does this affect the timing of their offers of coverage, including understanding the potential impact of the Rule of Parity
• How does this affect their monthly full-time counts
• How does this affect their future tracking of ALE Status

Layoff/Terminations:

These are both permanent separations of employment. Employers should consider the following when evaluating the impact on their ACA compliance.

• How does this affect their monthly full-time count totals
• How does this affect their future tracking of ALE Status
• If the termination is temporary, does the Rule of Parity impact your obligations to offer coverage

Note: For both Furloughs and Layoff/Terminations, employers should be aware of the Paycheck Protection Program included in the CARES Act, as it offers forgivable small business loans to employers who keep employees on the payroll during the COVID-19 Pandemic. For more on Paycheck Protection Program loans, see our whitepaper on the Employer Benefits under the CARES Act. In addition, employers should be aware of the new leave requirements in the Families First Coronavirus Response Act, as it places restrictions on employers and expands access to paid leave for certain categories of employees impacted by the COVID-19 Pandemic.

Hours Reductions:

This involves reducing scheduled working hours for existing employees whether part-time or full-time.

• How does this affect their tracking of hours of service and an employee’s status as full or part-time
• How does this affect their monthly full-time counts
• How does this affect their future tracking of ALE Status

Salary Reductions:

This typically involves reducing the salaries of full-time employees.

• Salary reductions do not generally have an affect on ACA Compliance
• Employers do need to watch for whether the change in salary affects the exempt vs. non-exempt status of their employees. Exempt employees are not subject to overtime rules for working more than a 40 hour week, non-exempt employees are.

Future Obligations under the ACA:

When we talk about an employer’s future obligations under the ACA, we are talking about determining whether they are an Applicable Large Employer (ALE).

The distinction of ALE status is important. If your organization is classified as an ALE 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.

To understand how this interacts with your workforce management solutions look at the example below of Tommy Joe’s Restaurant and the changes it makes to its operations 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.

Ongoing ACA Compliance Management:

Employee Classification:

With the significant changes in workforce size and hours occurring as a result of the COVID-19 Pandemic, an ALE must ensure that it is correctly classifying employees as full-time versus not full-time, e.g., part-time. Classifying employees incorrectly can lead to inaccurate information being submitted to the IRS in annual information filings. These errors can result in overcounting or undercounting of full-time employees, either of which can result in significant ACA penalties from the IRS.

To make sure your employees are classified correctly as full-time, you must use one of two IRS approved measurement methods; the Look-Back Measurement Method or the Monthly Measurement Method. 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 Look-Back Measurement Method

The Look-Back Measurement Method typically works best for workforces that have a significant number of part-time employees.

Sometimes it’s difficult to identify which employees should be considered to be full-time under the ACA. 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 so that the employers can know when to extend an offer of coverage. The Look-Back Measurement Method is in 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.

After the optional administration period comes 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.

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 measurement period. Tommy Joe’s would use the hours of service tracked during the measurement period to categorize their employees as full-time. During the administrative period, Tommy Joe’s would analyze the employee hours data to determine which employees it was required to extend offers of coverage. Finally, during the stability period 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. 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.

It is important to note that you cannot switch back and forth during the timeframe of the selected measurement method.

Determining which measurement method to use can be difficult. Consulting with an outside ACA expert can help ensure your organization chooses the right measurement method for your situation.

Failing to do so can result in penalties under the ACA’s Employer Mandate. The IRS is currently issuing Letters 226J for the 2017 tax year to employers identified as having failed to comply with the ACA’s Employer Mandate.

Monthly Full-Time Counts:

Furloughs, Terminations, layoffs, and hours reductions can all affect an employers Full-time count. While similar to the ALE status determination, the Monthly Full-time count is based on a 130 hour per month threshold, instead of 120 hours per month, and does not take into consideration full-time equivalents.

An accurate monthly full-time count is incredibly important as it is the basis IRC 4980H(a) penalties. This penalty applies if (a) in any month in the tax year, Minimum Essential Coverage (MEC) is not offered to at least 95% of a company’s full-time employees (and their dependents), and (b) if at least one full-time employee receives the Premium Tax Credit (PTC) for purchasing coverage through the Marketplace.

Here is an example: Tommy Joe’s restaurant in 2019 has 300 full-time employees, and one of those employees receives a PTC for 12 months, the cost of this penalty would be $675,000 as compared to $626,400 in 2018. The per employee penalty is assessed against each of the 300 full-time employees, minus 30, even if only one employee receives a PTC. The 4980H(a) penalty is often referred to as the hammer penalty because all it takes is one full-time employee receiving a PTC for the penalty to be imposed.

While the Federal Government has opened a special enrollment period for the healthcare exchange, California and other states have. This could increase the possibility of an employee receiving a PTC, whether correctly or incorrectly, and therefore the imposition of a penalty on the employer. Keeping an accurate full-time count could save an employer hundreds of thousands of dollars in penalties.

Offers of Coverage

As a reminder to employers in conjunction with the Employer Shared Responsibility Payment (ESRP), 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.

The best way to avoid potential ACA penalties is to make and track your offers of coverage.

Furloughs:

The first thing an ALE should do is check their own company policies regarding continued healthcare coverage for furloughed employees. As they are still technically employed, some companies allow them to stay on their health plan. From an ACA compliance perspective they are treated similarly to terminations and layoffs as the employee is no longer accruing hours of service.

For Employers that choose to rescind an offer or delay making it during the furlough/leave period, they need to remember that if an Employee entitled to coverage based on the prior measurement period returns during the current stability period, the offer must be made upon their return unless the Rule of Parity applies (discussed below).

Terminations/Layoffs:

A termination relieves the employer of the duty to continue to offer coverage to the employee, usually at the end of the month wherein the employee was terminated.

Employers who, after the stay at home orders are lifted, end up hiring back the same employees that were laid off need to remember that if an Employee entitled to coverage based on the prior measurement period returns during the current stability period, the offer must be made upon their return unless the Rule of Parity applies (discussed below).

The Rule of Parity:

When determining an employee’s eligibility for an offer of coverage, an important rule to keep in mind is the Rule of Parity.

The Rule of Parity, as cited from the IRS regulations, is as follows: “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 in order for the Rule of Parity to be used, the following needs to be true:

• The break should be at least 4 consecutive weeks.
• The break should not be more than 13 weeks (for an employee of an educational organization employer, the break should not be more than 26 weeks).
• The break should be more than the period of employment immediately preceding the break.

Example of when an employee furloughed due to COVID-19 might need an offer:

John Doe works as a dishwasher with a variable-hour schedule at a Tommy Joe’s restaurant. He has been employed by the restaurant for three years. He was determined to be full-time during his measurement period under the Look-Back Measurement Method, and was receiving health benefits from Tommy Joe’s during his corresponding stability period. Due to restrictions put in place during COVID-19 Pandemic he was temporarily terminated by the restaurant. He returned to the restaurant after 5 weeks.

How does the Rule of Parity reset an employee’s measurement?

Because his prior term of employment exceeded the term of the break, the Rule of Parity does not apply and Tommy Joe’s is required to extend him an offer of health coverage for the remainder of his prior stability period because John was counted as a full-time employee as measured during the previously discussed measurement period.

Now comes the tricky part, if John is terminated again 5 weeks later and returns a second time, the Rule of Parity comes into effect. Tommy Joes is no longer required to treat him as a full-time employee. Instead, the restaurant may treat him as a new hire and start measuring his initial measurement period under the ACA as allowed by the Rule of Parity.

If John had returned to Tommy Joe’s before 5 weeks, his employer would have had to extend him an offer of health coverage for the remainder of his prior stability period because John was counted as a full-time employee as measured during his prior measurement period.

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

An added wrinkle to the application of the rule is that if either of John’s breaks in employment lasted longer than 13 weeks, it does not matter how long he was employed prior to the break, his employer is allowed to treat him as a new hire and start a new initial measurement period.

Whether you’re running a restaurant, staffing agency, healthcare facility or some other organization, complying with the ACA on your own can be difficult, this is especially true today as Employers utilize all of their workforce management options to deal with the economic challenges presented by the COVID-19 Pandemic. Consider outsourcing a third-party expert who specializes in ACA compliance, data consolidation and analytics to avoid the headache and focus your resources on bettering your business and managing through the Pandemic.

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.

We’re committed to helping companies reduce risk, avoid penalties, and achieve 100% ACA compliance. For questions about the ACA contact us here.

Summary
Workforce Management, ACA Compliance and the COVID-19 Pandemic
Article Name
Workforce Management, ACA Compliance and the COVID-19 Pandemic
Description
A guide to navigating how workforce management can affect ACA compliance during the COVID-19 Pandemic.
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Publisher Name
The ACA Times
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