The Internal Revenue Service (“IRS”) and the Departments of Labor (“DOL”) and Health and Human Services (“HHS”), simultaneously, but separately, issued long awaited guidance to employers under the Patient Protection and Affordable Care Act (the “ACA”) regarding when part-time or seasonal employees must be treated as "full time" employees and the 90-day waiting period.

The ACA imposes new obligations on “applicable large employers.” The new obligations, referred to as “employer shared responsibility” rules, have been codified under IRC §4980H.

On August 31, 2012, the IRS released IRS Notice 2012-58, which provides safe harbors that employers may use to determine which employees to treat as full-time for purposes of the employer shared responsibility rules. On the same day, the agencies released IRS Notice 2012-59, Department of Labor Technical Release 2012-02, and HHS Bulletin, “Guidance on 90-Day Waiting Period Limitation under Public Health Service Act §2708,” each of which provided the same temporary guidance regarding the 90-day waiting period limitation under the employer shared responsibility rules.

A. Background

Beginning January 1, 2014, new IRC §4980H provides that an “applicable large employer” that does not provide its “full-time employees” with affordable minimum health care insurance coverage will face significant tax penalties. An “applicable large employer” is defined generally as any employer (taking into account all related businesses) that employed at least 50 full-time / full-time equivalent employees on business days during the preceding calendar year. For purposes of IRC §4980H, the term “full-time employee” generally means an employee who is employed on average at least 30 hours per week.

IRC §4980H also provides that an applicable large employer is subject to a potential tax penalty if (a) the employer fails to offer its full-time employees (and their dependents) the opportunity to enroll in any minimum essential healthcare coverage under the employer’s sponsored health plan, or (b) the employer offers its full-time employees (and their dependents) the opportunity to enroll in health coverage, but the coverage is either not affordable for the employee or does not provide minimum value or coverage and, as a result of such deficiency, one or more full-time employees is certified to receive a premium tax-credit or cost-sharing reduction. Coverage is considered “affordable” to a particular employee if the employee’s required contribution to the plan does not exceed 9.5 percent of the employee’s household income for the taxable year. Thus, there is a statutory guideline on how much premium the employer can pass on to the employee to pay without incurring a penalty.

B. Notice 2012-58: Determining “Full-Time” Employee Guidance

Notice 2012-58 expands on previously issued IRS guidance (IRS Notices 2011-36 and 2012-17) and provides safe harbors that applicable large employers may use (but are not required to use) to determine which employees will be treated as full-time employees for purposes of the shared employer responsibility rules.

Preliminarily, Notice 2012-58 states that if a large employer reasonably expects an employee to work an average of 30 or more hours per week when hired, then the employer must treat the individual as a full-time employee, i.e., the employer must offer essential minimum coverage to the employee to be effective within 90 calendar days, or the employer may be subject to significant tax penalties. If, however, the employer reasonably expects the employee to work a variable schedule that may not average more than 30 hours per week, or the employee is employed only on a seasonal basis, then the employer can use the safe harbor rules set forth in Notice 2012-58 to determine whether to treat the individual as a full-time employee.

1. Ongoing Variable Employees

An employee is a “variable employee” if, based on the facts and circumstances at the date the employee begins to provide services, it cannot be determined that the employee is reasonably expected to work an average of at least 30 hours per week. In such situations, an employer has two options: (a) it can simply concede that the employee will work an average of at least 30 hours per week, dispense with the need to make the calculations described below and treat the employee as a full-time employee; or (b) the employer must make a series of determinations, as described below.

First, the employer must designate a “Standard Measurement Period,” which is the period used to make the determination, and then must designate a “Stability Period,” which is the period during which the coverage must be provided. The Standard Measurement Period must be between three and 12 consecutive months. The Stability Period must be the greater of six consecutive months or the same number of consecutive months as the Standard Measurement Period. For example, if the Standard Measurement Period is the calendar year, then the Stability Period would be the following calendar year.

Second, the employer can include an administrative period of up to 90 days between the end of the Standard Measurement Period and the commencement of the Stability Period, so that the employer can determine who is eligible for coverage and give them an opportunity to enroll. For example, an employer could make October 15 to October 14 of the following year the Standard Measurement Period, designate October 15 to December 31 as the Administrative Period and designate the following January 1 to December 31 as the Stability Period.

Assuming the employer designated the foregoing periods, then the employer would determine the employee’s average hours worked during the Standard Measurement Period (e.g., October 15, 2014 to October 14, 2015). If the employee averaged at least 30 hours per week during this period, then the employer could offer the employee an opportunity to enroll in the essential minimum coverage during the period of October 15, 2015 to December 31, 2015. If the employee enrolled, then the employer must provide coverage to the employee for the period of January 1, 2016 to December 31, 2016. In this scenario, the employer would not be obligated to pay an assessment for the employee. The foregoing analysis would then be repeated each year unless the employer concedes that the employee has become a full-time employee.

2. New Employees

For new employees, the foregoing rules apply, but with a few additional determinations. Specifically, in addition to having designated a “Standard Measurement Period,” a “Stability Period” and, if elected, an “Administrative Period,” the employer also must establish an “Initial Measurement Period,” which is the period that will be used to determine the employee’s initial eligibility, and must make certain adjustments to the initial Administrative Period.

The Initial Measurement Period must be between three and 12 months, and the combination of the Initial Measurement Period and the initial Administrative Period may not extend beyond the last day of the first calendar month beginning after the employee’s one-year anniversary. If the employer uses the first calendar year of employment as the Initial Measurement Period, and if the employee works an average of 30 hours per week during that period (e.g., May 15, 2014 to May 14, 2015), then the employee must be treated as a full-time employee, i.e., the employer must offer the employee essential minimum coverage to be effective no later than July 1, 2015, for the period of July 1, 2015 through June 30, 2016, or be subject to significant tax penalties.

Finally, the foregoing analysis only applies until the employer can determine the employee’s status as an ongoing employee under the Standard Measurement Period, as discussed above; however, again, there is a twist. In the preceding example, while the employee qualified as a full-time employee under the Initial Measurement Period (May 15, 2014 to May 14, 2015), the employer must again determine the employee’s status under the Standard Measurement Period (October 15, 2014 to October 14, 2015).

Assuming the employee qualifies as a full-time employee under this analysis, then the employer will pay a tax penalty, unless the employer offers the employee coverage for the Stability Period of January 1, 2016 through December 31, 2016 (which overlaps somewhat with the Stability Period following the Initial Measurement Period of July 1, 2015 to June 30, 2016).

If, however, the employee did not qualify as a full-time employee during the Standard Measurement Period, then the employer need not offer the employee coverage during the Stability Period of January 1, 2016 through December 31, 2016. Nonetheless, because the employee earned a right to coverage for the initial Stability Period of July 1, 2015 through June 30, 2016 based on the hours he worked during the Initial Measurement Period of May 15, 2014 to May 14, 2015, the employee’s coverage would not end until June 30, 2016. In other words, the failure to earn full-time status based on the Standard Measurement Period cannot be used to reduce the potential for one-year of coverage the employee has based on the Initial Measurement Period.

3. Seasonal Employees

A “seasonal employee” is defined as a worker who performs labor or services on a seasonal basis, such as during the summer or the winter holidays. Again, an employer has two options when dealing with "seasonal employees": (a) it can simply concede that the employee will work an average of at least 30 hours per week, dispense with the need to make the calculations described below and treat the employee as a full-time employee; or (b) the employer must make either one or two of the following determinations:

First, when determining whether the employer is a “large employer” – employed more than 50 full-time / full-time equivalent employees during the prior calendar year – the employer can exclude entirely all seasonal employees who were employed on no more than 120 days during the prior calendar year. If the employer employs less than 50 full-time / full-time equivalent employees during the prior calendar year (thus, not a “large employer”), the employer is not subject to the shared responsibility rules and thus, not required to provide health insurance coverage under the ACA.

Second, if the employer is still a “large employer,” then the question of whether a seasonal employee has to be considered when deciding who must be offered minimum essential medical coverage turns on the same analysis used for variable part-time employees that is described above.

For example, if the employer uses the first calendar year of employment as the Initial Measurement Period, and if the seasonal employee works an average of 50 hours per week during a three-month season, but that does not amount to an annual average of at least 30 hours per week, the seasonal employee is not considered to be full-time employee and need not be considered when determining who is a full-time employee.

C. Notice 2012-59: 90-Day Waiting Period Limitation

Notice 2012-59 provides temporary guidance under Public Health Service Act (“PHSA”) Sec. 2708 that will remain in effect at least through the end of 2014 and until regulations or other guidance is issued by the agencies. PHSA § 2708 provides that, for plan years beginning on or after January 1, 2014, a group health plan or group health insurance insurer shall not apply any waiting period that exceeds 90 days. PHSA § 2704(b)(4), ERISA § 701(b)(4) and Code § 9801(b)(4) define a waiting period to be the period that must pass with respect to an individual before the individual is eligible to be covered for health benefits under the terms of the group health plan. The Notice clarifies that being “eligible for coverage” means having met the plan’s substantive eligibility conditions, such as being in an eligible job classification or achieving job-related licensure requirements specified in the plan’s terms while the 90-day limitation remains in effect.

If, under the terms of a group health plan, an employee may elect coverage that would begin on a date that does not exceed the 90-day waiting period limitation, the 90-day waiting period limitation will be satisfied. Accordingly, a plan or insurer will not be considered to have violated PHSA merely because employees take additional time to elect coverage.

The new guidance also recognizes and addresses cases where it might take time to determine whether a newly hired employee will reasonably be expected to work the number of hours that would classify the employee as full-time (i.e., 30 hours per week). In these circumstances, the plan may take a reasonable time period of time to determine whether the employee meets the plan’s eligibility requirements and conditions for participation.

By way of example, the Notice describes a situation where an employee begins working 25 hours per week on January 3 and is considered a part-time employee for purposes of the employer’s health plan. Under the employer plan, part-time employees are eligible for health coverage after they complete a cumulative 1,200 hours of service. The employee satisfies the plan’s cumulative hours of service on December 15. The Notice concludes under this example that the employer must provide coverage to the part-time employee no later than the 91st day after the employee works 1,200 hours.

D. Conclusion

The foregoing guidance (a) provides safe harbor methods that “applicable large employers” can use to determine whether and when part-time and seasonal employees must be treated as full-time employees for purposes of the ACA (for whom the employer must provide affordable minimum health care insurance coverage or face significant tax penalties), and (b) explains how the 90-day waiting period will be applied.