1 “pay or play” penalties: which employees put you at risk? kate ball area assistant vp,...

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“Pay or Play” Penalties: Which Employees Put You at Risk?

Kate BallArea Assistant VP, Compliance CounselArthur J. Gallagher & Co.

Feeling TheHeat?

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© 2015 Gallagher Benefit Services, Inc.15GBS25279D2

The intent of this presentation is to provide you with general information regarding the status of, and/or

potential concerns related to, your organization’s current employee benefits environment. It does not necessarily fully address all of your organization’s specific issues. It

should not be construed as, nor is it intended to provide, legal advice. Questions regarding specific issues should be addressed by your organization’s general counsel or

an attorney who specializes in this practice area, as appropriate.

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© 2015 Gallagher Benefit Services, Inc.15GBS25279D

Agenda

• Avoid Penalties by Correctly Identifying Full-Time Employees

• Counting Hours for Ongoing Employees• Counting Hours for New Employees• Special Rules• Action Items

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Glossary

• “EE” Employee• “ER” Employer• “ESR” Employer Shared Responsibility/Employer Mandate/Pay or Play• “FT” Full-time• “IAP” Initial Administrative Period• “IMP Initial Measurement Period• “ISP” Initial Stability Period• “PT” Part-time• “SAP” Standard Administrative Period• “SMP” Standard Measurement Period • “SSP” Standard Stability Period• “VH” Variable Hour

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Avoid Penalties by Correctly Identifying

Full-Time Employees

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Employer Shared Responsibility

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• Full-time (“FT”) employees who are not offered Employer Shared Responsibility (“ESR”) compliant coverage may trigger penalties for employers

• Employers may have their own classifications of employees– “Full-time employee”– “Part-time employee”– “Temporary employee”– “Project employee”

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Full-Time Employees

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• ESR has a very specific definition of FT employee• Employers need to know which employees are FT and

which are non-FT under the ESR rules– Necessary for ESR compliance – Necessary for avoiding ESR “Sledgehammer” and “Ice

Pick” penalties– Necessary for § 6056 reporting (Forms 1094-C and

1095-C)

Full-Time Employees

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• Under the ESR rules, FT employee is defined as an employee who is employed an average of 30 hours or more per week (130 hours per month)

• Two important questions– What kinds of activities must be included in employee

hours?– How are hours averaged under ESR rules?

Full-Time Employees

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• What kinds of activities must be included in employee hours?– Each paid hour of work– Each paid hour during which no work is performed

• Includes paid time off for military service, jury duty, vacation, holidays, sick days, incapacity (e.g., STD/LTD), layoff, and leave of absence (e.g., paid FMLA)

– Note: Salaried employees may be credited with 8 hours for each day worked and/or 40 hours for each week worked

Full-Time Employees

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• How are hours averaged under ESR rules?– Employers must “count hours” using one of two

permitted methods • These methods are complex• The rules must be followed precisely• No other averaging methods are permitted

– Counting hours is more challenging for employers with “variable hour” employees

– Counting hours rules are different for “Ongoing Employees” vs. “New Employees”

Full-Time Employees

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Counting Hours for Ongoing Employees

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Ongoing Employees

• Ongoing Employees have been employed for at least one Standard Measurement Period (“SMP”)

• Count hours worked by Ongoing Employee to determine FT status

• Two permitted methods of counting hours– “Monthly Measurement Method” – “Look-Back Method”

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• May only use different methods of counting hours for the following categories of employees– Each group of collectively bargained employees

covered by a separate collective bargaining agreement – Collectively bargained and non-collectively bargained

employees– Salaried employees and hourly employees – Employees whose primary places of employment are

in different states

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Ongoing Employees

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• Monthly Measurement Method– An employee’s FT status for a given month determined

after the month is over• FT status = 130 hours/month

– Only use for employees with fixed FT or non-FT status• E.g., employees who are going to be FT every month or

employees who are going to be PT every month• Do not use for VH employees—may trigger penalties

By the time employer realizes employee hit FT hours for the month, the month is over and it is too late to offer coverage

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Ongoing Employees

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• Dunder Mifflin is using the Monthly Measurement Method to count hours for all employees. Dwight, an hourly employee who has not been offered ESR-compliant coverage, works unpredictable hours. Dwight worked 150 hours in April 2015. Under the monthly measurement method, Dwight was a FT employee during April 2015. Dunder Mifflin could be subject to an ESR penalty for April 2015.

– To avoid ESR penalties under the Monthly Measurement Method, Dunder

Mifflin would have needed to offer Dwight ESR-compliant coverage starting April 1, 2015.

– Because Dwight is a variable hour employee who has not been offered coverage, Dunder Mifflin should not use the Monthly Measurement Method for hourly employees.

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Ongoing Employees

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• The Monthly Measurement Method may be easier to administer than the Look-Back Method

• But the Monthly Measurement Method should only be used for employees that cannot trigger ESR penalties– Employees eligible for ESR-compliant coverage

• Cannot trigger ESR penalties (even if FT) because offered ESR compliant coverage

– Non-FT employees who never, ever work 130 hours in a month • Cannot trigger ESR penalties because never FT for any month

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Ongoing Employees

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Ongoing Employees

• Duck Commander has two categories of employees. “TV personalities” work 70 hours per week and are offered ESR-compliant coverage. “Factory workers” work 20 hours per week and are not offered ESR-compliant coverage. According to Duck Commander policy, factory workers may never exceed 20 hours per week. Duck Commander can safely use the Monthly Measurement Method.

– TV personalities will not trigger ESR penalties because they are

offered ESR-compliant coverage. – Factory workers will not trigger ESR penalties because they never

work FT hours.

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Ongoing Employees

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• Look-Back Method – In order to avoid ESR penalties, should use for variable hour

employees who are not offered ESR-compliant coverage– Allows employers to count employee hours for up to 12

months to determine FT status before offering ESR-compliant coverage

– Rules are much more complicated than Monthly Measurement Method

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Ongoing Employees

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• Look-Back Method for Ongoing Employees– Benefits eligibility for 12-month plan year (also known as

the “Standard Stability Period” or “SSP”) determined by looking back to the 12-month “Look-Back Period” (also known as the “Standard Measurement Period” or “SMP”)

– If employee worked FT hours in most recent SMP; offer coverage for SSP

– May also have “Standard Administrative Period” of up to 90 days between SMP and SSP • Use SAP to tally up hours, make offers of coverage, and give

employees time to elect coverage• Design SAP to overlap with annual open enrollment period

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Ongoing Employees

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• Designing 12-Month Measurement and Stability Periods– Start with the ERISA plan year. This is the Stability Period.

• E.g., 1/1/15 to 12/31/15

– From the first day of the Stability Period, count backwards up to 90 days, this is the Administrative Period.• Two months may be easier to administer• E.g., 11/1/14 to 12/31/14

– From the first day of the Administrative Period, count backwards 12 months. This is the Measurement Period.• E.g., 11/1/13 to 10/31/14

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Ongoing Employees

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2014 2015 2016 2017

11/1/13 – 10/31/14SMP

11/1/14 – 10/31/15SMP

11/1/2015 – 10/31/16SMP

11/1/14 – 12/31/2014SAP

1/1/2015 – 12/31/2015SSP

1/1/2016 – 12/31/2016SSP

1/1/2017 – 12/31/2017SSP

11/1/15 – 12/31/15SAP

11/1/16 – 12/31/16SAP

Employer subject to ESR starting 1/1/2015. Employer starts counting hours in Fall 2013 with 12 month SMP, 2 month SAP, and 12 month SSP

Ongoing Employees

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Counting Hours for New

Employees

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• Upon hire, employer must classify New Employee as FT or non-FT based on employer’s “reasonable expectations”

• Critical question is whether employer reasonably expects the New Employee to average 30 hours or more per week during the first 12 months of employment– For this purpose, employer must assume that the New

Employee will be employed for entire IMP• Exception for seasonal employees

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New Employees

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• Reasonable expectations may be based on criteria such as:– Whether the position was advertised, communicated, or

documented as requiring hours that would average 30 or more hours per week during the first 12 months of employment

– The type of employee is the New Employee replacing—a FT employee or non-FT employee

– Whether employees in same/similar positions are classified as FT or non-FT

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New Employees

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• When must I offer coverage to New FT Employees?– Upon hire (after any applicable waiting period)

• For first 12 months of employment, use Monthly Measurement Method to count New Employee hours– After 12 months of employment, employer may use

Monthly Measurement Method or Look-Back Method

New Employees

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• Who is a New “non-FT” Employee?– PT

• Upon hire, reasonably expected to average less than 30 hours per week/130 hours per month

– Variable Hour• Upon hire, cannot be reasonably determined if employee will

average at least 30 hours per week/130 hours per month

– Seasonal• Period of employment is during the same part of the year

each year; annual employment of 6 months or less

New Employees

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• How do I count hours for New non-FT Employees?– Choice between Monthly Measurement Method and

Look-Back Method• Monthly Measurement Method

Not recommended for Variable Hour or Seasonal employees Only recommended for true PT employees

» Employees who never hit 130 hours/month• Look-Back Method

Employer may count hours for up to 12 months to determine whether non-FT employee has hit FT status

The counting hours rules differ for New Employees vs. Ongoing Employees

New Employees

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• Look-Back Method for Ongoing Non-FT Employees– Employer need not offer coverage upon hire– Hours may be tracked for up to 12 months after hire (known

as the “Initial Measurement Period” or “IMP”)• IMP begins on hire date, first day of month after hire date, or

first day of pay period after hire date (or any date in between)– May also have an “Initial Administrative Period” (“IAP”)

• Up to 90 days, however . . . • IMP + IAP cannot extend past last day of 1st calendar month

beginning on or after 1-year anniversary non-FT EE’s hire date

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New Employees

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• Look-Back Method for Ongoing Non-FT Employees– If non-FT employee hits FT hours in IMP, employer

offers coverage for 12-month ISP– ISP begins immediately after IAP

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New Employees

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2014 2015 2016 2017

11/1/13 – 10/31/14SMP

11/1/14 – 10/31/15SMP

11/1/15 – 10/31/16SMP

11/1/14 – 12/31/14SAP

1/1/15 – 12/31/15SSP

1/1/16 – 12/31/16SSP

1/1/17 – 12/31/17SSP

11/1/15 – 12/31/15SAP

11/1/16 – 12/31/16SAP

New Non-FT Employee DOH 5/20/15

6/1/2015 – 5/31/2016IMP

6/1/2016 – 6/30/2016IAP

7/1/2016 – 6/30/2017ISP

New Employees

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• Transition from New Employee to Ongoing Employee– New non-FT Employee tracked in IMP – Employee is concurrently tracked as an Ongoing Employee in

SMP when next SMP starts after DOH• This results in some overlap between the IMP/ISP and the SMP/SSP

– When ISP ends, employer determines whether employee is eligible for coverage going forward based on results of SMP• If employee’s status in ISP is favorable to employee, employee stays

in ISP until it expires• If employee’s status in SMP is favorable to employee, ISP ends early

and employee moves to SSP early

New Employees

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2014 2015 2016 2017

11/1/13 – 10/31/14SMP

11/1/14 – 10/31/15SMP

11/1/15 – 10/31/16SMP

11/1/14 – 12/31/14SAP

1/1/15 – 12/31/15SSP

1/1/16 – 12/31/16SSP

1/1/17 – 12/31/17SSP

11/1/15 – 12/31/15SAP

11/1/16 – 12/31/16SAP

New Non-FT Employee DOH 5/20/15 and hours tracked in IMP

6/1/15 – 5/31/16IMP

6/1/16 – 6/30/16IAP

7/1/16 – 6/30/17ISP

Also tracked in SMP that begins after DOH Employee

moves to SSP either here or here

New Employees

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Special Rules

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Temporary Employees

• No special treatment under ESR rules, must offer coverage if FT– As with any New Employee, classify as FT or non-FT upon

hire• Is employee reasonably expected to average 30 hours/week during

the IMP? May not take into account the possibility that employee will terminate

employment before IMP is over

– If FT, offer coverage after applicable waiting period– If non-FT, may count hours in IMP and if employee averages

30 hours/week (130 hours/month), offer coverage

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Special Unpaid Leave• Paid leave counts as hours worked• When using the Look-Back Method, employees on “Special

Unpaid Leave” must also be credited with hours worked– Unpaid leave for FMLA, military duty, and jury duty

• Two methods for crediting employee hours during Special Unpaid Leave– Exclude period of Special Unpaid Leave when calculating hours

worked during measurement period– Calculate average hours worked during measurement period

(excluding period of Special Unpaid Leave), and apply that average to period of Special Unpaid Leave

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Terminated & Rehired

• If less than 13 weeks passes between an employee’s termination and rehire:– Rehired employee is treated as a continuing

employee, not as a New Employee– The MP and SP employee was in before the

termination continues• MP: Employee credited with zero hours time period during

which he or she was not employed by employer• SP: If, before termination of employment, employee was in

a SP with FT status, coverage must be reactivated by first of the month after rehire

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• If 13 weeks or more passes between the termination and rehire:– Employee is treated as a New Employee

• FT: Employer may impose new waiting period before offering coverage

• Non-FT: Employer may impose new IMP before offering coverage


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• Jim is a Dunder Mifflin variable hour employee who tested as FT in the most recent SMP. Jim enrolled in coverage for the SSP. Due to cutbacks, Dunder Mifflin terminates Jim’s employment. But business picks up and Jim is rehired four weeks later. Jim should be treated as a continuing employee and his status during the SSP (and the coverage he elected) should be reactivated by the first of the month after rehire.


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• What if an employee has an “employment break period” where no hours of service are worked?– If employment break period is 13 weeks without an hour of

service (or shorter if Rule of Parity is applied), then the rehire rules may be applied

– Employer may treat the employee as terminated and rehired when employee returns to work• During the employment break period, employee is treated as a

continuing employee (any applicable MP and SP continue)

– Special rules apply for educational organizations

Employment Break Periods

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• Michael is a Dunder Mifflin variable hour employee who tested as FT in the most recent SMP. Michael enrolled in coverage for the SSP. After burning his foot on a George Foreman Grill, Michael takes twelve weeks of unpaid FMLA leave, followed by an additional two weeks of unpaid non-FMLA leave. This is a fourteen week employment break period.

– Dunder Mifflin is required to continue Michael’s coverage during the SSP, so as long as Michael pays his premium contributions, he remains covered during the employment break period.

– However, when Michael returns to work, Dunder Mifflin may treat him as a New non-FT (variable hour) employee. Dunder Mifflin may terminate Michael’s coverage and impose a new IMP before offering him coverage again.

Employment Break Periods

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• Special rules for changes in employment status (e.g., PT to FT)

• Special rules for breaks in service lasting longer than the initial employment period (“Rule of Parity”)

• Special rules for educational organizations• Special rules for “on call” hours• And many, many more!

Other Special Rules

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Action Items

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• Establish Standard Measurement, Administrative, and Stability Periods for Ongoing Employees

• Establish Initial Measurement, Administrative, and Stability Periods for New Employees

• If compliance with ESR requires changes to the plan’s eligibility terms:– Make necessary changes to plan document/SPD/leave

policies• Issue SMMs to plan participants

– Coordinate with carrier/TPA/stop-loss

Action Items

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• If you have variable hour or seasonal employees, consider engaging a vendor to count hours– Vendors who offer § 6055 and § 6056 reporting

services usually offer counting hours services as an add-on

• To avoid ESR penalties, offer coverage to employees with FT status by the employer’s ESR effective date

• “Counting Hours Toolkit” at ajghealthcarereform.com

Action Items

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Questions?

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The intent of this presentation is to provide you with general information regarding the status of, and/or

potential concerns related to, your organization’s current employee benefits environment. It does not necessarily fully address all of your organization’s specific issues. It

should not be construed as, nor is it intended to provide, legal advice. Questions regarding specific issues should be addressed by your organization’s general counsel or

an attorney who specializes in this practice area, as appropriate.

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Thank YouKate Ball

Area Assistant Vice President, Compliance Counsel

Arthur J. Gallagher & Co.

[email protected]

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1 “pay or play” penalties: which employees put you at risk? kate ball area assistant vp,...

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