Hours of Service under the Affordable Care Act (Benefit Minute)

Posted in: Benefit Minute, Employee Benefits

Under the Affordable Care Act’s employer shared responsibility provisions (the employer mandate), employers with fifty or more full time equivalent employees are required to make an offer of health coverage to at least 95% of full time employees or pay a penalty that equates to $2,160 per employee (less 30) annually if one full time employee purchases a Marketplace plan and qualifies for a premium tax credit. The ACA also imposes reporting requirements with respect to full time employees on employers subject to the employer mandate. Therefore it is important that employers understand how the ACA defines a full time employee.

Definition of Full Time Employee
The ACA defines a full time employee as an employee who is employed an average of at least 30 hours of service per week with an employer. The regulations provide for a monthly equivalency which states that 130 hours of service in a calendar month is treated as the monthly equivalency of 30 hours of service per week. Full time status may be determined using either a monthly measurement method or a lookback measurement method. Both methods have specific rules that must be followed.

Under the monthly measurement method, an optional weekly rule allows an employer to use 120 hours of service to determine full time status in months that have 4 weeks and 150 hours in months that have 5 weeks.

In addition, under the lookback measurement method, employees on special unpaid leave (FMLA, USERRA, jury duty) must be credited with hours of service even though not working and not paid.

Definition of Hour of Service
Generally, an hour of service means each hour for which an employee is paid, or entitled to payment, for the performance of duties for the employer, and each hour for which an employee is paid, or entitled to payment, for a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence.

For employees who are paid on an hourly basis, the employer must calculate actual hours of service from records of hours worked and other hours for which payment is made or due. For employees not paid on an hourly basis, an employer must either calculate actual hours of service from records of hours worked and other hours for which payment is made or due or use an equivalency. Under the days-worked equivalency, an employee is credited with 8 hours of service for each day the employee would be credited with at least one hour of service. Under the weeks-worked equivalency, an employee is credited with 40 hours for each week for which the employee would be credited with at least one hour of service.

For certain categories of employees whose hours of service are particularly challenging to identify or track or for whom the general rules for determining hours of service may present special difficulties, the IRS continues to consider additional rules for the determination of hours of service. Until further guidance is issued, employers are required to use a reasonable method of crediting hours of service. Employee categories and hours of service that may require special consideration include adjunct faculty, commissioned salespeople and airline employees, as well as layover hours and on-call hours.

Hours of service generally do not include hours related to compensation for services performed outside of the United States.

Disabled Employees
Hours of service include each hour for which an employee is paid or entitled to payment while disabled. In Notice 2015-87, the IRS explained when disability payments must be credited as hours of service. For this purpose, a payment is deemed to be made by or due from an employer regardless of whether the payment is made by or due from the employer directly, or indirectly through a trust fund or insurer to which the employer contributes or pays premiums.

Therefore, periods during which an individual is not performing services but is receiving payments due to short-term disability or long-term disability result in hours of service for as long as the individual retains status as an employee of the employer, unless the employee paid the disability premium with after-tax contributions or the employer imputed taxable income to the employee in an amount equal to the disability premium (so that the disability benefits received are excluded from income). The IRS guidance does not clarify how many hours of service must be credited during the disability leave, especially in cases where the employee is receiving less than 100% of the pre-disability income. The conservative approach would be to continue to credit these individuals with all hours of service that the employee would have been expected to work.

Periods during which the employee is not working but is receiving payments in the form of workers compensation wage replacement benefits under a program provided by the state or local government do not result in hours of service.

Implication for Employers
As long as disabled individuals remain employed and continue to accrue hours of service, they may have to be treated as full time employees for purposes of the ACA, implicating both offer of coverage obligations and reporting obligations. The required treatment of disability payments may cause employers to re-assess current policies and practices regarding payment of disability benefit premiums and treatment of individuals who are out on disability leave and beyond the protection of FMLA.

Regarding payment of premium, if the employee pays the full cost of the disability premium with after-tax contributions, then no hours of service are credited and disability benefits are not taxable. Any employer that offers an employee-paid disability plan should require after-tax contributions.

For employer-paid disability plans, an employer should consider including the disability premium in the income of employees each month (imputed income) so that the employee pays taxes on the value of the disability premiums and any benefit received is tax-free. This approach should generally be adopted at the beginning of a new plan year.

Finally, employers should carefully consider how long to continue the employment status of individuals who are on long-term disability. Employment termination decisions must be made with consideration of the Americans with Disabilities Act and other employment laws.

© PSA Insurance and Financial Services. Group insurance products offered through PSA Financial, Inc. The Benefit Minute provides general information for your reference.
Please see your benefits consultant to review your specific situation.

Related Posts

  1. Considerations for Employees Approaching Medicare Entitlement (Benefit Minute)
  2. PSA In Good Health Volume 10 Tips