Notice 2014-49, which was published by Treasury and the IRS, contains proposed rules that govern how an employer can switch between different-length measurement periods or between monthly and look-back measurement periods. (Even though they are "proposed," employers can rely on them now and until regulations are issued, but at least through 2016.) The Notice purports to give different treatment to employees who experience a measurement-approach change because they transfer from a job subject to one approach to a job subject to another approach (such as from a job that is in a classification for which the employer has elected a twelve-month look back period to a job in a classification for which a six-month look-back period applies) and situations in which the measurement change results from an employer's election to change the approach used (such as where the employer decides to use the look-back approach instead of the monthly approach or vice versa). However, the substantive rules (described below) are identical for both of those situations.
The rules are fairly straightforward (they're summarized in the bulleted paragraphs below). To make sure that everyone is starting from the same point, I'll include a few points about the context for these rules. The context is that "large employer" status and the employees who need to be offered medical coverage (if you are "playing") are based on employees' full-time status, which, for ACA, means 30 or more hours a week. When we don't know whether an employee is going to work that much, there are two ways that an employer can determine if the employee is full-time: (1) the monthly measurement method, in which we wait until there is a month in which the employee averages at least full-time hours, or (2) the look-back measurement method, in which we measure hours over a three to twelve month period and then lock in the result of that measurement (i.e., full-time or part-time status) over a following six to twelve month stability period, no matter what the employee's hours are during the stability period.
With that as foundation, I'll summarize the change-in-method rules. The substantive rules depend on whether the change is between two look-back measurement approaches (which includes both a change in measurement-period length and a change in measurement-period start date) or between the look-back and monthly measurement approaches:
- Where the employee is changing look-back measurement approaches, then the treatment depends on whether the employee was in a stability period (including if he or she was in the administrative period before the stability period). If the employee was, then his or her status will be continued through the stability period and, after that, status will be determined under the new approach. If the employee was not in a stability or administrative period, then his or her status will be determined under the new approach. In all cases, the new approach will use hours worked before the change, if they are relevant.
- The Notice's rules with respect to changes between monthly and look-back measurement periods piggy-back on the final play-or-pay regulations, which contained rules for when an employee transfers between a position using one approach to a position using the other. The Notice uses the same approach for employer-elected changes. Under the somewhat complicated rules, an employer is required to apply special transition rules for the stability period in progress at the time the change is made and for the following stability period (only in the second following stability period does the new approach apply exclusively). Different rules apply depending on whether the change is from look-back to monthly measurement approach or vice versa. The rules are described in the next two paragraphs.
- If the change is from the look-back measurement approach to the monthly measurement approach, then for the stability period in progress at the time of the change, any individual who was being treated as a full-time employee must continue to be treated as full-time and any individual who was not full-time may continue to be treated as not full-time, or the employer may apply the monthly measurement method to the non-full-time employee as of the beginning of any calendar month including the calendar month in which the change occurred. For the next stability period (the one that relates to the measurement period during which the change occurred), an employee must be treated as full-time in any calendar month for which he or she would have had that status under either of the measurement methods (I'll refer to that as the "either winner" approach). For subsequent stability periods, only the monthly measurement method will be used.
- If the change is from the monthly measurement approach to the look-back measurement approach, then for the stability period in progress at the time of the change, the monthly measurement method must be used unless an employee's hours of service prior to the change would have resulted in the employee's having full-time status for the stability period. In that case, the employer must treat the employee as full-time for the stability period in progress at the time of the change. For the next stability period, the "either-winner" approach described above applies. For subsequent stability periods, only the look-back approach will be used.
It is almost an understatement to say that these rules are complicated. Most employers have been taking a much more simplistic approach to determining whether part-time employees are full-time for ACA purposes. However, if play-or-pay rolls out fully over the next few years, employers may be managing their measurement methods more aggressively and these rules will be important to employers' handling of their workforces and workforce changes. Employers that would be disadvantaged by these rules should seriously consider commenting on the Notice by the December 29 deadline.