IRS Clarifies Employer Mandate’s Look-Back Method

In Notice 2014-49, the IRS has proposed an approach to applying the look-back measurement method to determine if an employee is a full-time employee for purposes of the Code Sec. 4980H employer health insurance mandate, also known as the shared responsibility payment. These rules supplement the final regulations that were published on February 12, 2014.

Taxpayers may rely on the IRS proposal until further guidance is issued, and in any case through the end of the 2016 calendar year. The proposal is not intended to prohibit or discourage employers from adopting eligibility provisions that make some employees eligible for coverage before they would be considered a full-time employee under this approach.

Background. The employer mandate imposes a penalty on an applicable large employer (ALE) that fails to provide its full-time employee with minimum essential health coverage, if any of those employees is certified to receive a premium tax credit or a cost-sharing reduction. An ALE is generally an employer that employed at least 50 full-time employees, including full-time equivalent employees, on business days during the preceding calendar year. Multiple employers that are treated as a single ALE are known as ALE members. The employer mandate was originally set to take effect in 2014, but was postponed until 2015.

The look-back method is one of the two methods an employer may use to identify full-time employees. The employer sets the starting date and length of two separate measurement periods: the standard measurement period, which is used for ongoing; and the initial measurement period, which is used for new variable hour, seasonal, or part-time employees. An ALE member also selects a stability period that immediately follows and is associated with a standard measurement period or an initial measurement period. An ALE member also may use an administrative period of up to 90 days between a measurement period and its associated stability period, or between a new employee’s date and the beginning of the initial measurement period. Each ALE member may use different measurement methods or measurement periods that differ in duration or that start on a different date for certain specified categories of employees, such as groups of collectively bargained employees covered by separate collective bargaining agreements, salaried and hourly employees, and employees in different states. Under the look-back measurement method, an employee generally is treated as a full-time employee for any month within a stability period if the employee averaged 30 or more hours of service per week during the applicable measurement period preceding the stability period.

Proposed approach. The IRS proposal applies to the look-back measurement method in two situations, and includes examples of their application:

1. Employee transfers. When the measurement period applicable to a particular employee changes because the employee transfers from one position to another within the same ALE or ALE member and the positions do not use the same measurement period, the employer includes hours of service earned in the first position either by counting the hours of service under the counting method applied to the employee in the first position, or recalculating the hours of service in the first position under the counting method applied to the employee in the second position. The employer must treat all similarly situated employees consistently. If the employee is in a stability period applicable to the first position as of the date of transfer, the employee’s status as a full-time or non-full-time employee for the first position remains in effect until the end of that stability period. Otherwise, the employee’s status as a full-time or non-full-time employee is determined solely under the look-back measurement method applicable to the second position as of the date of transfer, including all hours of service in the first position. In all other respects, the rules generally applicable to the look-back measurement method continue to apply. The status of a new employee who is expected to be a full-time employee continues to be determined on the bases of hours of service in each calendar month.

2. Employer changes in measurement periods or methods. An employer may change the measurement period or method (from or to the monthly measurement method, or in the duration or start date) for one or more categories of employees. If the employer changes the measurement method, the Reg. §54.4980H-3(f)(2) transition rules for employees who are changed between the monthly and look-back measurement methods must apply to all employees impacted by the change for a transition period after the effective date of the change. The status of each affected employee as of the date of the change is determined as if, on the date of the change, each of those employees had transferred from a position to which the original measurement method applied, to a position to which the revised measurement method applied. Similarly, if an employer changes the duration or start date of the measurement period under the look-back measurement method for a category of employees, the status of each employee in that category as a full-time employee after the date of the change is determined as if on the date of the change each employee in the category had transferred from a position to which the original measurement method applied, to a position to which the revised measurement method applied.

Corporate transaction. Until further guidance is issued, and in any case through the end of calendar year 2016, taxpayers involved in a corporate transaction in which employers use different measurement methods may rely on the proposed approach in determining an employee’s status as a full-time employee. If, in connection with a merger, acquisition or similar corporate transaction, individuals not employed immediately prior to the transaction by an ALE member become employed by that ALE member (new ALE member employees), the ALE member will not be treated as applying an impermissible categorization of employees under Reg. §54.4980H-3(d)(1)(v) merely because it applies during the transition period, to some or all of the new ALE member employees, the measurement method applicable to those employees immediately before the corporate transaction. For this purpose, the transition period is the period beginning on the date of the corporate transaction and ending on the last day of the first stability period following a standard measurement period that would have applied to the new ALE member employees absent the corporate transaction and that begins after the date of the corporate transaction (or, in the case of an ALE member that uses the monthly measurement method with respect to a category of employees, the last day of the first calendar year that begins after the date of the transaction).

Comments requested. The Treasury Department and the IRS invite public comments on the proposed approach, and on its potential application in the context of a corporate transaction such as a merger or acquisition involving employers using different measurement methods. Comments also are requested on whether additional rules are necessary to address situations where an applicable large employer transfers employees to another employment category or to a different ALE member that uses a different look-back measurement method for the purpose of delaying or avoiding the classification of the employee as a full-time employee. Public comments should be submitted no later than Dec. 29, 2014.

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