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A Better Partnership


Oct 2015
October 07, 2015

Excluding Certain Classes of Employees from your Health Plan May Increase Risk of Penalty

If your business or organization has 50 or more full-time equivalent employees but excludes certain classes of employees from health and welfare plan eligibility, you should review your eligibility rules now to minimize the risk of incurring Affordable Care Act (ACA) penalties.

Many health and welfare plans include eligibility rules that categorically exclude certain classes of employees—such as part-time, seasonal, and variable hourly employees and interns—from participating in the plan.  Historically, these kinds of rules have not been a problem because employers have had a lot of discretion as to which employees should be offered coverage. But the ACA’s employer responsibility rules have changed the playing field, and now these kinds of categorical exclusions can become problematic, especially if any of these excluded employees count as “full-time” employees.

The ACA’s employer responsibility rules impose penalties on employers with 50 or more full-time equivalent employees who fail to offer medical coverage to substantially all of their full-time employees. During 2015, the target that you have to hit each month is an offer of coverage to at least 70% of your full-time employees; but in 2016 and succeeding years, the monthly target increases to 95% of your full-time employees. If your organization fails to hit the target for any particular month, then the IRS will assess a penalty for that month—which is $166.67 times the total number of your full-time employees that month reduced by up to 30 (with the penalty amount to be adjusted each year for inflation). For these purposes a “full-time employee” is any employee who averages at least 30 hours of service per week. The monthly equivalent is 130 hours of service during the month.

The IRS allows two methods to determine who is a full-time employee:
  • The simplest method is the month-to-month method. Under this method, once a month has ended, the employer counts how many employees had at least 130 hours of service during that month—and beginning in 2016, if the employer did not offer coverage to at least 95% of these full-time workers, it will have missed its target for the month and be assessed the penalty for failure to offer coverage. Because the number of full-time employees for the month isn’t known until the month has ended, an employer who misses the target for a particular month has no opportunity to avoid the penalty by offering coverage to someone who worked full-time during the month but was ineligible to participate.
  • The other method of counting full-time employees is a look-back measurement method, which looks at an employee’s work history (typically over a 12-month period) to determine the employee’s status during an upcoming “stability” period (which must be at least as long as the measurement period). If an employee averages less than 30 hours of service per week over the course of a 12-month measurement period, the employee will not count as a full-time employee during the following 12-month stability period, regardless of the hours the employee actually works during the stability period. Conversely, if the employee averages 30 or more hours during the measurement period, the employee will count as a full-time employee during the following stability period—again, regardless of the hours that the employee actually works during the stability period. Ongoing employees go through a standard measurement period that runs at the same time each year.  Newly-hired variable-hour, seasonal and part-time employees go through an initial measurement period that begins when first hired (also typically 12 months long) to determine whether they are full-time or part-time and then transition to the standard measurement periods that apply to ongoing employees; but newly-hired full-time employees will count as full-time as soon as they satisfy a waiting period that can be no longer than three full months from when hired.
Whether you use the month-to-month method or the look-back measurement method to determine who is a full-time employee, categorical exclusions of entire classes of employees from your medical plan increase the risk that you will miss your targets, especially beginning in 2016, when you’ll have much less margin for error:
  • If you use the month-to-month method, any employee in one of these excluded classes will count as a full-time employee during any month that he or she has at least 130 hours of service. The risk is particularly high with seasonal employees, interns, and workers on variable hour schedules.  If these kinds of workers are excluded from your plan and comprise more than 5% of your work force during any particular month, you probably should not be using the month-to-month method of determining full-time employees.
  • If you use the look-back measurement method, your risk is mostly limited to newly-hired variable hour, seasonal and part-time employees. These employees will generally be in a “limited non-assessment period” during their initial measurement period and won’t count as full-time employees during that 12-month time period, even if they end up averaging 30 or more hours during that time—but ONLY if the employee would be eligible for coverage in your medical plan at the end of the 12-month initial measurement period.  If the employee is categorically excluded from the medical plan and ends up averaging 30 or more hours during the initial measurement period, you will have to count the employee as a full-time employee not only during the following 12-month stability period, but also during the initial 12-month measurement period. Ongoing employees categorically excluded from your medical plan who measure as full-time employees for the first time during a standard measurement period are less of a problem: they will only count as full-time employees during the following stability period, which gives you an opportunity to avoid penalties by reclassifying the worker and offering coverage before the start of the stability period.
The discussion above has focused on the § 4980H(a) penalty for failure to offer coverage, but categorical exclusions also increase the risk of incurring the § 4980H(b) penalty, which applies when your organization avoids the (a) penalty but any of your full-time workers end up purchasing health insurance on the Exchange and qualifying for the tax subsidy. Any employee who has been categorically excluded from the medical plan is potentially eligible for a subsidy on the Exchange. If an employee who is considered full-time for any particular month (under either the month-to-month method or the look-back measurement method) obtains the subsidy, your organization will be assessed a $250 monthly penalty for that employee (with the penalty amount subject to adjustment every year for inflation).

In the coming weeks, you should review your plan’s eligibility rules to see if any employees are categorically excluded from your medical plan. If so, consider whether you need to amend your eligibility rules or change the method you use to determine full-time employees. If you have questions about these issues, or any other Affordable Care Act issues, please contact Norbert F. Kugele (at or 616.752.2186), April A. Goff (at or 616.752.2154), or any other member of the Warner Norcross & Judd LLP Employee Benefits/Executive Compensation practice group.

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