ACA Creates Unique Compliance Issues for Employers With High Turnover and Large Numbers of Seasonal Workers

The Affordable Care Act ¹P.L. 111-148, 124 Stat. 119 (2010), amended by Health Care and Education Reconciliation Act of 2010, P.L. 111-152, 124 Stat. 1029. provides unique compliance obligations for employers in certain industries, such as the retail, lodging, restaurant, and grocery sectors, many of which employ large numbers of part-time and seasonal employees, and may comprise multiple smaller employers.

Of paramount concern for these employers, as for all employers, is the impending application of the shared responsibility rules. The guidance to date has been very much a mixed bag for these high-turnover industries. Some of the shared responsibility provisions will have a greater impact on these industries because of their size and employee mix, while others provide useful interpretations that will lessen some of the negative impacts of these rules.

This article will briefly examine the four major steps required under the shared responsibility rules in the context of these industries. These include:

• determining whether the business is subject to the shared responsibility rules;
• identifying the number of full-time employees a particular employer may have;
• examining the way the shared responsibility rules relate to high-turnover industries; and
• identifying strategies for compliance.

Overview

As background, the employer shared responsibility rules provide that “applicable large employers” with 50 or more full-time employees (including full-time equivalent employees) will be subject to a tax penalty if any full-time employee receives a premium tax credit or cost-sharing reduction to purchase health coverage through a health insurance exchange.

Generally, an employee is eligible for a cost-sharing subsidy if:

• an employer does not offer the majority of its full-time employees (and their dependents) the opportunity to enroll in coverage; or
• an employer offers its full-time employees the opportunity to enroll in coverage, but the coverage is “unaffordable” or does not provide “minimum value.”

Conceptually, the shared responsibility rules are not difficult to understand. However, as with all things ACA, the devil is in the details and the details are what complicate shared responsibility compliance for high-turnover industries.

Applicable Large Employers
And the Seasonal Employee Exception

Industries that experience seasonal increases in the demand for their goods or services, in many cases, respond to this temporary spike in demand by hiring temporary employees with no intention of extending the employment relationship beyond the time of increased demand. For example, it is not uncommon for small employers to hire college students over the summer to deal with a stockpile of odd jobs that accrue over the course of a year. To the extent those businesses are small businesses, the regulations provide an exception whereby such workers would not be counted for purposes of determining whether the business is an “applicable large employer” subject to the shared responsibility provisions.

In general, employers are considered “applicable large employers” and, therefore, subject to the shared responsibility provisions if they engage 50 or more “full-time” employees or a combination of “full-time” and part-time employees that equals 50 “full-time” equivalent employees during the prior calendar year.

However, there is a seasonal employee exception, which applies when an employer’s workforce exceeds 50 full-time employees for no more than 120 days or four calendar months (which need not be consecutive) during a calendar year, if the employees in excess of 50 during that period were seasonal employees. Employers may use a reasonable, good faith interpretation of the term seasonal worker until the IRS issues further guidance.

This provision is significant for many high-turnover industries as it allows the businesses to meet their needs by hiring temporary workers without being subject to the shared responsibility provisions on those grounds.

Applicable Large Employers
And Controlled Group Status

A hallmark of many of these high-turnover industries is that they are comprised of a strong independent sector. In general, independent businesses are made up of either one facility or a small number of facilities that may be owned by one person or a family. For purposes of determining whether an employer has at least 50 full-time employees, companies that have common ownership or are otherwise related (such as family-owned enterprises) will be combined using a test codified at §414 of the Internal Revenue Code.

In the context of the ACA, these rules will affect these high-turnover industries, especially the independent sector. While these rules are certainly not new, in many cases, the shared responsibility rules are the catalyst for these businesses to offer coverage for the first time, and the rules represent yet another complication.

Entities that may be affected by these rules should examine their ownership structures to determine whether their businesses will be treated as a single entity under §414. The concern with treating these businesses (many of which may be only tangentially related) as a single entity is that it jeopardizes many of the efficiencies independent businesses are able to create. For example, parents may not be able to split different segments of the family business to offer their various heirs, while retaining some ownership stake, without such businesses being aggregated and forced to provide costly benefits or pay a tax penalty.

Governance issues are also likely to arise as some of these business owners may not agree with their family members on whether to “pay or play” (meaning cover workers or pay the fine for not doing so). If the pay contingent represents more than 5% of the workforce, it could force the hand of the entire controlled group. By withholding an offer of health coverage, this group could trigger the penalty across the entire full-time workforce even if the remainder of the business offered coverage.

The Full-Time Employee
And High-Turnover Industries

Perhaps the most significant change the ACA will make for employers who rely on a large seasonal or part-time workforce comes from the new requirement that employers classify employees who work, on average, as few as 30 hours per week as “full-time.” Of particular note, an employee’s hours of service include each hour for which the employee is paid for performance of services, or entitled to payment even when no work is performed (for example, because of vacation, illness, or leave of absence).

Before passage of the ACA, few employers would have considered such 30-hour employees “full-time” or eligible for health benefits. Further exacerbating the effect of the new “full-time” definition was that under the ACA itself, it appeared as though employers would be required to determine whether an employee was “full-time” on a month-to-month basis and potentially enroll and disenroll employees in health coverage accordingly. This, of course, would have been an administrative nightmare for employers and engendered great ill will from employees whose status was periodically flipped from covered to uncovered.

In response to this problem, previous guidance proposed, and the proposed shared responsibility regulations (REG-138006-12) adopted, a “look-back stability safe harbor method” for determining whether employees worked the requisite average of 30 hours per week to be considered full-time. Generally, under this approach, employers are allowed to select a period of time between three months and one year to use as a “measurement period.”

If an employee provided 30 hours of service per week during the “measurement period,” then the employer must treat the employee as a full-time employee for a corresponding “stability period” regardless of the number of hours of service the individual works over that time period. Generally, an employer must use the same look-back period for all employees but may use different periods for certain categories of employees.

In general, the look-back stability safe harbor method works well for high-turnover industries. Because of the transient nature of employee populations in these sectors, many employees who would have been considered full-time do not stay with the company long enough to qualify for benefits. Thus, only employees who are truly full-time, and committed to the company, will qualify for health benefits.

However, one complicating factor for many high-turnover industries is the “break-in-service” rules. In general, these rules are designed to prevent employers from terminating and later rehiring employees in order to avoid providing them benefits. Consequently, the proposed rule identifies two methods for accounting for the hours of rehired or resuming service employees under the shared responsibility provisions.

First, if the period of time for which no hours of service are credited is at least 26 consecutive weeks, an employer may treat an employee, for purposes of determining full-time status, as a newly hired employee.

For periods of less than 26 weeks, the employer may also choose to apply a rule of parity. Under this rule, an employee may be treated as having terminated employment and having been rehired as a new employee if the period with no hours of service is at least four weeks and is longer than the employee’s period of employment immediately preceding that period with no credited hours of service.

If an employee is treated as a new hire, the employer must use the look-back period that is applicable to all new hires. However, if the employee is treated as a continuing employee, the measurement and stability period that would have applied to the employee, had the person not experienced the period of no credited hours, would resume upon resumption of service.

In these high-turnover industries, it is common for employees to come in and out of employment with a particular employer. Therefore, it is important that employers in these industries take the steps to terminate employment when an employee leaves to minimize the possibility that a returning employee, who is unlikely to be full-time moving forward, may qualify for benefits.

Applicability of Shared Responsibility
Provisions to High-Turnover Workforces

An “applicable large employer” may be subject to a shared responsibility tax penalty in one of two ways:

• the applicable large employer fails to offer at least 95% of its full-time employees (and their dependents) the opportunity to enroll in coverage; or
• an applicable large employer offers its full-time employees the opportunity to enroll in coverage, but the coverage is “unaffordable” or does not provide “minimum value.”

Offer of Coverage/Dependent Coverage

The shared responsibility provisions impose liability on applicable large employers that fail to offer to at least 95% (or, if it would provide greater flexibility to the employer, to all but five) of their full-time employees the opportunity to enroll in coverage.

One of the more controversial aspects of the shared responsibility rules is that they require applicable large employers to offer coverage not only to full-time employees, but also to their dependents. The shared responsibility regulation defines dependents as children up to age 26, but does not include spouses.

To give employers sufficient time to implement these changes, the shared responsibility regulations provide a transition relief period with respect to dependent coverage for 2014. Under this relief, any employer that takes steps in 2014 to fulfill its obligations to offer coverage to dependents of full-time employees will not be liable for any tax payment under the law solely on account of failing to offer coverage to dependents in plan year 2014.

The requirement to make an offer of coverage generally applies for high-turnover employers in the same way it does for other businesses. However, the workforce composition of most high-turnover employers complicates the offer of coverage and necessitates copious recordkeeping. This is because most high-turnover industries employ disproportionate numbers of low- to moderate-income hourly employees.

In general, these employees are unlikely to accept an employer’s offer of coverage for several reasons. First, the cost for most employer-sponsored plans will far exceed the costs associated with the individual mandate penalties. Therefore, in many cases it will make economic sense for such employees to forgo coverage.

Further, with the market reform changes, individuals can obtain primary care through nontraditional settings and wait until they need health insurance before signing up for coverage.

To the extent an individual attempts to receive a subsidy to purchase coverage through an exchange it is important that the employer has systems in place to document the offer of coverage so as not to trigger the shared responsibility penalties. The shared responsibility regulations do not currently require a specific manner of documenting the offer, as long as the offer comports with the general recordkeeping requirements in the code.

Minimum Value and Affordability

Even if an employer offers its full-time employees the opportunity to enroll in coverage, it may still be subject to a tax penalty if the offered coverage is either unaffordable or does not provide the requisite level of minimum value.

The ACA provides that an employer-sponsored plan meets the minimum value requirement if the percentage of total allowed costs of benefits provided is no less than 60%. ²§36B(c)(2)(C)(ii). Health and Human Services has released final regulations setting forth four methodologies employers may use to determine whether their plan meets the minimum value threshold. Specifically, plans may use the following methods:

• the Minimum Value Calculator allows plans to enter the features of their plan to determine whether they meet the “minimum value” requirements ³http://www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/index.html.;
• any safe harbor established by HHS and IRS;
• certification by an actuary, but only if the plan contains nonstandard features that are not suitable for the Minimum Value Calculator or other safe harbor; or
• for any plan in the small group market, meeting any of the “metal levels” of coverage based on the Actuarial Value Calculator.

Coverage is deemed affordable if the employee’s required contribution for self-only coverage does not exceed 9.55 of the employee’s household income for the taxable year. If an employer offers multiple coverage options, the affordability test applies to the employer’s lowest-cost option that also meets the “minimum value” requirement.

Employers generally will not know their employees’ household incomes and there are situations in which an employee’s income may actually be less than what a particular employer pays the employee. Therefore, the regulations allow employers to use one of three affordability safe harbors to determine whether an employer’s coverage satisfies the 9.5 percent affordability test.

The affordability safe harbors are:

• the Form W-2 safe harbor, which allows plans to base affordability on the wages reported in Box 1 of an employee’s Form W-2;
• the rate of pay safe harbor, under which an employee’s monthly contribution amount is affordable if is equal to or lower than 9.5% of the employee’s hourly rate of pay multiplied by 130 hours per month; and
• the federal poverty line safe harbor, under which coverage offered to an employee is affordable if the employee’s cost for self-only coverage under the plan does not exceed 9.5 percent of the federal poverty line for a single individual.

In general, the calculators and safe harbors are helpful for demonstrating compliance with the affordability and minimum value requirements. However, HHS has recently released a proposed regulation that could complicate an employer’s task of demonstrating compliance with these standards.

Specifically, the regulation proposes that a plan’s share of costs for minimum value purposes is determined without regard to reduced cost-sharing available under a wellness program. Likewise, the affordability of an employer-sponsored plan is determined by assuming that each employee fails to satisfy the requirements of a wellness program.

While wellness incentives may not generally be used to determine whether the minimum value and affordability standards are satisfied, the proposed rule provides an exception allowing plans to factor in the cost-sharing features of tobacco cessation programs for both minimum value and affordability purposes.

For plan years beginning before 2015, the proposed rule gives plans the ability to assume that all wellness program incentives, tobacco-related or otherwise, would have been earned by an employee for the purposes of calculating minimum value and affordability. This transition relief only applies to wellness programs and incentives in effect as of May 3, 2013, and employees eligible for the wellness program as of May 3, 2013.

Employer Mandate Delayed Until 2015

On July 2, in reaction to employers’ concerns about the many difficulties posed in efforts to comply with the Employer Mandate provisions of the ACA, the Obama administration delayed the implementation of the reporting and penalty provisions of the shared responsibility regulations until 2015. This delay could be a precursor to other implementation delays as the administration seeks to make the ACA’s implementation successful, especially in light of intense scrutiny as to implementation and an inability to amend the law in Congress.

Employers and business groups have lobbied the administration heavily in recent months, emphasizing the cost and administrative burdens that compliance with the shared responsibility regulations will place on them. Significantly, employers have struggled to analyze the number of employees who work 30 hours or more per week and the costs associated with providing such employees with affordable coverage. In addition, new recordkeeping and reporting requirements, for which little guidance has been released, left employers with many unanswered questions and made it difficult to institute efficient compliance systems.

Importantly, other aspects of the ACA remain in effect despite the delay of the Employer Mandate. For example, the Individual Mandate requirement stays in place, requiring individuals to obtain coverage by Jan. 1, 2014, or pay a $95 penalty. Benefit plan design issues remain important, including capping any waiting period to 90 days to obtain coverage.

Considerations for Plans With Many
Seasonal or Part-Time Workers

The new definition of “full-time” is likely to greatly increase the number of workers eligible for an employer’s group health plan. In response, many employers, especially those with large numbers of seasonal and part-time workers, will need to consider appropriate workforce management techniques to control the increasing costs associated with their group health plans.

To start, such employers should examine past employment statistics to determine the likely number of newly minted full-time employees and the additional costs associated with providing such individuals health coverage. If the additional costs are not sustainable, the employer must evaluate its workforce against business needs. The employer may need to modify its employees’ hours to achieve an affordable mix of full-time employees, to whom benefits will be provided, and “part-time” employees (with hours not exceeding 30 hours per week).

As noted, the shared responsibility regulations authorize employers to use a look-back period of up to one year. In light of the recent transition relief the shared responsibility provisions become effective Jan. 1, 2015; the look-back period for 2015 could have begun as early Jan. 1, 2014. In light of this, an employer wishing to engage in such workforce management techniques must act now to ensure that employees it does not intend to provide benefits for do not have the requisite number of hours to be considered full-time.

It is important to note, however, that workforce management techniques are not without legal risk to the employer. There is a growing concern in the employer community that certain workforce management practices could give rise to ERISA §510 claims. In general, ERISA §510 makes it unlawful to interfere with employee benefits and protects an employee’s right to present and future entitlements. ⁴29 USC §1140. Thus, any workforce realignment that reduces the number of hours an employee works could give rise to arguments that the employer interfered with an employee’s right to present or future benefits under ERISA §510.

Restructuring Employee Hours

While carefully managing and restricting the number of hours certain employees may work might make sense from an economic standpoint, employers also should consider noneconomic consequences prior to implementing such a structure. Namely, employers that engage in aggressive workforce management techniques may well experience significant levels of employee dissatisfaction. This could have significant and unforeseen repercussions on the employer’s business and undermine the justifications for employer-sponsored benefits.

Employers that aggressively manage their workforce’s hours are more likely to be targeted by union organizing efforts. In addition, employees who have become accustomed to a certain number of hours and resulting level of earnings are likely to become dissatisfied should an employer reduce or “cap” the number of hours an employee may work. This discontent will likely make them more receptive to union organizing appeals or lead to more workforce turnover with the costs associated with such turnover.

Even employees who are provided with health care coverage are likely to be influenced by their dissatisfied colleagues should aggressive workforce management techniques be employed. Disgruntled employees could cause an overall decrease in workplace morale and productivity. As a result, in situations of such diminished morale, it will be difficult for employers to recruit and retain key employees. This is especially true if competitors exist that do not aggressively distinguish between part-time and full-time employees as such employers will likely be more attractive to employees.

Finally, businesses that engage in aggressive workforce management could suffer harm to their community standing. Potential customers could view the company as lacking in corporate social responsibility and unsympathetic to employees. In such cases, the reputational harm could outweigh the benefit of workforce management efforts.