Question: How should employers approach the basic ACA reporting questions in the setup forms used by most payroll or benefits administration systems?
Short Answer: The three key inputs are the measurement method, affordability safe harbor, and—for those employers utilizing the look-back measurement method—the measurement and stability periods.
Note: This is the first post in a four-part series addressing ACA reporting vendor setup questions.
General Rule: ACA Reporting
The ACA requires Applicable Large Employers (ALEs) subject to the ACA employer mandate to report whether they offered medical coverage (i.e., minimum essential coverage) that was affordable and provided minimum value to full-time employees. This reporting is generally handled via IRS Forms 1094-C/1095-C.
Although Congress effectively repealed the ACA individual mandate in the Tax Cuts and Jobs Act by zeroing out the tax penalty as of 2019, employers with a self-insured plan (and insurance carriers for a fully insured plan) are still required to report the months of coverage for the employee and any covered dependents. Self-insured ALEs report this coverage information—despite it no longer having any federal income tax consequence—in Part III of the Form 1095-C. Insurance carriers for fully insured plans report this coverage information on a separate Form 1095-B.
For more details from an employer perspective:
- ABD 2020 ACA Employer Mandate Pay or Play and ACA Reporting Guide
- ABD Compliance Alert: ACA Reporting Deadlines Extended Again
For more details from an employee perspective:
- ABD ACA Reporting Infographic for Employees: Fully Insured
- ABD ACA Reporting Infographic for Employees: Self-Insured
- ABD ACA Reporting Infographic for Employees: Fully Insured and Self-Insured
- ABD ACA Educational Reporting Video
Key Decision Point #1: Measurement Method
The ACA employer mandate offers employers the option to choose between two alternative measurement methods to determine which employees are treated as full time (i.e., averaging at least 30 hours of service per week) for §4980H (employer mandate) purposes:
- The Monthly Measurement Method (MMM)
- The Look-Back Measurement Method (LBMM)
The IRS provides a nice short summary of these options here: https://www.irs.gov/affordable-care-act/employers/identifying-full-time-employees
In general, employers must apply the same measurement method across all employees. For example, the employer cannot apply the LBMM to variable hour employees while applying the MMM to regular full-time employees.
However, employers are permitted to choose separate measurement methods for the following classes of employees:
- Hourly vs. salaried employees
- Employees in different states
- Union vs. non-union employees
- Employees in different union groups
Understanding the Monthly Measurement Method
The MMM is best thought of as the ACA’s default measurement method for determining employees’ full-time status. It is relatively simple and straightforward.
In short, the MMM provides that an employee is considered full-time for any given calendar month if the employee completes at least 130 hours of service.
Important Point: There is no measurement, administrative, or stability period under the MMM. It is simply a month-to-month approach.
The ACA reporting industry rarely discusses the advantages and disadvantages of each measurement method. Below is a high-level summary of some of the main considerations for the MMM:
Advantages of the MMM:
- Administrative simplicity for workforces with generally stable hours
- Limited non-assessment period available the first time an employee works full-time in a month
Disadvantages of the MMM:
- No predictability as to full-time/part-time status for the plan year because it is determined monthly
- Not feasible for workforces with a significant population that regularly fluctuates above or below 30 hours of service per week
- Won’t know hours of service for any given month until the month has been completed—and at that point it’s too late to offer coverage for prior month if worked full-time (130+ hours of service)
- No initial measurement period available to delay the offer of coverage to new variable/seasonal/part-time employees for 13 months
- Employers with all or almost all full-time workforce
- Employers who set eligibility below 30 hours of service per week (e.g., 20 hours/week)
- Employers without a significant number of new variable/seasonal/part-time hires
- Employers without a significant number of ongoing employees whose hours may fluctuate above and below 30 hours of service per week
Understanding the Look-Back Measurement Method
The ACA did not originally contain a LBMM. Instead, it required ALEs to look an employee’s full-time status each month to determine whether the employee averaged at least 30 hours of service per week—which the IRS now refers to as the MMM. (See IRC §4980H(c)(4)(A): “The term ‘full-time employee’ means, with respect to any month, an employee who is employed on average at least 30 hours of service per week.” (emphasis added)).
When the IRS first referred to the LBMM concept in Notice 2011-36 prior to issuing the proposed employer mandate regulations, the rationale was clear:
“A determination of full-time employee status on a monthly basis for purposes of calculating an employer’s potential §4980H liability may cause practical difficulties for employers, employees, and the State Exchanges. These difficulties include uncertainty and inability to predictably identify which employees are considered full-time and, consequently, inability to forecast or avoid potential § 4980H liability. This issue is particularly acute in circumstances in which employees have varying hours or employment schedules (e.g., employees whose hours vary from month to month or who are employed for a limited period)…One possible alternative would permit applicable large employers, at their option, to use a look-back/stability period safe harbor that would provide certainty as to which employees would be considered full-time for a particular coverage period.”
To summarize: The IRS gave birth to the LBMM as an optional alternative to the default MMM particularly to address concerns for employers with largely variable hour workforces.
As the final regulations were later issued in 2014, the IRS gave the MMM its formal name to reflect the default measurement method. Prior to the final regulations, the MMM didn’t even have a name. It was just the standard way of determining full-time status under the ACA. Only the LBMM initially needed a name because it was developed subsequently as an alternative to the standard statutory approach (the MMM).
For potentially dubious reasons, the reporting vendor industry has largely turned the ACA full-time employee determination on its head. ACA reporting vendors generally treat the LBMM as the default measurement method, while dismissing the MMM as an unusual and obscure alternative. In reality, both measurement methods are viable and reasonable, depending on the employer’s workforce characteristics.
The reporting industry rarely discusses the advantages and disadvantages of each measurement method. Below is a high-level summary of some of the main considerations for the LBMM:
Advantages of the LBMM:
- Predictability as to which employees are full-time and which are part-time for the entire plan year (the stability period)
- Ability to place variable hour, seasonal, and part-time new hires in an initial measurement period and initial administrative period (up to 13 months, plus a partial month for a mid-month hire) prior to offering coverage with no potential penalties (limited non-assessment period)
- Standard stability period will generally track traditional plan year
Disadvantages of the LBMM:
- Administratively complex and demanding to track hours—particularly for new variable/seasonal/part-time hires
- May require paying the ACA reporting vendor an additional fee per employee to perform hours tracking and administer the measurement/administrative/stability periods
- To avoid potential pay or play penalties, the LBMM requires offering coverage to previously full-time employees currently working under 30 hours of service per week for the duration of the stability period (e.g., employees who move to part-time or go on an unpaid, non-protected leave)
- Employers with significant population of new variable/seasonal/part-time hires
- Employers that set health plan eligibility at 30 hours of service per week and have significant population of ongoing employees who fluctuate above and below that threshold
Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship. Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).