A reader recently asked us to comment on a consultant’s warning against a three month look-back measurement period. We concur. Here’s why.
The preamble to the IRS Employer Shared Responsibility Cost final rules said, “Under the look-back measurement method for ongoing employees, an applicable large employer member determines each ongoing employee’s full-time employee status by looking back at a standard measurement period of at least three months but not more than 12 months, as determined by the employer.” 79 Fed. Reg. 8,554 (Feb. 12, 2014). Addressing comments about the three month measurement period, the preamble further said:
In general, under the proposed regulations, the minimum length of a measurement period is three months but the minimum length of a stability period for an employee who is a full-time employee based on hours of service in a measurement period is six months. Commenters requested that a three month stability period be permitted if the employer uses a three-month measurement period and the employee is determined to be a full-time employee during the measurement period. The Treasury Department and the IRS remain concerned that permitting stability periods as short as three months for employees who are full-time employees based on hours of service in the measurement period could lead to employees moving in and out of employer coverage (and potentially Exchange coverage) multiple times during the year, which would be undesirable from both the employee’s and employer’s perspective, and could also create administrative challenges for the Exchanges. Accordingly, this suggestion is not adopted.
79 Fed. Reg. 8,555. After giving an example of how a three month measurement period could work with a six month stability period, so as to conjoin stability periods by November 1 of Year 1, the preamble noted: “For ongoing employees that do not average at least 30 hours of service per week during a measurement period, the length of the stability period cannot exceed the length of the measurement period.” That sounds to us like an IRS warning to avoid this option.
Discussing the relationship between the initial measurement period and the associated stability period, the preamble then said –
Further, the final regulations also clarify that for a variable hour employee or seasonal employee who does not average at least 30 hours of service per week during the initial measurement period, the maximum length for a stability period associated with the initial measurement period is the end of the first full standard measurement period (plus any associated administrative period) during which the new employee was employed (rather than at the end of the standard measurement period (plus any associated administrative period) in which the initial measurement period ends), which was the rule contained in the proposed regulations.
79 Fed. Reg. 8,560. The related text of the final rules reads –
Except as provided in paragraph (d)(4)(iv) of this section, the stability period for such employees must not be more than one month longer than the initial measurement period and must not exceed the remainder of the first entire standard measurement period (plus any associated administrative period) for which a variable hour employee, seasonal employee, or part-time employee has been employed.
26 CFR § 54.4980H-3(d)(3)(iv). There follow 16 examples, none of which involves use of a three month measurement period. Maybe the IRS thought no reader would consider that option at this point. Why? Because, though a three month measurement period is permissible, it introduces so much complexity as to make violation almost inevitable.
In an answer to a May 2014 set of questions from the American Bar Association, the IRS provided further guidance which shows how the rules about measurement and stability periods can require or forbid something, practically speaking, not stated expressly anywhere in those rules. Here’s the ABA question, the ABA’s expected IRS response, and the actual IRS response.
26. § 4980H – Length of Initial and Standard Measurement Periods
The final regulations state that an employer may choose an initial measurement period “of no less than three consecutive months and no more than 12 consecutive months.” The term standard measurement period means a period “of at least three but not more than 12 consecutive months that is used by an applicable large employer member as part of the look-back measurement method.” The final regulations do not state that the initial measurement period and the standard measurement period must be the same length, but this seems to be implicit in the operation of the look-back measurement method. May an employer have different length initial measurement periods and standard measurement periods that apply to same category of employees? For example, could the employer have 6-month initial measurement periods and 12-month standard measurement periods? The idea of having more frequent initial measurement periods would be to give new variable-hour employees more opportunities to qualify for plan coverage, while allowing ongoing employees to lock-in full-time status during a longer stability period.
Proposed Response: The initial measurement period and the standard measurement period must be the same length. The proposed arrangement (6-month initial measurement period and 12-month standard measurement period) is not consistent with the final regulations because it would require new variable hour employees to complete more than one initial measurement period before they completed a standard measurement period. Note that the employer can accomplish the result it wants using a 12-month initial measurement period because the initial measurement period is used only to determine whether an employee is treated as a full-time employee for purposes of Code § 4980H. This determination is separate from the determination of eligibility for the employer’s plan. So, this employer could measure an employee’s hours during the first six month of employment and extend an offer of coverage to employees with full-time status without Code § 4980H implications. See Treas. Reg. § 54.4980H-3(f)(2)(ii), Example 1, for an example of an “early” offer of coverage.
IRS Response: The way the regulation is set up is that it provides that the stability period has to be the same. There is a reason that it is tied to the stability period and it does not say the exact same thing for the measurement period. The reason is that there is a special rule for new employees. Basically, once an employer has the stability periods the same for a new employee and for an ongoing employee, an employer cannot keep someone out if the employee is determined to be part-time during a measurement period. An employer cannot keep an employee out generally for longer than the measurement period. So, once the employer has the stability periods the same, it is generally going to have to have the measurement periods the same for the new variable hour employees and for the ongoing employees in the same category. For example, if an employer applies a look-back measurement for all its hourly employees, it would have to use basically the same measurement period. However, there is a special rule for new employees that allows the measurement period to be a month shorter than the stability period. The Service representative noted that the reason they did this is that when an employer is dealing with new variable hour employees, the employer has to comply with three constraints. First, the measurement period cannot be longer than 12 months. Second, the administrative period cannot be longer than 90 days. The administrative period is the period between when the employer measures and when it gets people into the plan. An employer has to comply with both of those constraints, but the employer also has to comply with an overall constraint that it must get an employee who is full-time during the initial measurement period into the plan by the beginning of the 14th calendar month or potentially face an assessable payment.
In order to give employers who are subject to these constraints a little bit more time for the administrative period, an employer can use an 11-month initial measurement period. That can give an employer two and a half months in effect for its administrative period and then when it brings people into the plan and it can apply a 12-month stability period. So, that is why the regulation is set up in terms of the stability period being the same, rather than stating that the measurement period has to be the same. But, the effect is the measurement period basically has to be the same except for this one month rule.
When reading the ACA or ACA administrative rules, don’t stop when you find something that seems by itself to answer your question. Read what’s around it and study enough to understand why it’s there. It might turn out to mean what it seemed to mean when you first read it. Or not.