New Health Care Rules on the 90-Day Waiting Period and “Full-Time” Employee Status
Employee Benefits Law Alert
On August 31, the federal agencies which oversee the health care reform law issued two new, significant pieces of guidance for employers. In the first notice, the agencies provide a definition of “waiting period” for purposes of the new rule that employers cannot have a health plan waiting period of longer than 90 days. In the second notice, the Internal Revenue Service (“IRS”) describes methods employers can use to determine whether an individual is a “full-time” employee for purposes of the “Pay or Play Rule.” Both notices are helpful because they generally provide guidance employers can rely on through at least December 31, 2014. This certainty will help employers design and model their health plans as they anticipate Exchanges and upcoming 2013 - 2014 health plan changes.
Background on Changes. The health care reform law (the Patient Protection and Affordable Care Act (now called the “ACA” by regulators)) provides that an employer cannot impose a waiting period of longer than 90 days with respect to the employer’s health plan. This requirement applies to both grandfathered and non-grandfathered health plans and begins for plan years starting on or after January 1, 2014. The new guidance from last week defines the term “waiting period” and clarifies how the rule will apply to certain classes of employees, such as employees whose hours vary from month-to-month.
In addition, the ACA also creates a new Pay or Play Rule. The Pay or Play Rule generally applies to “large” employers — usually those with 50 or more “full-time” employees. The Pay or Play Rule generally requires that employers provide health plan coverage to these full-time employees or pay a penalty to the federal government. A persistent question for employers has been how to define a “full-time” employee. The new guidance provides clarification on this topic and creates several new terms, which employers must review and understand.
We first review the 90-day waiting period guidance and then summarize the Pay or Play Rule guidance.
Waiting Period. Many employers that have health plans require a new employee to work a certain period of time before the employee can enroll in the health plan. This “waiting period” typically applies to the employee and the employee’s family. For plan years beginning on or after January 1, 2014, an employer’s waiting period generally cannot exceed 90 days (the “90-Day Rule”). The new guidance (IRS Notice 2012-59 and Department of Labor (“DOL”) Technical Release 2012-02; note that guidance from the Department of Health and Human Services (“HHS”) seems forthcoming) defines “waiting period” as the “period of time that must pass before coverage for an employee or dependent who is otherwise eligible to enroll under the terms of the plan can become effective.” This definition is not surprising and tracks a similar definition used under HIPAA.
Effective Date. The 90-Day Rule is effective for plan years beginning on or after January 1, 2014. Employers can rely on this guidance at least through December 31, 2014.
Employee Delays Enrollment. In some situations employees can elect to enroll within 90 days, but the employee delays returning the enrollment form or completing the online enrollment. The new guidance provides that the employer will not violate the 90-Day Rule in this situation because the delay is caused by the employee, not the employer.
Newly Hired, Full-Time Employees. Many employers offer health plan coverage to full-time employees. If a newly hired employee is reasonably expected to be full-time, it appears that the newly hired employee must be eligible to enroll within 90 days of the employee's start date. Note that this 90-day standard appears to be a true “days passed” standard. The new guidance does not appear to allow an employer to wait, for example, until the first of the month after 90 days have passed. This seems to require employers to allow mid-month enrollments. If an employer does not want to have such a mid-month enrollment, it appears the employer must allow employees to participate well before 90 days have passed.
|Illustration of Newly Hired, Full-time Employee. Goodco has always allowed employees to participate in its health plan as of the first of the month after the employee has worked for 90 days. Goodco prefers this “first of the month” rule for administrative reasons (e.g., it is easier to calculate the premiums owed when a full month is used, rather than a partial month). Will this “first of the month after 90 days” standard be acceptable under the 90-Day Rule?|
Probably not. For example, suppose Goodco hires Frank as a full-time employee on June 1, 2014. Ninety days from Frank’s first day of employment (June 1, 2014) is August 29, 2014. It appears that Frank’s final day of the waiting period is August 29 and that Frank must be allowed to enter the plan on August 30, 2014. Goodco appears to violate the 90-Day Rule by requiring Frank to wait until September 1, 2014 to enter the plan. If Goodco prefers to enroll employees as of the first of the month, Goodco likely should enroll Frank on August 1, 2014 and not delay his enrollment until September 1, 2014.
Note that the answer to this question is not completely clear. The other new guidance (IRS Notice 2012-58, discussed below) states that the 90-Day Rule requires coverage “at or before the conclusion of the employee’s initial three calendar months of employment.” A 90-day period is not, of course, always equivalent to three months. This is illustrated in the above example. If a three-month standard could be used, Goodco may be able to enroll Frank on September 1, 2014 (rather than August 30, 2014). Further clarification from the IRS on this point would be helpful. In the meantime, conservative employers will probably use a 90-day standard, not a three-month standard.
Measurement Periods Acceptable if Full-Time Status in Doubt. Sometimes an employer will hire a new employee but not be certain whether the employee will be full-time or part-time (or whether the employee will work a certain number of hours during a relevant period). The guidance calls such employees “variable hour” employees. The guidance allows an employer to take a “reasonable period of time” to determine whether the employee meets the plan’s eligibility requirements. This can include a “measurement period” of up to 12 months (which must be consistent with the new Pay or Play Rules, described below). The effect of such a measurement period is that an employer could have slightly less than 14 months to enroll the employee. (Technically, the standard is that coverage must be effective no later than 13 months from the employee’s start date, plus if the employee’s start date is not the first day of a calendar month, the remaining time until the first day of the next calendar month.) An example of this is in the box below.
Measurement Period for Variable Hour Employee. Wishy-Washy Inc. hires Samantha on January 25, 2014. As of that date, Wishy-Washy is uncertain whether Samantha will be a full-time employee — her hours are reasonably expected to vary. Wishy-Washy only offers health plan coverage to full-time employees. Samantha works on a full-time basis over the next year. By when must Samantha be offered the opportunity to enroll in the plan?
March 1, 2015. Wishy-Washy can examine the hours Samantha works during the measurement period of January 25, 2014 through January 24, 2015. When Wishy-Washy determines that Samantha is a full-time employee, Wishy-Washy would notify Samantha of her eligibility. If Samantha elects coverage, her first day of coverage must be the first calendar month after the 13th month from when her employment began (here, February 2015 is the 13th month). Thus, Samantha must be able to enter the plan by March 1, 2015.
Other Guidance. IRS Notice 2012-59 and DOL Technical Release 2012-02 also provide an example of a situation where an employee was part-time, then became full-time. It appears that the 90-Day Rule begins applying when the person becomes a full-time employee. Similarly, the guidance discusses an employer who requires an employee to work a certain number of hours (not days) in order to participate. The 90-Day Rule apparently begins applying on the day that the employee reaches the minimum hour requirement. Note that the guidance caps this hourly requirement at 1,200 hours.
Determining “Full-Time” Employee Status for Pay or Play Rule Purposes. As noted above, the other significant IRS guidance will help employers determine whether an employee is a “full-time” employee for purposes of the Pay or Play Rule. The new guidance (IRS Notice 2012-58) creates several new concepts, which had not been identified previously by the IRS. Some concepts remain from prior guidance. For example, as noted above in the 90-Day Rule discussion, an employer generally can establish a “measurement period” to determine whether an employee is a full-time employee. This measurement period is a period of time defined by the employer, with a minimum of three and a maximum of 12 calendar months. In general, if an employee is a full-time employee during the measurement period, the employee will remain a full-time employee (regardless of actual hours) during a future “stability period,” provided the employee remains employed. An employer will usually have two measurement periods: an “initial” measurement period for new employees and a “standard” measurement period for ongoing employees.
Effective Date. The effective date of the notice is somewhat unclear. The notice indicates that most of it can be relied upon by employers until at least January 1, 2015 (see IRS Notice 2012-58, Section IV). This constitutes the majority of the notice, and this is helpful for employers. It is unclear why certain other portions of the notice are excluded from this “Reliance” section. It seems that the IRS wishes to make some changes in the future (see IRS Notice 2012-58, Section IV, which requests public comments by September 30, 2012).
Employers Must Classify Employees in Different Categories. Under the new guidance, employers generally will classify all employees in one of the following categories for purposes of the Pay or Play Rule.
||Definition of Term
||Summary / Contents|
||Employee who has been employed by employer for at least one complete standard measurement period. An Ongoing Employee can be full-time (working at least 30 hours per week) or part-time.
||A “standard” measurement period is the 3-12 month period actually selected by the employer.|
|New Employee — Reasonably Expected to Work Full-Time
||Employee is reasonably expected as of his or her start date to work full-time.
||Note that it is a “snapshot” test which focuses on the first day of employment. It appears that a subsequent change in employer expectation (e.g., a change which occurs on day 2 of employment) is ignored.|
|New Employee — Variable Hour
||Employer cannot, as of start date, determine whether employee is reasonably expected to work on average at least 30 hours per week. Also includes individuals who are initially expected to work 30 or more hours per week but whose employment is expected to be of “limited duration” and who is not expected to work 30 hours during an entire measurement period (e.g., a retail worker who is expected to work 40 hours per week during a busy holiday season but who is expected to work less than 30 hours other times of the year).
||Determination is made based on all “facts and circumstances.” Note that it is a “snapshot” test which focuses on the first day of employment. It appears that a subsequent change in employer expectation (e.g., a change which occurs on day 2 of employment) is ignored.|
|New Employee — Seasonal
||Term is not specifically defined. An employer can use a “reasonable, good faith interpretation” of term through at least 2014.
||Appears an employer could look to definition of “seasonal employee” in 29 CFR Section 500.20(s)(1) and / or consider IRS example of “retail workers employed exclusively during holiday seasons.” Appears there could be overlap with New Employee — Variable Hour category, above.|
||Employee whose hours were measured during the measurement period and who was determined to be a full-time employee.
||This category provides a “transition” for someone who may have been a new employee and now is becoming an Ongoing Employee. Note that the term “Transitional Employee” is our term, not an IRS term.|
Administrative Period. A new concept introduced by the IRS is the “administrative period.” Sometimes a less-than-full-time employee (e.g., a Variable Hour or Seasonal Employee) will work enough hours during the measurement period to qualify as a full-time employee. However, an employer may need a few weeks or months to gather the relevant work history data, perform the calculations and reach this conclusion. Similarly, an Ongoing Employee may have been full-time for several years, but perhaps his or her hours were reduced over the past several months, so the full-time status is now in doubt. The time period in which the employer makes these determinations is called the administrative period.
The administrative period usually occurs after the measurement period but before the stability period. However, it also includes any delay between when an employee is first hired and when the employer first begins the measurement period. The administrative period must not exceed 90 days in total.
Examples. The IRS guidance contains about a dozen examples which explain how the rules apply to different employee categories. Below are two of the examples that were most helpful. Given the length and complexity of the guidance, it was not possible to reprint all the examples. Thus, employers should review the actual IRS guidance for further details and examples.
|Ongoing Employees and Administrative Period. Employer Inc. chooses a 12-month stability period which begins January 1 and a 12-month standard measurement period which begins October 15. Employer chooses to use an administrative period between the end of the standard measurement period (October 14) and the beginning of the stability period (January 1) to determine which employees worked full-time during the measurement period. Employer uses this time to notify such employees of their eligibility for the plan for the next calendar year, to answer questions, collect materials and to enroll employees who elect coverage. Employer only allows full-time employees to participate in its health-plan. Already-enrolled full-time employees continue to receive coverage during the administrative period.
Andy and Beth have been employed by Employer for several years, working continuously since their start dates. Andy worked full-time during the standard measurement period of October 15, 2013 through October 14, 2014 (and all prior measurement periods). Beth had previously worked full-time but is not a full-time emplyee during the measurement period of October 15, 2013 through October 14, 2014.
In this situation, with respect to Andy:
In this situation, with respect to Beth:
- Because Andy was employed by Employer for the entire standard measurement period beginning October 15, 2013 through October 14, 2014, Andy is an Ongoing Employee with respect to the stability period running from January 1, 2015 through December 31, 2015
- Andy must (for Employer to avoid a Pay or Play Rule penalty) be offered health plan coverage for all of 2015 (the stability period which relates to the measurement period of October 15, 2013 through October 14, 2014)
- Andy's 2014 coverage must include coverage during the administrative period of October 15, 2015 through December 31, 2015.
- Because Beth was employed by Employer for the entire standard measurement period beginning October 15, 2013 through October 14, 2014, Beth is an Ongoing Employee with respect to the stability period running from January 1, 2015 through December 31, 2015.
Because Beth did not work full-time during this standard measurement period, Employer is not required (under the Pay or Play Rule) to offer Beth coverage during 2015 (the stability period relating to the measurement period of October 15, 2013 through October 14, 2015).
|New, Variable Hour Employee (with Administrative Period). Superco uses a 12-month initial measurement period that begins on the start date of a new employee. Superco selects an administrative period which varies (it is not a fixed 90 days). Superco’s administrative period runs from the end of the initial measurement period through the end of the first calendar month beginning on or after the end of the initial measurement period.|
Superco hires Employee on May 10, 2014. Employee's initial measurement period runs from May 10, 2014 through May 9, 2015. Employee works an average of 30 hours per week during this initial measurement period. Superco offers coverage to Employee for the stability period that runs from July 1, 2015 through June 30, 2016. Will this be acceptable?
Yes. With respect to Employee and Superco, all the IRS rules are followed:
- Superco uses an initial measurement period which does not exceed 12 months
- Superco uses an administrative period which is not more than 90 days (here it is a little over a month, from May 10, 2015 through June 30, 2015)
- The combined initial measurement period (May 10, 2014 - May 9, 2015) and administrative period (May 10, 2015 - June 30, 2015) does not last beyond the final day of the first calendar month beginning on or after the one-year anniversary of Employee’s start date (June 30, 2015)
- Superco satisfies the 90-Day Rule with respect to Employee.
Bonus Question. As a “bonus” question, suppose Superco tests Ongoing Employees for full-time employee status by using an October 15, Year 1 - October 14, Year 2 measurement period. (It is acceptable under the IRS rules to have separate measurement periods for Ongoing Employees and New Employees.) Further suppose that Superco’s health plan uses a 12-month stability period that begins on January 1. By when must Superco test Employee again? How long will the effect of that determination last?
Superco must test Employee based on the period from October 15, 2014 through October 14, 2015, which is Superco’s first standard measurement period that begins after Employee’s start date. If Employee is a full-time employee during that period, it appears that Employee would receive coverage for all of the following stability period (January 1, 2016 - December 31, 2016). Note that Employee was already entitled to receive plan coverage, as noted above, through June 30, 2016 (due to Employee’s status as a New Employee who worked 30 hours per week during the initial measurement period of May 10, 2014 - May 9, 2015). The additional test demonstrates that Employee is entitled to receive coverage (as an Ongoing Employee) for all of 2016, not just through June 30, 2016.
For more information contact the author of this alert, John Barlament, at (414) 277-5727 /
. You may also contact any of the following Quarles & Brady employee benefits attorneys: Marla Anderson at (414) 277-5453 /
; Amy Ciepluch at (414) 277-5585 /
; Sarah Fowles, at (414) 277-5287 /
; Angie Hubbell at (312) 715-5097 /
; Paul Jacobson at (414) 277-5631 /
; David Olson at (414) 277-5671 /
; Robert Rothacker at (414) 277-5643 /
or your Quarles & Brady attorney.
Washington, D.C. Office