Workforce Reductions and Affordable Care Act Compliance
By Christy Abend
There are many things that employers are taking into consideration as they manage their workforce through the COVID-19 pandemic, including Affordable Care Act (ACA) compliance.
There are many things that employers are taking into consideration as they manage their workforce through the COVID-19 pandemic. Different employers are choosing different options, but decision-makers need to keep Affordable Care Act (ACA) compliance in mind. Depending on the path an employer takes -- whether it's a reduction in hours, a layoff, or actually terminating employees -- there are different actions that may be considered to help the organization remain ACA compliant.
Considerations for Reduction in Hours or Furloughed Employees
The first item to consider is whether the employer is using the monthly measurement method or the look-back method for benefits eligibility. If the employer uses the monthly measurement method, it technically does not have an ACA-mandated requirement to offer coverage for any months that employees don’t work 130 hours. An important consideration here is the anticipated duration of the reduction in hours or furlough. Employers may find that removing an employee from the benefit plan, only to re-enroll them the following month if they resume working full time, creates unnecessary extra work. It also could have a negative impact on employee morale.
Employers who use the look-back method to determine eligibility have different considerations for employees who have a reduction in hours or are furloughed. Employees who have completed a full standard measurement period, qualified for benefits and are in a stability period, according to ACA regulations, must continue to be offered coverage throughout the remainder of their stability period. Failure to continue offering affordable coverage could result in penalties if the employee seeks coverage from the marketplace and is eligible for a subsidy. Employees should also continue to be measured in their existing measurement period, and any subsequent qualification of benefits should be honored for the duration of the upcoming stability period. Employers need to refer to their benefit plan documents to help ensure they are administering their plan in accordance with plan guidelines. But they also need to recognize that there could be an impact on ACA compliance when those guidelines don’t align with ACA requirements.
Offers of COBRA Coverage
Employers with plans that require cancellation of coverage due to furlough or reduction in hours need to be concerned with two things. The first is regarding affordability of COBRA coverage. Employees who decline an offer of COBRA coverage due to affordability, who then subsequently enroll in coverage from the marketplace and are eligible for a subsidy, will subject employers to the 4980H(b) penalty. This penalty can become quite costly with a 2020 monthly penalty of $321.66 per employee.
No Offer of Coverage
In addition, employers who make no offer of coverage to an otherwise eligible employee could face not only 4980H(b) penalties, but also the 4980H(a) penalty if the number of employees that are not offered coverage exceeds 5% of their eligible population. Since these penalties are assessed on a monthly basis, even failing to offer coverage to 95% of the eligible population for just one month during a furlough, could result in the 4980H(a) penalty for that month.
Breaks in Service
One of the biggest considerations for employers who decide to terminate employees is the break in service rule. ACA legislation states that employees who experience a break in service and are subsequently rehired must be reinstated to the same circumstance they were in prior to termination. That is as long as that break in service is not more than 13 weeks (or 26 weeks for educational institutions). This means that an employee who had already completed a measurement period prior to termination, must continue with their previous eligibility determination and finish the remainder of the current stability period upon rehire. In this situation, the employee would be treated as though they never left employment.
Rule of Parity
The exception to the break in service rule is the rule of parity. If an employee has a break in service that is at least four weeks, but longer than their previous length of employment, they can be rehired as a new employee, and have their measurement period restarted. For example, an employee who had only worked for a company for five weeks prior to termination, who is then rehired six weeks later, can be considered a new employee and have their measurement period restarted. However, if the employee only worked five weeks, and then was rehired four weeks later (less of a break than time employed), they would have to pick up where they left off being measured as they were prior to termination. This would mainly impact variable hour employees who are in an initial measurement period, but could also impact newer full-time employees who are being monthly measured, and still in their limited non-assessment periods.
While the complex regulations of the Affordable Care Act remain unchanged, now is a good time to brush up on employer responsibilities under the law in order to help avoid unnecessary compliance risk and potential IRS penalties. If your organization needs help managing ACA reporting for prior, current or future years, contact the specialized ACA team at Equifax.
Equifax is not providing, and cannot provide, legal advice on any legal issues relating to ACA requirements. Your company should work with its legal counsel and other experts to make all determinations regarding specific ACA obligations.