By Christy Abend
Challenging economic times can generate greater financial stress for businesses and employees alike. These stressors can lead some organizations to enact hiring slowdowns, hiring freezes, and even workforce reductions. Depending on the path you take - whether it's a reduction in hours, a layoff, or actually terminating employees - there are different actions that you should consider to help your organization address their Affordable Care Act (ACA) requirements.
The first item to consider is whether you are using the monthly measurement method or the look-back method for benefits eligibility. If you use the monthly measurement method, there is not 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. You may find that removing an employee from the benefit plan, only to re-enroll them the following month if they resume working full-time, can create unnecessary extra work. It also could have a negative impact on employee morale.
If you use the look-back method to determine eligibility, you will 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, should 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. Be sure to refer to your benefit plan documents to help ensure you are administering your plan in accordance with plan guidelines. But you also need to recognize that there could be a negative impact when those guidelines don’t align with ACA requirements.
If you have a plan that requires cancellation of coverage due to furlough or reduction in hours, you should be aware of two potential penalties to avoid. The first relates to the affordability of COBRA coverage and the second to your failing to offer 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 typically subject employers to the 4980H(b) penalty. This penalty can become quite costly with a 2023 monthly penalty of $360.00 per employee.
Additionally, if you make no offer of coverage to an otherwise eligible employee, you 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 the eligible population. This penalty of $240.00 per month per employee is assessed on every benefit eligible employee, regardless of whether or not they had an offer of coverage.
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.
An important regulation you should consider if you 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, as long as the break in service is not more than 13 weeks (or 26 weeks for educational institutions).
This means that an employee who 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 is treated as though they never left employment.
The exception to the break in service rule is the optional 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 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.
It is always a good idea to stay on top of your responsibilities under the law in order to help your business avoid unnecessary ACA 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.
The information provided is intended as general guidance and is not intended to convey any tax, benefits, or legal advice. For information pertaining to your company and its specific facts and needs, please consult your own tax advisor or legal counsel. Equifax Workforce Solutions provides services that can help employers reduce their compliance risks. Details on our provision of these services and related support will be contained in your services agreement. Links to sources may be to third party sites. We have no control over and assume no responsibility for the content, privacy policies or practices of any third party sites or services.