Under the ACA’s Employer Mandate, employers are required to follow certain guidelines as determined by the IRS. In the case of any mistake or noncompliance, they may be subject to severe penalties. If you have ever been hit with IRS Letter 226J, you must know that it is a serious matter. According to the IRS, employers that failed to comply with the Employer Affordable Care Act Mandate, need to pay penalties. For any business owner or employer, navigating the complicated ACA healthcare benefits is a daunting task. Moreover, understanding the details of the ACA is only the first step towards compliance.
ACA Employer Mandate: An Overview
Employers with 50 or more full-time or full-time equivalent employees are considered Applicable Large Employers (ALEs).
The Affordable Care Act’s Employer Mandate of 2018 require ALE’s to
- Provide the required minimum value of Minimum Essential Coverage to at least 95% of their full-time workforce and their dependents.
- Ensure that affordability of coverage is determined using one of the IRS-approved affordability calculation methods.
In case of noncompliance with any of these two requirements, your organization will be liable for penalties. This penalty is subject under Internal Revenue Code (IRC) Section 4980H. More often than not, identifying which employees need coverage can be difficult. One of the most effective ways for determining this is by implementing the applicable ACA measurement methods.
ACA Measurement Methods
The IRS has determined methods to identify whether an employee is eligible for the ACA healthcare mandate or not. As these methods play a significant role in avoiding employers from penalties, their understanding is critical. In addition to avoiding hefty penalties, employers can be sure that they are offering healthcare benefits to the right people. Employers can use two specific methods to determine whether employees are full-time under the Affordable Care Act:
- The Look-Back Measurement Method
- The Monthly Measurement Method.
To determine the most suitable measurement method for their organization, employers must first evaluate the nature of their workforce. If your organization is primarily made up of employees with variable hours, you should consider implementing the Look-Back Measurement Method. In contrast, the monthly measurement method will be more effective for a company having mostly full-time employees.
1. The Look-Back Measurement Method
Generally, the Look-Back Measurement Method works best with organizations having a large number of part-time employees. With the Look-Back Measurement Method, organizations can monitor and track the service hours of workers. The data obtained will be used to determine if they are considered full-time workers under the ACA or not.
Utilizing this method, employers can determine if and when they should offer health insurance to their employees. There are three parts of the Look-Back Measurement Method: The measurement period, the administrative period, and the stability period.
- The Measurement Period
During the measurement period, the working hours of each employee are estimated and averaged over the period duration. The measurement period can be as short as three months to as long as 12 months. The accuracy in representing the status of every employee depends upon the duration of the measurement period. When the measurement period is longer, accuracy will be better.
- The Administration Period
After the measurement period, an optional administration period can be applied. Practically, employers choose between 30 to 60 days as the administration period, but it can be of a maximum of 90 days. During the administrative period, all the necessary paperwork is collected to ensure that the offer can be made on time.
- The Stability Period
The stability period follows the optional administration period. Ideally, the stability period should begin on the date when the offered coverage becomes effective. According to the results of the preceding measurement period, the employee is classified as either full-time or not full-time in the stability period. Regardless of the employee’s currently working hours, they are locked into either full-time or not full-time positions in the stability period. Employees who are "locked" into non-full-time positions may still receive coverage, but employers are not obligated to provide them.
2. The Monthly Measurement Method
Organizations with primarily full-time workforces can use the Monthly Measurement Method to track their employees. The method provides a simple way of capturing an employee's status. Employees are classified into two groups according to how many hours they provide per month or each week. It is to see whether employees are working for 130 hours monthly and 30 hours weekly or not.
As there is no stability or measurement period with the Monthly Measurement Method, an employee can fluctuate between full-time and part-time status. The hours are averaged each month. However, if your organization has a large number of employees with variable hours, this method may not be appropriate for you.
It is important to note that during the timeframe of the selected measurement method, you cannot switch from one method to another.
It can be difficult to determine which measurement method is suitable for your organization. To avoid this, you can consult with an outside expert in ACA to ensure that your organization chooses the right measurement method for your situation. In addition to providing full-service ACA Complete Service, we will help you determine which measurement method is best suited to your organization.
To understand the ins and outs of the ACA's Employer Mandate, you can read our articles related to "ACA Essential Guide for Employers". In addition to record-keeping, supporting documentation, and ACA reporting, we will also help you handle monthly ACA compliance.
The Bottom Line
The IRS requires ALEs to provide minimum essential coverage to employees that are affordable. To determine whether an employee is affordable for minimum health coverage or not is equally significant. In case of any noncompliance, employers may be subjected to hefty penalties. There are two methods used to determine the affordability of the workers. In case the organization has more part-time employees, the Look-Back Measurement Method can offer benefits. For organizations having more full-time employees, the Monthly measurement method will be suitable.