By Jamie Zveitel Kwiatek and Alexia M. Nobl
In recent guidance, the IRS advised that policies implemented by employers to prevent part-time and seasonal employees from working 30 hours or more per week may not be sufficient to prevent liability under the Affordable Care Act (ACA) employer mandate.
If an employer is an applicable large employer (ALE), minimum essential health coverage must be offered to at least 95 percent of full-time (30 hours per week) employees (FTEs). An employer becomes an ALE when the company employs at least 50 employees (computed by aggregating part-time employees and determining full-time equivalents) who work on average a minimum of 30 hours per week. The ACA penalizes employers who fail to provide minimum essential coverage to their FTEs through a penalty tax structure.
To prevent such penalties, some employers have implemented policies to restrict part-time and seasonal employees (non-FTEs) from working an average of 30 or more hours per week. However, the IRS recently specified that these policies are not enough to avoid liability. Actual hours count – even if performed in violation of an employer’s policy.
In Information Letter 2016-0030, the IRS responded to an employee’s inquiry (yes, it was really the employee asking the question!) regarding whether an employer’s policy against non-FTEs working more than 29 hours per week could prevent the employer from being liable for penalty taxes. The IRS stated that the employer could still be liable for failing to provide minimum essential coverage if it did not offer coverage to an employee who violates the policy and works on average more than 30 hours per week in any given month. Thus, it is essential that employers closely monitor employee hours and adherence to these policies.
Should a part-time or seasonal employee subject to the restricted hours policy average 30 or more hours per week in any given month, the employer still may be able to avoid the penalty. First, if minimum essential coverage that is affordable and provides minimum value is offered to at least 95 percent of the employer’s FTEs (including any who are FTEs as a result of violation of the restricted hours policy), no penalty will apply. Further, if the employer offers minimum essential coverage (but it either is not affordable or does not provide minimum value), if the employee does not obtain coverage on the Marketplace for which the employee receives tax credit, no penalty is due with respect to that employee.
As a result of the guidance, ALEs should:
- Implement, monitor and enforce policies against non-FTEs working in excess of 30 hours per week and reduce work schedules as necessary to avoid violations;
- Instruct supervisors not to approve additional hours for employees subject to the policy;
- Include employees that violate the policy and work on average 30 hours or more per week in the ALE computation and offer such employees coverage if necessary to comply with the ACA; and
- Carefully determine whether employees may be excluded from employer provided coverage, e.g., where they do not have Marketplace coverage or are not eligible for the tax credit.