IRS Propose Guidance On Pay Or Play Measurement Process Changes

1. September 30, 2014
Health Care Reform Update: Week of September 29
IRS Propose Guidance On Pay Or Play Measurement Process Changes
On September 18, the Internal Revenue Services (IRS) published guidance in IRS Notice 2014-49, in which it proposed an approach for addressing the manner in which an employer can make certain changes in its Pay or Play measurement process under the Patient Protection and Affordable Care Act (PPACA). The proposed approach discusses (1) employee transfers within the same applicable large employer (ALE) or between different ALE members within a controlled group of companies, when an employee moves between positions with different measurement periods, (2) ALE modification of the measurement period applicable to a position, and (3) application of these rules in connection with corporate transactions.
In general, the guidance provides as follows:
• For an employee who has been employed for a full measurement period at the time of transfer (and thereby has established either full-time or non-full-time status), the employee retains the individual’s status through the end of the associated stability period.
• For an employee who is not in a stability period (or administrative period) at the time of transfer, the employee’s status is determined using the measurement period applicable to the second position, but the hours of service from the first position are included in applying that second position measurement period.
Background
Under the Pay or Play final regulations issued on February 20, 2014, an applicable large employer can choose between two measurement processes to determine if an employee is a full-time employee and the employer therefore is required to provide minimum essential coverage that is affordable and provides minimum value (or pay the applicable penalty)—the monthly measurement method and the look-back measurement method. The monthly measurement period treats an employee as full-time for a month if the employee averages 30 or more hours of service per week during the month. The look-back measurement method treats an employee as full-time for any month within the corresponding stability period if the employee averages 30 or more hours per week during the applicable measurement period preceding the stability period.
An applicable large employer (ALE) is an employer with 50 or more full-time employees (subject to an exemption in plan year 2015 for ALE members with less than 100 full-time employees). Each ALE is required to comply with the Pay or Play requirements whether it a single company or part of a controlled group of companies, each of which companies is referred to as an ALE member to the

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extent the company has 50 or more full-time employees (subject to the previously noted limited exemption).
Use of the look-back measurement period method requires an employer to set up two separate measurement periods—a standard measurement period for ongoing employees (generally an individual who has been employed at least one standard measurement period) and an initial measurement period for new variable hour, seasonal and part-time employees.
Each ALE member of a controlled group of companies may use different measurement processes (monthly or look-back) as well as measurement periods that differ in duration or start date. In addition, each ALE, whether an individual company or a member of a controlled group of companies, is permitted to use different measurement methods or measurement periods that differ in duration or start date within each of four specified categories of employees:
• Collectively bargained employees/non-collectively bargained employees;
• Each group of collectively bargained employees covered by a separate collective bargaining agreement;
• Salaried employees/hourly employees; and
• Each group of employees whose primary place of employment is in a different state.
The new guidance addresses three different types of measurement process changes:
• When an employee transfers from a position to which one measurement period applies to a position to which a different measurement period applies;
• When an employer changes the measurement method for one or more of the permissible categories of employees identified above; and
• When an employee transfers between an employer with one type of measurement method to an employer with a different type of measurement method in connection with a merger, acquisition or similar corporate transaction.
Employee Transfers Between Positions with Different Measurement Periods
This portion of the guidance applies when an employee transfers between positions either within the same ALE or between different ALE members of a controlled group of companies and the second position uses a measurement period that is different from the first position measurement period. A second position’s measurement period is considered different if it has a duration or start date that is different from the first position’s measurement period.

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Before applying the second position measurement period, the employer must credit the employee with the hours of service earned in the first position by either (1) counting the hours of service using the counting method applied to the employee in the first position (for example, using a weekly equivalency method for no-hourly employees), or (2) recalculating the hours of service earned in the first position using the hours of service counting method applied to the employee in the second position (for example, using a monthly equivalency method for non-hourly employees). Whichever approach is used, it must be applied consistently to all similarly situated employees.
Transferred Employee in a Stability Period or Administrative Period
If an employee is in a stability period as of the date of transfer, the employee’s status at that time as a full-time employee or non-full-time employee remains in effect until the end of the stability period. An employee is considered to be in a stability period as of the date of transfer if the employee is an ongoing employee who has been employed for a full standard measurement period, or the employee is a new variable hour, part-time or seasonal employee who has been employed for a full initial measurement period. In the event the employee is in an administrative period between the measurement and stability periods, the employee retains full-time or non-full-time status in the same manner as if the employee was in a stability period—based on the results of the immediately preceding measurement period.
At the end of the stability period (or the administrative period following the stability period) during which the transfer occurs, the employee assumes full-time or non-full-time status based on the look- back measurement method in effect for the second position, which is applied after including the employee’s hours of service from the first position.
For example, if a variable hour employee is determined to be non-full-time while employed by an ALE member with a 6-month measurement and stability period measurement method and transfers during a stability period to an ALE member with a 12-month measurement and stability period measurement method, the employee continues to be viewed as non-full-time until the end of the 6- month stability period for the first position. At that time the employee is then reevaluated under the 12-month process applicable to the position with the second ALE member, and if the employee does not have sufficient hours over the 12-month measurement period applied at that time to establish full- time status (including all hours counted from the first position 6-month measurement process and any hours prior to that period), the employee continues to be considered a non-full-time employee as of the end of the first position stability period.
Transferred Employee Not in a Stability Period or Administrative Period
In the event an employee is not in a stability period or administrative period at the time of the transfer, the employee’s status as full-time or non-full-time is determined solely under the look-back measurement method applicable to the second position as of the date of transfer, using hours of

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service the employee had from the first position. Under the above example, if the variable hour employee transfers during the 6-month measurement period, the employee is reevaluated based on the 12-month measurement process that applies to the second position, and to the extent the employee does not have sufficient hours from the first position 6-month measurement process and any prior period of employment to qualify for full-time status under the 12-month measurement process, the employee remains non-full-time.
Application of the “Reasonably Expected to Average 30 Hours Per Week” Rule
The guidance makes it clear that an employee’s transfer between positions with different look-back measurement processes does not trump the rule that requires an employer to treat a new employee as full-time if the employee is reasonably expected to average at least 30 hours of service per week at the time of hire, as provided in the final regulations. Such a new employee is not subject to an initial measurement period, and instead, that employee’s status is determined on the basis of hours of service in each month. Until that new employee has been employed for a full standard measurement period applicable to the second position (including service in the first position), the employee’s full-time or non-full-time status is determined on a month to month basis according to the hours of service worked each month.
Employer Changes in Measurement Processes for Permissible Categories of Employees
This portion of the guidance addresses whether and under what conditions an employer can change measurement processes for a category of employees—collectively versus non-collectively bargained employees, collectively bargained employee groups each covered by a separate collective bargaining agreement, salaried versus hourly employees, and employee groups whose primary places of employment are in different states. The change in measurement process can involve either a change in measurement methods (from the look-back measurement method to the monthly measurement method or vice versa), or a change in the duration or start date of the applicable look-back measurement period.
Change in Measurement Method
For a change in the measurement method, employers are directed to follow the guidelines in the final regulations governing an employee transferring between a position that applies the look-back measurement period to a position that applies the monthly measurement period (or vice versa), by treating the employee as if the employee had transferred positions as of the effective date of the change in measurement method. Those guidelines provide for the transition rules described below, which must be applied to all employees affected by the change in measurement method.
• Change from look-back measurement method to monthly measurement method:

5. September 30, 2014
o If the employee is in a stability period under which the employee is treated as full-time, continue to treat the employee as full-time through the end of the stability period;
o If the employee is in a stability period under which the employee is not treated as a full-time, either continue to treat the employee as non-full-time until the end of the stability period or apply the monthly measurement method through the end of the stability period starting with the month in which the change occurred;
o If the change occurred during a measurement period, treat the employee as full-time for the stability period that would have applied based on the measurement period in which the change occurred or would be treated as full-time under the monthly measurement method; and
o Apply the monthly measurement method for any month following the stability period.
• Change from monthly measurement method to look-back measurement method:
o Continue to use the monthly measurement method to determine the employee’s full-time status for the remainder of the stability period during which the change occurred, unless the employee’s hours of service prior to the change in employment status would have resulted in the employee being treated as full-time during the stability period in which the change occurred, in which case the employer must treat the employee as full-time for that stability period;
o For the applicable stability period following the measurement period during which the change occurred, treat the employee as full-time for any month during which the employee either would be treated as a full-time employee based on the measurement period during which the change occurred or would be treated as a full-time employee under the monthly measurement period; and
o Apply the look-back measurement method for any month following the applicable stability period described above.
In applying the above transition rules to an employer switching between the look-back and monthly measurement methods, the status of each affected employee as of the date of change is determined as if on the date of the change each of those affected employees had transferred from a position to which the original measurement method applied, to a position to which the revised measurement method applied.

6. September 30, 2014
Change in Measurement Period Duration or Start Date
For a change in the duration or start date of the measurement period under the look-back measurement method for a category of employees, an employee’s full-time or non-full-time status is determined as if on the date of the change the employee had transferred from a position to which the original measurement method applied, to a position to which the revised measurement method applied, following the guidelines described in the Employee Transfers Between Positions with Different Measurement Periods section above.
Measurement Method Applied After Corporate Transaction
The proposed approach in the IRS guidance also addresses a change in measurement method in connection with a merger, acquisition or similar corporate transaction. If as a result of such a corporate transaction an employee transfers employment between ALEs using different measurement methods (i.e., one ALE uses the monthly measurement method and the other uses the look-back measurement method, or vice versa), the new employer can apply the prior employer’s measurement method for a transition period to some or all of the transferred employees—even though the new employer is using a different measurement method for the rest of its employees. The transition period during which the new employer can use the prior employer’s measurement method for the transferred employee is as follows:
• Look-back measurement method—when the new employer is applying the look-back measurement method that the prior employer was using, the transition period during which that method can be used begins on the date of the merger, acquisition or other corporate transaction and ends on the last day of the first stability period following the standard measurement period that begins after the date of corporate transaction and that would have applied to the employee if the employee had not been transferred in connection with the corporate transaction.
• Monthly measurement method—when the new employer is applying monthly measurement method that the prior employer was using, the transition period during which that method can be used begins on the date of the corporate transaction and ends on the last day of the first calendar year that begins after the date of the corporation transaction.
The IRS has invited comments on this proposed approach. Until further guidance is issued, employers can rely on this proposed approach in determining an employee’s full-time status, and in any case through the end of the 2016 calendar year.
Willis’ National Legal & Research Group will continue to review and provide timely updates on these and other related changes in Health Care Reform that affect employers.

7. September 30, 2014
This information is not intended to represent legal or tax advice and has been prepared solely for informational purposes. You may wish to consult your attorney or tax adviser regarding issues raised in this publication.