Guidance on “Full-Time” Employees
In guidance issued late last year (Notice 2011-36), the IRS first proposed a “look-back/stability period” safe harbor by which plan sponsors could determine whether ongoing (as opposed to newly hired) employees fall within the “full-time” category for purposes of the shared responsibility penalties. Under this safe harbor, a sponsor may track an employee’s hours during a “standard measurement period” of 3 to 12 months. If an employee averages at least 30 hours per week during that period, he or she would be considered full-time during a subsequent “stability period” of at least six months (but no shorter than the measurement period). If an employee averages fewer than 30 hours per week, he or she would not be considered full-time during the subsequent stability period – even if he or she actually works 30 or more hours per week.
Earlier this year (in Notice 2012-17), the IRS proposed a similar – though slightly different – approach for determining whether a new employee meets this full-time threshold. (For this purpose, a “new” employee is defined as one who has not yet completed a standard measurement period.) If a new employee is reasonably expected to work at least 30 hours per week, he or she would be considered full-time as of the date of hire. However, if it cannot reasonably be determined whether a new employee is expected to meet this 30-hour threshold (thereby constituting a “variable hour employee”), the sponsor would be allowed to count the employee’s actual hours during his or her first 3 months (or, in limited cases, 6 months) and then apply rules similar to those previously proposed for ongoing employees.
In response to numerous comments, the IRS has now extended to 12 months the maximum measurement period for newly hired employees. As a result, this “initial measurement period” could now be as long as the “standard measurement period” applicable to ongoing employees.
Moreover, Notice 2012-58 would allow plan sponsors to apply this 12-month initial measurement period not only to variable hour employees, but also to seasonal employees. And through at least the end of 2014, sponsors would be allowed to use any reasonable, good-faith definition of a “seasonal employee.”
Notice 2012-58 also allows for an “administrative period” between any measurement period and its related stability period. This administrative period is intended to allow a plan sponsor to determine which employees are eligible for coverage, notify those employees of that fact, and then enroll them in the plan. In general, an administrative period may last for up to 90 days.
There are various constraints on this provision, however. For instance, to prevent a lengthy administrative period from creating a gap in coverage for an ongoing employee, any administrative period for an ongoing employee must overlap with the prior stability period. Accordingly, any ongoing employee who was considered full-time during the prior stability period must retain that status throughout the following administrative period.
Moreover, if a plan sponsor chooses to use an initial measurement period of 12 months, the subsequent administrative period must be shorter than 90 days. This is because the total combined length of an initial measurement period plus the subsequent administrative period may not exceed 13 months, plus any portion of a month remaining until the first day of the following month.
As a general rule, Notice 2012-58 requires that a plan use the same measurement period for all employees. Of course, a plan sponsor may – and probably will – use an initial measurement period that differs from the standard measurement period. The initial measurement period will likely run from each employee’s date of hire, whereas the standard measurement period will not.
In either event, the Notice would allow for different measurement periods (and associated stability periods) in the following four circumstances:
- Collectively bargained versus non-collectively bargained employees
- Salaried versus hourly employees
- Employees of different entities
- Employees located in different states
Notice 2012-58 also provides guidance on rules to be followed when transitioning an employee from his or her initial measurement period to the plan’s standard measurement period. Once an employee has been employed for an entire standard measurement period, he or she must be retested for full-time status using that standard measurement period. If the employee would be considered a full-time employee using that standard measurement period, he or she must be considered full-time during the associated stability period – even if the employee would not be considered full-time during the remainder of his or her initial stability period.