H&W: Play or Pay FTE Safe Harbor

152021962Play or Pay FTE Safe HarborPlay or Pay FTE Safe Harbor: This IRS recently issued Notice 2012-58 describing safe harbor methods that employers may use (but are not required to use) to determine which employees are treated as full-time employees for purposes of the shared employer responsibility provisions included in the Affordable Care Act (ACA).


The ACA provides that a large employer (who employed at least 50 full time employees, including full time equivalents) is subject to a penalty (often referred to as the play or pay penalty) if either:

(1)    the employer fails to offer to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage and any full-time employee is certified to receive a premium tax credit or cost-sharing reduction; or

(2)    the employer offers its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage and one or more full-time employees is certified to receive a premium tax credit or cost-sharing reduction (generally because the employer’s coverage either is not affordable or does not provide minimum value as defined by the ACA).

The premium tax credit is only available to individuals:

(1)    whose household income for a taxable year is between 100 percent and 400 percent of the federal poverty level for the taxpayer’s family size; and

(2)    who are not eligible for other minimum essential coverage, including employer sponsored coverage.

Minimum essential coverage includes eligible employer-sponsored plan coverage (excluding certainexcepted benefits) that is “affordable” and provides “minimum value.”

Affordable means the employer offers at least one coverage option in which the employee’s share of the premium for self-only coverage does not exceed 9.5% of the employee’s “household” income (Form W-2 wages may also be used instead of household income to determine whether premiums are affordable).

Minimum value generally means that the employer sponsored plan is expected to cover, on average, at least 60% of health care costs (i.e. the plan has an actuarial value of at least 60%).


The monthly penalty for an employer who does not offer health coverage to its full-time employees and their dependents will be equal to the number of its full-time employees (i.e., generally those who work at least 30 hours per week) minus 30, multiplied by one-twelfth of $2,000.

The monthly penalty for an employer who offers coverage that is deemed unaffordable or fails to provide minimum value will be one-twelfth of $3,000 multiplied by the number of full-time employees who receive the premium tax credit. This penalty is capped at an overall limitation equal to its full-time employees (i.e., generally those who work at least 30 hours per week) minus 30, multiplied by one-twelfth of $2,000.

Therefore, the definition of a full-time employee is key in determining whether, and to what extent, an employer may incur a penalty under this provision.

Full-Time Equivalent Determination Process

The law defines a full-time employee as one who works an average of at least 30 hours per week. The IRS has provided a safe harbor method to determine if employees with variable or uncertain work schedules and seasonal employees should be considered full-time and thus subject to the play or pay penalty.


There are 3 periods employers should put in place for this process:

  1. Measurement Period when the employer analyzes the hours worked by the employee to see if he or she averages 30 hours or more per week and thus is considered full-time and eligible to enroll in the group health plan. This period is referred to as a “Standard Measurement Period” for ongoing employees and an “Initial Measurement Period” for new employees.

The Measurement Period must:

  • be at least three and not more than twelve months long;
  • be applied uniformly to all employees in one of the following permissible classifications:
    • collectively bargained and non-collectively bargained employees;
    • salaried and hourly employees;
    • employees of different business entities; and
    • employees located in different states.
  1. Administrative Period (optional) when the employer can enroll employees it has determined are full-time.
  • The Administrative Period is optional and cannot be more than 90 days.
  • Any Administrative Period between the Measurement Period and the Stability Period may neither reduce nor lengthen the Measurement Period or the Stability Period.
  1. Stability Period when the employee (and dependents) are covered by the plan (if they choose to enroll).
  • The Stability Period can be the same length as the Measurement Period, but no shorter than 6 months.
  • An employee’s status (full-time or not full-time) determined during the Measurement Period will apply during the entire Stability Period regardless of his or her actual hours worked during the Stability Period.

New Employees versus Ongoing Employees

The safe harbor method distinguishes between new employees and ongoing employees. An ongoing employee is generally an employee who has been employed by the employer for at least one complete Standard Measurement Period. The employer must use the same Stability Period for both new and ongoing employees in the same classification.

Ongoing Employees

  • The Measurement Periods for ongoing employees are called “Standard Measurement Periods.”
  • The employer has the flexibility to determine the months in which the Standard Measurement Period starts and ends, provided that the determination must be made on a uniform and consistent basis for all employees in the same category.
    • For example, if an employer chose a Standard Measurement Period of 12 months, the employer could choose to make it the calendar year, a non-calendar plan year, or a different 12-month period, such as one that ends shortly before the start of the plan’s annual open enrollment season.
  • To prevent an Administrative Period from creating any potential gaps in coverage, it will overlap with the prior Stability Period, so that, during any such Administrative Period applicable to ongoing employees following a Standard Measurement Period, ongoing employees who are eligible for coverage because of their status as full-time employees based on a prior Measurement Period would continue to be offered coverage during the Administrative Period.
  • If the employer determines that the employee did not work full-time during the Standard Measurement Period, the employer would be permitted to treat the employee as not a full-time employee during the Stability Period that follows, but this period cannot be longer than the Standard Measurement Period.

New Employees

  • If a new employee is reasonably expected to work full-time, the employer that offers coverage to the employee at or before the end of the employee’s initial 3 calendar months of employment will not be subject to the employer responsibility penalty by reason of its failure to make coverage available during that initial period.
  • New variable hour and seasonal employees (those who have not been employed for at least one full Standard Measurement Period) can be subject to an “Initial Measurement Period.”  A new employee is a variable hour employee if, based on the facts and circumstances at the start date, it cannot be determined that the employee is reasonably expected to work on average at least 30 hours per week.
  • The Initial Measurement Period and the Administrative Period combined may not extend beyond the last day of the first calendar month beginning on or after the one-year anniversary of the employee’s start date (totaling, at most, 13 months and a fraction of a month). Therefore, these periods may likely cover different timeframes for new employees versus ongoing employees.
  • If an employee is determined to be a full-time employee during the Initial Measurement Period, the Stability Period must be a period of at least six consecutive calendar months that is no shorter in duration than the Initial Measurement Period and that begins after the Initial Measurement Period (and any associated Administrative Period).
  • If a new variable hour or seasonal employee is determined not to be a full-time employee during the Initial Measurement Period, the employer is permitted to treat the employee as not a full-time employee during the Stability Period that follows the Initial Measurement Period. This Stability Period for such employees must not be more than one month longer than the Initial Measurement Period and must not exceed the remainder of the Standard Measurement Period (plus any associated Administrative Period) in which the Initial Measurement Period ends.

Transition from New Employee to Ongoing Employee

  • Once a new employee, who has been employed for an Initial Measurement Period, has been employed for an entire Standard Measurement Period, the employee must be tested for full-time status, beginning with that Standard Measurement Period, at the same time and under the same conditions as other ongoing employees.
  • The employer may change an employee’s full-time status only after the end of the Stability Period associated with the Initial Measurement Period. Thereafter, the employee’s full-time status would be determined in the same manner as that of the employer’s other ongoing employees.

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