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Pay or Play Penalty- When to Begin Tracking Employee Hours

The Affordable Care Act (ACA) imposes a penalty on applicable large employers (ALEs) that do not offer health insurance coverage to substantially all full-time employees and dependents. Penalties may also be imposed if coverage is offered, but is unaffordable or does not provide minimum value. The ACA's employer penalty rules are often referred to as "employer shared responsibility" or "pay or play" rules.

On February 12, 2014, the IRS published final regulations on the employer shared responsibility rules. These regulations finalize provisions in proposed regulations released on January 2, 2013. Under the final regulations, ALEs that have fewer than 100 full-time employees (including full-time equivalents, or FTEs) generally will have an additional year, until 2016, to comply with the pay or play rules. ALEs with 100 or more full-time employees (including FTEs) must comply with the pay or play rules starting in 2015.

The pay or play rules will take effect for most ALEs beginning on Jan. 1, 2015. To prepare for compliance, employers that intend to use the look-back measurement method for determining full-time status for 2015 will need to begin tracking their employees’ hours of service in 2014 to have corresponding stability periods for 2015.

Identifying Full-Time Employees

A full-time employee is an employee who was employed on average at least 30 hours of service per week. The final rules treat 130 hours of service in a calendar month as the monthly equivalent of 30 hours of service per week. The final regulations provide two methods for determining full-time employee status—the monthly measurement method and the look-back measurement method. These methods provide minimum standards for identifying employees as full-time employees. Employers may decide to treat additional employees as eligible for coverage, or otherwise offer coverage more expansively than would be required to avoid a pay or play penalty.

Monthly Measurement Method

The monthly measurement method involves a month-to-month analysis where full-time employees are identified based on their hours of service for each calendar month. This method is not based on averaging hours of service over a prior measurement period. Month-to-month measuring may cause practical difficulties for employers, particularly if there are employees with varying hours or employment schedules, and could result in employees moving in and out of employer coverage on a monthly basis.

To read more about the Pay or Play Penalty, click here.

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