Health Care Reform: Will You Play . . . or Pay?

One of the most significant elements of health care reform is its requirement that, beginning January 1, 2014, certain employers must make health coverage available to their full‑time employees (and their dependents) or else face a penalty. These “play or pay” rules become effective in less than a year, and employers need to take steps now to:

• Determine whether they will be subject to the rules;
• If the rules apply, understand what kind of coverage must be offered, and to whom, in order to avoid a penalty;
• Understand the potential penalty amounts; and
• Decide whether, for 2014, to offer the required coverage (play) or risk a penalty (pay).

Overview.

A “large employer” will be assessed a penalty if (1) the employer either fails to offer group health coverage to its full‑time employees (and their dependents) or offers inadequate coverage, and (2) at least one of its full‑time employees both receives coverage through a health insurance exchange and is eligible for a premium tax credit or cost‑sharing reduction for that coverage (“subsidized exchange coverage”).

Health insurance exchanges are the online marketplaces that will make health coverage available to individuals and small employers beginning January 1, 2014. Exchanges will also determine whether an individual who applies for coverage is eligible for subsidized exchange coverage. Generally, an individual will be eligible for subsidized exchange coverage if he or she has a household income from 100 to 400 percent of the federal poverty line (currently, 400 percent of the federal poverty line is $45,960 for an individual and $94,200 for a family of four) and the individual either:

• Is not eligible for employer‑sponsored coverage, or
• Is eligible for (but not enrolled in) employer‑sponsored coverage that is unaffordable or does not provide minimum value.

For a large employer to ensure that none of its full‑time employees receives subsidized exchange coverage and therefore that no penalty is assessable to the employer, the employer must offer affordable, minimum‑value coverage to all its full‑time employees (and their dependents), beginning January 1, 2014. (See below, however, for a transitional rule for fiscal‑year plans.)

In January 2013, the IRS published proposed regulations concerning the play or pay rules. Employers may rely on those regulations until final regulations are issued. Any future guidance that is stricter than the proposed regulations will be effective on a prospective basis only.

Which employers are subject to the play or pay rules?

The new rules apply only to “large employers,” meaning those that had an average of at least 50 full‑time employees, including full‑time equivalents (“FTEs”), on business days during the preceding calendar year. For‑profit, tax‑exempt, and government (including Indian tribal government) employers all may qualify as large employers. If an employer is a member of a controlled group or affiliated service group under the Internal Revenue Code, the employees of all the group’s members are counted to determine whether the controlled group or affiliated service group is a large employer. (Once a controlled group or affiliated service group is determined to be a large employer, however, the play or pay rules (including any assessable penalty) are generally applied separately to each group member.)

The common‑law definition of “employee” applies when determining large‑employer status. (Under the common‑law standard, an employment relationship generally exists if the employer has the right to direct or control the manner in which the individual performs services.) Leased employees, sole proprietors, partners in a partnership, and 2 percent S‑corporation shareholders are not employees for this purpose, and work performed outside the U.S. is generally not taken into account. The IRS has indicated that the forthcoming final regulations will include an anti‑abuse rule to prevent employers’ use of temporary and other staffing agencies to avoid the play or pay rules.

A “full‑time employee” is an employee with an average of at least 30 hours of service per week. For this purpose, 130 hours of service in a calendar month are treated as equivalent to 30 hours of service per week. In counting “hours of service” for hourly employees, an employer must use actual hours worked and paid time off. For nonhourly employees, an employer may use actual hours worked and paid time off, or it may elect to use an equivalency method (eight hours per day or 40 hours per week for each day or week, as applicable, that an employee was credited with an hour of service). An employer may not elect to use an equivalency method, however, if it would substantially understate hours of service in a manner that would cause the employee not to be treated as full‑time. For example, an employer may not use the eight‑hours‑per‑day equivalency method for an employee who generally works three, 10‑hour days per week.

As noted above, FTEs must be included when determining large‑employer status. FTEs are determined each calendar month by calculating the aggregate number of hours of service for all part‑time employees (but not more than 120 hours per employee) and dividing that number by 120. In determining FTEs for each calendar month, fractions are taken into account. After adding the 12 monthly full‑time employee and FTE totals and dividing the sum by 12, however, all fractions are disregarded. For example, an average of 49.9 full‑time employees (including FTEs) on business days in the preceding calendar year would be rounded down to an average of 49 full‑time employees.

There are a number of special rules concerning the determination of large‑employer status, including the following:

• Transitional rule for 2014. An employer may measure employees during any period of at least six consecutive calendar months in 2013 (instead of during the entirety of 2013) to determine whether it is a large employer for 2014. For example, an employer could determine whether it employed an average of at least 50 full‑time employees (including FTEs) during the period of March 1 through August 31, 2013, and, from that data, establish whether or not it is a large employer for 2014.
• Seasonal workers. An employer is not a large employer subject to the play or pay rules if (1) the sum of its full‑time employees and FTEs exceeds 50 for no more than 120 days (or four months) during the preceding calendar year, and (2) the employees in excess of 50 during that period were all seasonal workers. The 120 days (or four months) may be nonconsecutive. A “seasonal worker” is one whose services ordinarily pertain to or are of the kind exclusively performed during certain seasons or periods of the year and that, by their nature, may not be continuous or carried on throughout the year. Seasonal workers include but are not limited to retail workers employed exclusively during the holiday seasons and agricultural workers employed on a seasonal basis. Until further guidance is issued, employers may use a reasonable, good faith interpretation of the term “seasonal worker.”
• New employers. An employer that was not in existence throughout the preceding calendar year is a large employer for the current calendar year if it is reasonably expected to, and actually does, employ an average of at least 50 full‑time employees (including FTEs) on business days during the current year. The proposed regulations do not address whether a new employer in existence for at least six (but fewer than 12) months in 2013 may instead use the transitional rule described above to determine whether it is a large employer for 2014, but that transitional rule’s terms do not specifically limit its use to employers that existed throughout 2013.
• Employees compensated on commission, adjunct faculty, and transportation employees. Some employees’ compensation is not based primarily on hours, such as salespeople compensated on a commission basis and adjunct faculty compensated on the basis of credit hours taught. The work hours of other employees, such as airline pilots, may be subject to safety‑related regulatory limits. Until applicable guidance is issued, employers of such employees (and those in other positions that raise similar issues) must use a reasonable method for crediting hours of service that is consistent with the purposes of the play or pay rules. A method of crediting hours would not be reasonable if it took into account only some of an employee’s hours with the effect of recharacterizing, as non‑full‑time, an employee in a position that traditionally involves more than 30 hours per week. For example, it would not be a reasonable method of crediting hours of service to take into account only an adjunct faculty member’s classroom time and not his or her class preparation time.

How are penalties calculated, and what coverage must be offered to avoid them?

The play or pay rules provide for two alternative penalties that are assessable if one or more of the large employer’s full‑time employees receive subsidized exchange coverage. Which penalty applies depends on whether the employer offered any group health coverage to its full‑time employees (and their dependents) and, if it did, whether that coverage met certain standards. Note that offering only a HIPAA‑excepted benefit, such as a stand‑alone dental or vision plan, is not treated as offering group health coverage under the play or pay rules.

A “dependent” for purposes of these rules is an employee’s child under age 26. A “child” includes a stepchild, adopted child, child placed for adoption, and eligible foster child. The term “dependent” does not include a spouse. As a transitional measure, a large employer that does not offer dependent coverage in its 2013 plan year will not be assessed a penalty for failing to offer such coverage in its 2014 plan year, if it takes steps during the 2014 plan year to satisfy the dependent coverage requirement.

No‑coverage penalty. This penalty applies if the large employer does not offer group health coverage to substantially all its full‑time employees (and their dependents). “Substantially all” means all but 5 percent (or, if greater, five) of its full‑time employees (and their dependents). If an employer does not offer coverage to substantially all its full‑time employees (and their dependents) and at least one of its full‑time employees receives subsidized exchange coverage, the employer will be assessed a penalty of $166.67/month ($2,000/year) for each of its full‑time employees, disregarding the first 30 such employees. (FTEs are not included when calculating the penalty.) For employers in a controlled group or affiliated service group, the 30‑full‑time‑employee reduction is allocated ratably among the group’s members.

Each full‑time employee is included in the calculation of the penalty (other than the first 30 employees) regardless of whether the employee received subsidized exchange coverage. Thus, it takes only one full‑time employee receiving subsidized exchange coverage to trigger the penalty, but the penalty is calculated using all full‑time employees (minus 30).

Example A: A large employer has 80 full-time employees and does not offer any group health coverage. One of its full-time employees receives subsidized exchange coverage all year. The assessable penalty is $100,000/year ((80 - 30 full-time employees) × $2,000).

Example B: In 2014, an employer had an average of 20 full-time employees and 30 FTEs, so it is a large employer for 2015. The employer does not offer any group health coverage to its employees in 2015, and 11 full-time employees receive subsidized exchange coverage all year. The assessable penalty is $0 ((20 - 30 full-time employees) × $2,000).

Example C: A large employer has 80 full-time employees and offers group health coverage to 75 of them (and to their dependents). One of the employer's full-time employees receives subsidized exchange coverage all year. The assessable no-coverage penalty is $0 because the employer offered coverage to substantially all its full-time employees (and their dependents) . . . but the alternative play or pay penalty discussed below is assessable.

Inadequate‑coverage penalty. This penalty applies if the large employer offers group health coverage to all or substantially all its full‑time employees (and their dependents) but (1) the coverage does not provide “minimum value” or is not “affordable,” and (2) a full‑time employee receives subsidized exchange coverage. This penalty also applies if the employer offers affordable, minimum-value coverage to substantially all its full‑time employees (and their dependents) and one or more of its full‑time employees not offered coverage receives subsidized exchange coverage. The assessable penalty is $250/month ($3,000/year) for each of the employer’s full‑time employees who receives subsidized exchange coverage. This penalty is capped at the amount the employer would have paid if it had not offered coverage (i.e., the no‑coverage penalty). No penalty applies with respect to a full‑time employee who is ineligible for coverage during a waiting period of up to the first three months of employment, provided the employer otherwise offers coverage to full‑time employees (and their dependents) during that period.

In contrast to the no‑coverage penalty, the inadequate-coverage penalty is calculated using only full‑time employees who received subsidized exchange coverage.

Example D: An employer offers health coverage to its 100 full-time employees and their nonspouse dependents, but the coverage is not affordable or does not provide minimum value. Ten full-time employees receive subsidized exchange coverage all year. The assessable penalty is $30,000 ($3,000 for each full-time employee receiving subsidized exchange coverage) and would be capped at $140,000 ($2,000 × (100 - 30 full-time employees)).

Example E: Same facts as Example C, above. For the full-time employee to be eligible for subsidized exchange coverage, his or her household income must have been between 100 and 400 percent of the federal poverty level and either he or she was one of the five full-time employees to whom coverage was not offered or the employer offered coverage that either was unaffordable or did not provide minimum value. In either case, the assessable penalty is $3,000 ($3,000 × 1 full-time employee receiving subsidized exchange coverage) and would be capped at $100,000 ($2,000 × (80 - 30 full-time employees)).

Minimum value. An employer’s group health plan provides “minimum value” when it covers at least 60 percent of the plan’s total allowed cost of benefits. The plan’s percentage of the total allowed cost of benefits will be determined using one of three methods: (1) a minimum value calculator, (2) design‑based safe harbor checklists, or (3) by a certified actuary (available only if the plan has nonstandard features not accommodated by the first two methods).

Affordable. Under statute, an employer’s plan is “affordable” if the employee’s required contribution does not exceed 9.5 percent of the employee’s annual household income. Since employers generally will not know an employee’s household income, the proposed regulations provide for three optional safe harbors under which the employer’s coverage will be considered affordable for purposes of the play or pay penalty (even if, in fact, a full‑time employee receives subsidized exchange coverage). An employer may choose one or more of the safe harbors for all its employees or for any reasonable category of employees, as long as it does so on a uniform and consistent basis for all employees in a category.

The determination of affordability under the safe harbors is based on the employee’s portion of the employee‑only premium for the employer’s lowest‑cost minimum‑value coverage, regardless of the employee’s actual elected coverage. The proposed regulations do not address, so it is still uncertain, whether a premium surcharge under a wellness program (e.g., for a smoker) is included in an employee’s required contribution when determining whether coverage is affordable.

• Form W‑2 safe harbor. An employer satisfies this safe harbor with respect to an employee if the employee’s required contribution does not exceed 9.5 percent of his or her Form W‑2 wages from the employer for the year. (Since this option is based on box 1 of Form W‑2, the employee’s “wages” do not include elective contributions to a 401(k) or 403(b) plan or salary reduction contributions to a cafeteria plan.) This safe harbor is available only if the employee’s required contribution remains a consistent amount or percentage of all W‑2 wages during the calendar year (or, for fiscal‑year plans, within the portion of each plan year during the calendar year). Application of this safe harbor is on an employee‑by‑employee basis after the end of the calendar year, although it may also be used prospectively, at the beginning of the year, to set the employee contribution level so that it will not exceed 9.5 percent of the employee’s W‑2 wages. W‑2 wages must be adjusted for individuals who were not full‑time or were not offered coverage for the entire year.
• Rate of pay safe harbor. An employer satisfies this safe harbor with respect to an employee for a calendar month if the employee’s required contribution does not exceed 9.5 percent of his or her monthly wage amount. For an hourly employee, the monthly wage amount is the employee’s hourly rate of pay as of the first day of the coverage period (generally, the plan year) multiplied by 130. The monthly wage amount for a salaried employee is his or her monthly salary. An employer may use this safe harbor only to the extent that it does not reduce hourly wages or monthly salaries during the calendar year. Note that this safe harbor may result in higher income for purposes of the affordability determination, compared to the W‑2 safe harbor, because this method does not exclude the employee’s elective deferrals to a 401(k), 403(b), or cafeteria plan.
• Federal poverty line safe harbor. An employer satisfies this safe harbor with respect to an employee for a calendar month if the employee’s required contribution does not exceed 9.5 percent of a monthly amount that is determined by dividing the federal poverty line for a single individual by 12. For example, the 2013 federal poverty line for a single individual in the contiguous U.S. is $11,490/year. If that rate is unchanged in 2014, to satisfy this safe harbor, an employee’s required contribution could not exceed $90.96 per month (i.e., 9.5 percent of ($11,490/12 months)).

Offer of coverage. For both the no‑coverage and inadequate‑coverage penalties, an employer is not treated as having offered coverage to a full‑time employee for a plan year if the employee is not given an effective opportunity to enroll (or decline to enroll) in the coverage at least once during the year. The preamble to the proposed regulations says that an employee must have an opportunity to decline coverage “that is not minimum value coverage or that is not affordable” because an employer could otherwise render an employee ineligible for subsidized exchange coverage by providing mandatory, but inadequate, coverage. Notwithstanding the preamble, the proposed regulations do not say that the opportunity to decline is required only for inadequate coverage. So it is not entirely clear whether employers that prohibit employees from opting out of affordable minimum‑value coverage will be treated as having offered coverage for purposes of the play or pay rules.

Transitional relief for fiscal‑year plans. There are two transitional rules under which a large employer with a fiscal‑year plan will not be assessed a penalty, despite failing to offer its full‑time employees the coverage required by the play or pay rules. The relief is available only to employers that maintained plans as of December 27, 2012, and that offer affordable minimum‑value coverage as of the first day of the 2014 plan year. The relief applies for the portion of the 2013 plan year that falls in 2014.

The first rule provides that no penalty will be assessed with respect to any employee (whenever hired) who is eligible to participate in the employer’s plan under its terms as of December 27, 2012 (whether or not the employee actually elected coverage). If, for example, an employer’s coverage for the 2013 plan year does not provide minimum value or is not affordable and a full‑time employee who was eligible for that coverage receives subsidized exchange coverage, the employer will not be subject to the penalty that would otherwise apply for the period before the first day of the 2014 plan year, if the employee would be eligible for and is offered affordable minimum-value coverage no later than the first day of the 2014 plan year.

The second rule provides that the employer will not be subject to a penalty with respect to any of its full‑time employees until the first day of the 2014 plan year if (1) the fiscal‑year plan (including any other fiscal‑year plans with the same plan year) was offered to at least one‑third of the employer’s employees (full‑time and part‑time) during the most recent open enrollment period before December 27, 2012, or (2) the plan(s) covered at least a quarter of the employer’s employees (determined as of the end of the most recent enrollment period or any date between October 31, 2012, and December 27, 2012). This rule applies only if those full‑time employees would not have been eligible for coverage under any calendar‑year plan that the employer maintained as of December 27, 2012.

Employers using this transitional relief are still subject to the reporting required under Internal Revenue Code Section 6056 for the entire 2014 calendar year. Generally, Code Section 6056 requires large employers to report annually to the IRS whether they offered coverage to their full‑time employees (and their dependents) and certain other information. To comply with this reporting requirement, a large employer will need to track its number of full‑time employees for each month in 2014, notwithstanding the transitional relief available for the employer’s fiscal‑year plan. For the portion of the 2013 plan year that falls in 2014, the employer may identify its full‑time employees for reporting purposes using actual service data (or, presumably, permitted equivalencies for nonhourly employees) rather than the look‑back measurement method described below.

There is a separate transitional rule for fiscal‑year cafeteria plans. Such a plan may be amended to permit an employee who made a salary reduction election for health coverage for the 2013 plan year to prospectively revoke or change that election once during the 2013 plan year, regardless of whether a change‑in‑status event occurred. The plan may also be amended to permit an employee who elected no salary reduction election for health coverage for the 2013 plan year to prospectively elect such coverage during the 2013 plan year, regardless of whether a change‑in‑status event occurred. If an employer with a fiscal‑year cafeteria plan wants to use one or both of these changes, it must amend its plan by December 31, 2014.

Identifying full‑time employees for penalty purposes.

Essential to the play or pay penalty is the identification of an employer’s full‑time employees. As noted above, a full‑time employee is, with respect to a calendar month, an employee with an average of at least 30 hours of service per week (or 130 hours of service per month). The statute contemplates that employees’ status as full‑time (or not) will be determined on a month‑by‑month basis, in real time. The month‑by‑month determination method may work well for standard full‑time and part‑time employees, but it poses significant compliance problems for employers whose employees’ hours fluctuate. Such an employer would know only after the month has ended that an employee was full‑time and should have been offered coverage for that month, at which point it would be too late to offer the coverage and avoid a penalty. The proposed regulations, therefore, provide for an optional look‑back method that employers may use to determine their employees’ full‑time status for penalty purposes. (The look‑back method may not be used for determining large‑employer status.)

Generally, under the look‑back method, an employer selects a “measurement period” during which it will determine whether each of its employees is full‑time. An employee who had an average of at least 30 hours per week during the look‑back measurement period must be treated as a full‑time employee during a subsequent “stability period” (regardless of the employee’s actual hours during the stability period). The employer may also opt for an “administrative period,” between the measurement and stability periods, to determine which employees must be offered coverage and to notify and enroll those employees. The administrative period cannot exceed 90 days (and, in certain cases, must be shorter than 90 days). The look‑back method for “ongoing employees” is different from the method for “new employees.”

Ongoing employees. These are individuals who have been employed for at least one complete standard measurement period. The employer elects how long its standard measurement period is, but the period must be at least three and no more than 12 consecutive months.

• If an ongoing employee is employed an average of at least 30 hours per week during the standard measurement period, the corresponding stability period must be at least six months and no shorter than the standard measurement period. For example, if the employer selects a three‑month standard measurement period, the stability period for full‑time employees must be at least six months. If the employer selects a 12‑month standard measurement period, the associated stability period must be at least 12 months.
• If an ongoing employee is not employed an average of at least 30 hours per week during the standard measurement period, the corresponding stability period must be no longer than the standard measurement period. If, for example, an employer selects a 12‑month standard measurement period, the stability period for non‑full‑time employees must be 12 or fewer months.

The standard measurement and stability periods that an employer selects must apply to all employees, except that an employer may select different periods for collectively bargained and non‑collectively‑bargained employees, employees covered by different collectively bargained agreements, salaried and hourly employees, and employees whose primary places of employment are in different states. Members of a large employer that is a controlled group or affiliated service group are not required to use the same measurement, stability, or administrative periods.

Generally, if an employer wants a 12‑month stability period, it must have a 12‑month measurement period. For stability periods beginning in 2014, however, a special transitional rule permits employers to adopt a shorter measurement period (and still use a 12‑month stability period). The transitional measurement period must be at least six months long, begin no later than July 1, 2013, and end no earlier than 90 days before the first day of the 2014 plan year. For example, an employer with a calendar‑year plan could use a transitional measurement period of April 15, 2013, through October 14, 2013 (six months long and ending less than 90 days before the beginning of the 2014 plan year), followed by an administrative period that ends on December 31, 2013, and then have a 12‑month stability period beginning January 1, 2014.

New employees. These are individuals who have not been employed for at least one complete standard measurement period. If a new nonseasonal employee is reasonably expected, at his or her start date, to be a full‑time employee, there is not an applicable look‑back method. Rather, to avoid any penalty, the employer must offer the employee (and his or her dependents) affordable, minimum‑value coverage at or before the end of the employee’s first three full calendar months of employment.

The look‑back method comes into play for new employees who either are seasonal or will have variable hours. The proposed regulations reserve the definition of “seasonal employee” for purposes of the look‑back method, but through 2014 employers may use a reasonable, good faith interpretation of that term. A new employee is a “variable‑hour” employee if, based on the facts and circumstances at the start date, it cannot be determined whether the employee is reasonably expected to average at least 30 hours of service per week because the employee’s hours are variable or otherwise uncertain. (The regulations do not address new part‑time employees whose hours are not expected to vary. Perhaps such employees will be subject to the same rules as variable-hour employees. The final regulations may clarify this issue.)

The proposed regulations provide for a transitional rule for full‑time, short‑term employees. Under that rule, if a new employee’s period of employment at 30 or more hours per week is reasonably expected to be for a limited period and the employer cannot determine that the employee is reasonably expected to be employed at that level over his or her initial measurement period (discussed immediately below), then the employer can treat the employee as a new variable‑hour employee. This transitional rule expires December 31, 2014, after which an employer must assume that any new nonseasonal employee will be employed for his or her entire initial measurement period.

The look‑back method for new variable‑hour or seasonal employees involves an “initial measurement period” of 3 to 12 consecutive months. The initial measurement period may begin on any date between the employee’s start date and the first day of the following calendar month. The initial measurement period and administrative period combined cannot extend beyond the last day of the first calendar month beginning on or after the one‑year anniversary of the employee’s start date (i.e., the entire period cannot exceed 13 months and a fraction of a month from the start date). The stability period for new variable‑hour and seasonal employees must be the same length as the stability period for ongoing employees.

• If a new variable‑hour or seasonal employee has an average of at least 30 hours per week during his or her initial measurement period, the corresponding stability period must be at least six months and no shorter than the initial measurement period.
• If a new variable‑hour or seasonal employee is determined not to be employed an average of at least 30 hours per week during his or her initial measurement period, the corresponding stability period 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.
• If a new variable‑hour or seasonal employee’s position or status materially changes during his or her initial measurement period such that, if the employee had started employment in that new position or status, he or she would have reasonably been expected to average at least 30 hours of service per week, then, to avoid any penalty, the employer must offer the employee coverage by the first day of the fourth calendar month following the change.

Note that if a variable‑hour or seasonal employee is employed for the duration of a standard measurement period, he or she must be tested under that period, even if it begins before the initial measurement period has ended. An individual employed an average of at least 30 hours per week during either the initial or standard measurement period must be treated as a full‑time employee for the entire associated stability period.

Employees rehired or resuming service after an absence. If, during a measurement period, an employee is rehired or returns to work after an absence, special rules govern the employee’s treatment as a new hire or as a continuing employee for purposes of the look‑back methods. The rules are designed to prevent an employer from inappropriately restarting an employee’s initial measurement period or causing the employee to be subject to a new waiting period for coverage. The rules do not determine an individual’s employment status (i.e., whether the employee is a terminated or current employee) during the period for which no hours of service are credited, and they make no distinction between employees who resume services after a layoff and those rehired after a termination.

Under the proposed regulations, an employer may treat a returning employee as new for purposes of the look‑back method only if the period for which no hours were credited to the employee was (1) at least 26 consecutive weeks, or (2) if chosen by the employer, a shorter period (of at least four consecutive weeks) that exceeds the period of employment immediately preceding the absence. For a returning employee who is treated as a continuing (not a new) employee for purposes of the look‑back methods, the same measurement and stability periods apply upon resuming service that would have applied had the employee not had an absence. Note that the proposed regulations are permissive, which implies that an employer may treat an employee who resumes service after a 26‑week absence as a continuing employee.

Example F: An individual has been employed by the employer continuously for two years and is treated as full‑time for the current stability period. He is laid off four months into the 12‑month standard measurement period and has no credited hours for a period of 20 weeks, at which point he is recalled to work. The employer may not treat the employee as a new hire for purposes of the look‑back method because his absence was shorter than 26 weeks and was shorter than his period of employment preceding the absence. Because he is a continuing (not new) employee, the same measurement and stability periods apply upon his resuming service that would have applied had the employee not had an absence, so he is treated as a full‑time employee upon return and through the end of the stability period. When determining whether the employee had an average of 30 hours per week during the measurement period, the employer would take into account the layoff as a period of zero hours of service and also would take into account the employee’s hours before layoff.

Example G: The same facts as in Example F, except the employee is laid off for 27 weeks. Upon recall, the employer may treat the employee as a new hire for purposes of the look‑back method. Subject to the transitional rule for full‑time short‑term employees, if he is a nonseasonal employee who is reasonably expected, as of his new start date, to be a full‑time employee, then the employer must offer him coverage by the end of his first three full calendar months of reemployment. If, instead, the employer cannot determine, as of his new start date, whether the nonseasonal employee is reasonably expected to average at least 30 hours per week, he may be treated as a new variable‑hour employee, subject to a new initial measurement period.

Example H: A new variable‑hour employee is hired on March 15, 2015, and her initial measurement period begins April 1, 2015. After 12 weeks, the employee quits, but she is rehired, again on a variable‑hour basis, 18 weeks later. The employer may treat her as a continuing employee because her absence was shorter than 26 weeks. In that event, the employer would determine the employee’s average weekly hours during the initial measurement period that began April 1, 2015, and would take into account the 18‑week period of absence at zero credited hours. The employer may instead treat the employee as a new hire, with a new initial measurement period based on her rehire date. This second option is available because the employee’s period of absence was at least four weeks and was longer than her 12‑week period of employment immediately preceding her absence.

The proposed regulations provide for an “averaging method” to be used in a measurement period if the returning continuing employee had a period of unpaid FMLA leave, USERRA leave, or leave for jury duty (“special unpaid leave”). Under the averaging method, the employer includes the special unpaid leave period when determining the employee’s average weekly hours and credits hours for weeks in that period at a rate equal to the average weekly rate for the nonleave period. Alternatively, the employer may exclude the special unpaid leave period from the determination.

The averaging method also applies for returning continuing school employees who had at least four consecutive weeks (disregarding special unpaid leave) without credited hours (an “employment break”) during a measurement period. The school employer must either exclude the employment break period when determining the employee’s average weekly hours for the measurement period or include the break period with hours credited at a rate equal to the average weekly rate for the nonbreak period. A school employer is required to include (or exclude) no more than 501 hours for an employee’s break periods in a calendar year, although that limit does not apply with respect to special unpaid leave.

Will You Play . . . or Pay?

There is no question that these rules are complicated and that their ramifications can be significant. Miller Nash LLP has the expertise to help you determine whether you are subject to the play or pay rules and, if you are, to assist with identifying and understanding your options. Please contact a member of the Benefits Team if you would like any assistance.