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Does the Affordable Care Act Require Health Insurance Coverage for Substitutes?
On January 2, 2013, the IRS issued proposed rules addressing key issues for employers under the Affordable Care Act (ACA). One of these issues is the method for determining which
workers will be considered full-time employees under the ACA. This determination is important because employers are subject to penalties if they fail to offer minimum essential coverage to all full-time employees. For purposes of the ACA, a full-time employee is a worker who is employed 30 or more hours per week.
The proposed rules do not expressly require districts to offer health insurance to all substitutes. The rules would, however, result in some substitutes’ being considered full-time employees for purposes of the ACA penalty. Specifically, a substitute who averages 30 or more hours per week, over an extended period of time, would be considered to be full-time under the ACA. To assist districts with fiscal planning for the 2013-14 school year, TASB Legal Services provides the following general overview of the proposed rules for determining whether employees who work variable hours, such as substitutes, will be deemed to be full-time employees under the ACA Penalty
It is important to understand when a district will incur a penalty under the ACA for failing to offer health insurance coverage to substitutes and other variable-hour employees. In many cases, the number of variable-hour employees who meet the ACA’s definition of full-time is too small to create liability for the district under the ACA.
Beginning January 1, 2014, a large employer is subject to a penalty under the ACA if it fails to offer minimum essential coverage to all of its full-time employees.1 The penalty is $2,000 per full-time employee, including employees to whom insurance was offered.
Example: District A has 500 employees who are regularly scheduled for 30 or more hours per week. The district offers health insurance to all of these employees. The district also has 50 substitutes who meet the ACA’s definition of full-time (see below). Therefore, for ACA purposes, the district has 500 + 50 = 550 full-time employees. The district does not offer health insurance to substitutes. The district is subject to an annual penalty: 550 full-time employees x $2,000 = $1,100,000.
5% Exception: The IRS has recognized that this “all or nothing” penalty could have harsh
consequences if an employer inadvertently fails to offer health insurance to even one employee who is deemed full-time under the ACA. Accordingly, the IRS has proposed an exception to the
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For the rules on determining whether a district is a large employer, see TASB Legal Services’ School Districts and the Affordable Care Act.
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penalty if an employer offers health insurance to at least 95% of its full-time employees. 78 Fed. Reg. 232-3. For small employers, the exception applies if the employer offers insurance to all but 5% of its full-time employees or, if greater, five full-time employees.
Under this exception, a district that fails to offer health insurance to its substitutes would not be subject to the ACA penalty unless: (a) the substitutes meet the ACA definition of full-time; and (2) these full-time substitutes, plus any other full-time, variable-hour employees to whom insurance was not offered, comprise more than 5% of the district’s full-time workforce.
Example: District B has 500 employees who are regularly scheduled for 30 or more hours per week. The district offers health insurance to all of these employees. The district also has ten substitutes who meet the ACA’s definition of full-time. Therefore, for ACA purposes, the district has 500 + 10 = 510 full-time employees. The district does not offer health insurance to substitutes. Because the district offers health insurance to 500 of its 510 full-time employees (98%), it would not be subject to the ACA penalty. Before allocating resources to determining a measurement period and related issues, a district should calculate the number of variable-hour employees, including substitutes, who potentially meet the ACA’s definition of full-time. If this number is limited, the district may fall under the 5% exception and not be at risk for the ACA penalty.
Full-time, Variable-hour Employees
Determining whether an employee with variable hours, such as a substitute, works 30 or more hours per week is problematic because the hours of such an employee are, by definition,
unpredictable. The proposed regulations would permit an employer to use the employee’s average service hours during a look-back period to make this determination for purposes of the ACA. 78 Fed. Reg. 226-9; proposed 26 C.F.R. § 54.4980H-3(c). Here is how the look-back period would work:
Standard measurement period: A district would designate a measurement period of 3 to 12 months. The measurement period is used to determine the average weekly hours of a variable-hour employee for purposes of the ACA. If the employee averages 30 or more hours per week during the measurement period, the employee would be considered full-time, under the ACA, during the subsequent stability period. 78 Fed. Reg. 226; proposed 26 C.F.R. § 54.4980H-1(a)(40), 54.4980H-3(c).
Stability period: During the stability period, the district must offer health insurance to a variable-hour employee who is deemed to be full-time, under the ACA, based on hours worked during the measurement period, regardless of the number of hours the
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measurement period2 and would last the greater of (1) six months; or (2) the duration of the measurement period selected by the district. 78 Fed. Reg. 226; proposed 26 C.F.R. § 54.4980H-1(a)(39).
In other words, for purposes of the ACA, a variable-hour employee’s full-time status during a stability period is based on the average weekly hours worked by the employee during the
preceding measurement period. If the employee averaged at least 30 hours per week during the measurement period, the employee would be considered full-time, under the ACA, during the stability period and the district would be subject to the ACA penalty if it failed to offer insurance to the employee. As discussed above, however, an exception to the penalty may apply if full-time, variable-hour employees comprise less than 5% of the district’s full-time workforce.
Example: District A selects a standard measurement period of seven months. During the measurement period, the district determines that a substitute has worked an average of 30 hours per week. The district is subject to a penalty (unless the 5%
exception applies) if it does not offer health insurance to the substitute for the duration of the subsequent stability period.
If the district determined that the employee did not average at least 30 hours per week during the measurement period, the district would not be subject to the ACA penalty for failing to offer insurance to the employee during the subsequent stability period.
Other Issues
The proposed rules cover a number of aspects relating to the look-back period that are beyond the scope of a general overview, including:
who is a “variable hour employee”, including employees serving in multiple, variable-hour positions
who is a “new employee,” including impact of breaks in service, and how the standard measurement period applies to new employees
what is an “hour of service”
averaging hours for educational organizations during “special unpaid leaves” and employment break periods
methods for determining the measurement period
effect of a change in employment status of a variable-hour employee transition relief for calendar year 2014
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4 TASB will address these topics in the near future. Practical Implications
It is important to remember that these are proposed rules that may be revised before they are finalized. However, the IRS has stated that employers may rely on the rules as guidance until final regulations are adopted or further guidance is issued.
Based on the rules as proposed, here are key points to remember:
The rules for variable-hour employees do not apply to employees who work a regular schedule. The rules outlined above are to be used only to determine whether a
variable-hour employee is full-time for purposes of the ACA. A “permanent substitute” or similar
employee who has a regular, albeit temporary, assignment is not a variable-hour employee. A district is subject to the ACA penalty for failing to offer benefits to an employee whose hours are not variable, even if the employment is expected to be temporary. The district would not be liable for the penalty during the employee’s 90-day waiting period, however.
A district should analyze its variable-hour workforce, including substitutes, to determine how many of these employees might be considered to be full-time under the ACA. If
these employees comprise more than 5% of the district’s full-time workforce, the district should plan for health insurance coverage for these employees for the 2013-14 school year. Alternatively, the district may decide to limit the hours of substitutes and other
variable-hour employees to avoid application of the ACA to these employees.
Districts with a sufficient number of variable-hour employees (i.e., more than 5% of all full-time employees, including full-time, variable-hour employees) should designate a standard measurement period. The determination may need to be made as early as the
beginning of the 2013-14 school year. TASB will provide further guidance on this
determination.
Employees who are full-time for ACA purposes may not be full-time for other purposes, such as eligibility to participate in TRS-ActiveCare, and vice versa. Further, the penalty
under the ACA for failing to offer insurance is separate from an employee’s eligibility for coverage under the district’s insurance plan. For districts that participate in
TRS-ActiveCare, an employee may be eligible for coverage if employed for 10 hours or more each week.3 Such an employee may not be considered full-time under the ACA.
Open enrollment periods under TRS-ActiveCare and other insurance plans are
independent of ACA requirements. Districts should plan to offer insurance to employees
who will be considered full-time under the ACA during open enrollment periods for the applicable health insurance plan.
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The foregoing is a general overview of a very complex subject. For further guidance, districts should contact their school attorneys. Districts may also contact TASB Legal Services at 800.580.5345. TASB Legal Services will continue to monitor developments under the Affordable Care Act as they pertain to Texas school districts.
This document is provided for educational purposes only and contains information to facilitate a general understanding of the law. It is neither an exhaustive treatment of the law on this subject nor is it intended to substitute for the advice of an attorney. It is important for the recipient to consult with the district’s own attorney in order to apply these legal principles to specific fact situations.
