Last fall, the Internal Revenue Service (IRS) released guidance (Notice 2014-49) that addresses several issues not addressed in the final employer mandate regulations regarding the application of the look-back rules in situations in which the measurement method or period changes.

The final employer mandate regulations describe two measurement methods that applicable large employers (ALEs) can use to determine whether an individual is a full-time employee: (1) the look-back measurement method; or (2) the monthly measurement method.

Under the final regulations, an employer generally must apply the same measurement method and, if using the look-back method, the same measurement period, to all employees in the same category (e.g., salary vs. hourly). The final regulations include rules on an employee transferring from a category for which one measurement method applies to a category under which the other method applies, but do not address the rules that apply if an employer changes the measurement method or period for a category of employees. 

The Notice describes proposed approaches for applying the look-back rules when an employee transfers from one position to another with an employer and when an employer changes measurement methods or periods for a category of employees. It also requests comments on the potential application of these approaches in the case of corporate transactions such as mergers and acquisitions.  Below we address frequently asked questions related to the Notice. 

How do the look-back rules apply to employees who transfer positions or between employers? 

The Notice addresses situations in which an employee experiences a change in measurement method or period as a result of a transfer between ALE members or between employee categories. Following the transfer, the employer must take into account the hours of service earned in the first position either by counting the hours using the counting method applied to the employee in the first position or recalculating the hours of service earned in the first position using the hours of service counting method applied to the employee in the second position. 

The Notice proposes an approach to apply the look-back measurement method after the change. In general, the application of the look-back rules vary depending upon whether the employee was in a stability period or administrative period applicable to the first position as of the date of the transfer. If the employee was in a stability or administrative period as of the transfer date, the employee’s full-time or part-time status for the first position remains in effect until the end of that stability period. Then, at the end of the applicable stability period, the employee assumes the full-time or part-time status that employee would have had under the look-back method applicable to the second position (and including hours from the first position). 

For employees not in a stability or administrative period as of the transfer date, the employee’s full-time or part-time status is determined solely under the look-back method applicable to the second position as of the date of transfer, including all hours of service in the first position. Otherwise, the general look-back rules, including the rules that apply to new, full-time employees, continue to apply.

How do the look-back rules apply if the employer changes the measurement method or measurement period for a category of employees? 

The Notice includes rules that apply when an employer makes changes in the measurement method, or the duration or start date of the measurement period, that applies to a category of employees. In general, the Notice applies the rules in the final regulations that apply to an employee transferring from a category for which one measurement method applies to a category under which the other method applies to all employees impacted by the employer’s change in methods for a “transition period” after the effective date of the change. In general, the rules in the final regulations apply as if on the date of the change each of those employees had transferred from a position to which the original measurement method or period applied to a position to which the revised measurement method or period applied.

What rules apply in the case of mergers and acquisitions? 

The final regulations provided only limited guidance about the application of the rules in the case of mergers and acquisitions and indicated that the IRS would issue further guidance. The Notice requests comments about the potential application of the approach proposed in the Notice in the context of corporate transactions such as mergers and acquisitions. 

The Notice states that until further guidance is issued and at least through the end of 2016, employers involved in corporate transactions in which employers use different measurement methods may rely on the approaches described in the Notice (i.e., for employee transfers) in determining an employee’s status as a full-time employee. As an example, the IRS describes a situation where one corporation (seller) merges into another corporation (buyer) and both corporations use the look-back method, but with different measurement periods. The corporations may apply the approach set forth in the Notice by treating the seller’s employees as having transferred on the date of the merger from one position (at seller) to another position (at buyer) with a different measurement period.

The Notice also includes a proposed approach under which an ALE member may apply to its newly acquired employees as a result of a transaction the measurement method that applied to the acquired employees immediately before the corporate transaction during a transition period. The IRS notes that this proposed approach for corporate transactions is not necessarily the only permissible approach and requests comments on other possible approaches.

You can find a handy list of Key Provisions of the Patient Protection and Affordable Care Act and their effective dates at http://www.groom.com/HCR-Chart.html   

Contributors:   

Christy Tinnes is a principal in the Health & Welfare Group of Groom Law Group in Washington, D.C. She is involved in all aspects of health and welfare plans, including ERISA, HIPAA portability, HIPAA privacy, COBRA, and Medicare. She represents employers designing health plans as well as insurers designing new products. Most recently, she has been extensively involved in the insurance market reform and employer mandate provisions of the health-care reform legislation.   

Brigen Winters is a principal at Groom Law Group, Chartered, where he co-chairs the firm's Policy and Legislation group. He counsels plan sponsors, insurers, and other financial institutions regarding health and welfare, executive compensation, and tax-qualified arrangements, and advises clients on legislative and regulatory matters, with a particular focus on the recently enacted health-reform legislation.