SECOND OPINIONS: Counting Hours for Seasonal Employees

August 7, 2013 (PLANSPONSOR.com) – Experts from Groom Law Group answer a question about seasonal employees and how they are treated under the employer mandate look-back rules.

“My employer has more than 500 full-time employees throughout all departments. Employees are currently offered a good insurance package with a reasonable co-pay. One department has several seasonal employees who work 35 hours per week for 36 weeks, and then they are terminated for the remaining 16 weeks of the year due to winter and lack of work. Each employee works approximately 1,260 hours per year. Averaged over 52 weeks, this results in an average of 24.2 hours per week, less than the 30 hours per week threshold for full-time employee status. What is the proper procedure to determine an employee’s status for insurance coverage?” 

In January, the Treasury Department and the Internal Revenue Service (IRS) published proposed regulations (78 Fed. Reg. 217 [January 2, 2013]) under the employer “shared responsibility” requirements (Internal Revenue Code [IRC] Section 4980H). The proposed regulations allow employers to use an optional, look-back safe harbor method for determining full-time employee status. The treatment of the employees described in your scenario under the employer mandate rules will depend in part on whether your employer elects to use these look-back rules, the length of any look-back and stability periods it elects to use, and the application of rules on the treatment of rehired employees and employees returning after other absences. 

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As described in previous columns, the proposed regulations permit an employer to elect to use a “look-back measurement period” for counting hours of service, a “stability period” during which coverage may have to be provided (depending on full-time employee status during measurement period), and an “administrative period” that allows time for enrollment or disenrollment. The employer may choose the length of time for the measurement and stability periods (generally, up to 12 months for each), within specified parameters. The safe harbor requirements differ based on whether employees are “new” employees or “ongoing” employees, and, in the case of new employees, whether the employees are expected to work full time or are “variable” or “seasonal” employees. If an employer elects not to use the safe harbor rules, the statutory language in Code Section 4980H suggests that the determination of full-time employee status—and application of the excise tax penalties—will occur on a month‐to‐month basis.

The term “seasonal employee” is not defined in the proposed regulations. Instead, the proposed regulations state that employers may use a reasonable, good faith interpretation of the term seasonal employee until further guidance. The preamble to the proposed regulations indicate that the Treasury Department and the IRS may adopt a specific time limit (e.g., up to six months)) for “seasonal” in future guidance. Employees of educational organizations generally may not be treated as seasonal.

The proposed regulations contain rules regarding how the look-back safe harbor requirements apply to employees who are rehired after termination of employment or who resume service after other absences, and, specifically, whether the employer is required to consider the employee’s previous service in determining full-time status. For example, the proposed regulations provide that, if the period of “no service” was at least 26 consecutive weeks, an employer may treat an employee who returns to work as a new employee for purposes of determining the employee’s status as a full-time employee. For “no service” periods of less than 26 weeks, the employer may apply an optional rule of parity and treat the employee as a new employee if the “no service” period is at least four but less than 26 weeks long and is longer than the period of employment. If neither of these tests is satisfied, the employer must treat the employee who returns to work as a continuing employee who retains the same measurement and stability period that would have applied if the employee had not had a period of “no service” (e.g., if an employee who was being treated as full time for a stability period returns during that stability period, he or she must be treated as full time for the balance of the stability period). Special rules apply in the case of a continuing employee who resumes after a special unpaid leave (FMLA, USERRA, jury duty).

Under the facts you describe, the treatment of the employees will vary depending on, among other things:

  • whether the employer elects to use the look-back rules;
  • the length of the measurement and stability periods it elects to use;
  • whether the employees satisfy the definition of seasonal employees to be provided in future guidance;
  • the length and timing of the period during which the employees are employed;
  • the length of any gap in employment; and
  • whether the employer elects to use the optional rule of parity.

You can find a handy list of key provisions of the Patient Protection and Affordable Care Act (PPACA) 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.

PLEASE NOTE: This feature is intended to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice.

Cracks in the Nest Eggs of Displaced Workers

August 6, 2013 (PLANSPONSOR.com) - Displaced workers have suffered setbacks in their retirement savings, a survey shows.

 

According to the survey report, “Repairing the Damaged Retirement Nest Egg: How to Improve the Retirement Outlook of the Unemployed and Underemployed,” part of the 14th Annual Transamerica Retirement Survey, 62% of displaced workers are “not too” or “not at all” confident about their retirement prospects.

The ultimate objective of the study was to shine a light on the tens of millions of Americans who are still looking to regain their financial footing, said Catherine Collinson, president of the Transamerica Center for Retirement Studies. The economic downturn resulted in unemployment or underemployment for many, she noted. Transamerica also wanted the study to help highlight opportunities to help displaced workers get back on track with their savings.

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The findings present a sobering reality of the challenges that the unemployed and underemployed face, Collinson told PLANSPONSOR. Collinson uses the word “displaced” to refer to both groups of workers. Even amid signs of economic recovery and an unemployment rate that has been showing signs of improvement, millions of Americans are still unemployed or underemployed, Collinson pointed out.

“Many displaced workers have raided their retirement accounts to make ends meet, and many may be overlooking the importance of retirement benefits as they seek meaningful employment. It’s critical that we raise awareness of the issues and identify opportunities to help them rebuild their long-term financial futures,” she said.

Fifty-nine percent of displaced workers report having a retirement savings account of any kind, the study found. But, despite a widespread recognition of the taxes and penalties that may apply, more than one-third (36%) of displaced workers who have retirement accounts have made withdrawals because of their financial predicament. 

Collinson said plan sponsors should consider including some guidance about how to handle retirement accounts, with a strong educational message about the risks of taking loans. “Further underscore the consequences of taking early withdrawals to employees,” she said. It may not be the most cheerful news, she added, but having more knowledge could lead to better decisions on the part of plan participants.

“Some leakage comes from participants who had outstanding plan loans at the time of separation,” Collinson observed. Plan loans, typically on a five-year repayment plan, might be a wolf in sheep’s clothing, she said, since statistically people change jobs more often than five years. If the employment is ended, the repayment period is much shorter, and if the employee can’t repay the loan, it turns into taxable distributions. “Statistically speaking, a significant number of plan sponsors offer multiple loans,” she said. “But are multiple loans really necessary?”

A simple thing plan sponsors can do for all employees is promote awareness of the saver’s credit for low- to moderate-income workers to save for retirement, Collinson said. “The second thing employers should do is to keep the faith in offering competitive retirement benefits. Make the plans as efficient as possible with auto features so that people who are displaced can begin saving again as soon as possible, as soon as they regain employment.

“The passage of time out of work, especially the one-year mark, can have a detrimental effect on retirement accounts,” Collinson said. “Forty-two percent of those displaced for a year or more took a withdrawal compared with only 23% of those displaced for less than a year.”

Of those who participated in a 401(k) plan at their most recent employer where they were fully employed, 43% indicate they have taken a withdrawal from their accounts, including 53% of the unemployed and 38% of the underemployed. “While being underemployed is certainly not ideal, statistically it is better because people are not as forced to tap into retirement accounts to make ends meet,” Collinson said.

Another sobering figure, Collinson noted, is that median savings of all displaced workers, both with and without a retirement account, is $7,500. “Those in their 40s have been especially hard hit,” she said. People in their 40s showed median savings of $1,900, and also showed the highest level of withdrawal activity.

Collinson, who described herself as someone who obsesses over numbers, said she was really astonished at the difference in estimated median household savings between those with college degrees versus those with high school diplomas. The difference in estimated median savings is “huge,” she said: Displaced workers with a  college degree have saved an estimated median of $60,300, versus those with a high school diploma or some college, who have saved $3,300. “So there is an even higher cost associated with not having a degree,” Collinson said.

The underemployed report higher levels of retirement savings at an estimated median of $8,600 compared with the unemployed at $6,500. The study also found that the underemployed are faring better than the unemployed in terms of income, health care benefits and general outlook. 

“Many displaced workers may be overlooking the importance of retirement benefits when seeking employment opportunities, which could put them at a greater disadvantage in terms of rebuilding their retirement savings,” Collinson said. Only 17% of displaced workers cite generous retirement benefits as one of their top three most important characteristics of a future employer. The majority (56%) say competitive pay, followed by company stability (33%) and a convenient commute (31%) are most important to them.

Fifty-five percent of respondents prefer a job with higher pay but poor retirement benefits. In making this trade-off, they are placing a higher priority on immediate financial goals but may be overlooking retirement benefits, which can be a meaningful part of their compensation package to build a more secure long-term financial future.

“From a public policy perspective, our current retirement system is largely predicated on the assumption that workers have access to meaningful employment so that they can self-fund a substantial portion of their retirement,” Collinson said. “If displaced workers fail to overcome retirement savings setbacks due to unemployment or underemployment, society may ultimately bear the cost when future generations of senior citizens run out of savings.”

A 10-minute online survey was conducted by Harris Interactive on behalf of the Transamerica Center for Retirement Studies between March 5 and  March 19 among a nationally representative sample of 610 unemployed  or underemployed U.S. residents, age 18 or older. Survey respondents were previously fully employed in a for-profit company employing 10 or more people and were unemployed or underemployed at the time of the survey.

The full report can be viewed online.

 

Jill Cornfield

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