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The COVID-19 pandemic raises many issues for employers and employees under the Affordable Care Act (ACA). This Alert focuses on situations employers face in coping with the pandemic, the effect of those changes on their ACA compliance, and potential exposure to employer mandate penalties.

Specific ACA issues discussed in this Alert include:

• Determining full-time status under new leave policies
• Staffing decisions and how they impact potential ACA penalties
• Transmission deadlines for federal, New Jersey, and Washington, DC tax year 2019 reporting

The Alert also includes an example applying these issues to an employer.

General overview of the ACA rules for ALEs

The ACA added Section 4980H to the Internal Revenue Code (IRC), which applies to applicable large employers (ALEs). An employer is an ALE if the combination of full-time employees (generally those who work an average of at least 30 hours per week) and part-time employees converted to full-time "equivalent" employees (FTE) equals or exceeds 50 in the prior calendar year. The ACA defines full-time as averaging 30 hours of actual work per week, not just scheduled, and includes complicated averaging rules found in the regulations. (For more information on calculating hours of service see Tax Alerts 2014-0357 and 2015-2439)

In determining whether a given entity is an ALE, all members of its controlled group are aggregated to determine if the 50 FTE threshold is surpassed. For example, if a parent organization had 25 FTEs in 2019 and its subsidiary had 35 FTEs in 2019, then both parent and subsidiary will be considered ALEs for 2020 even though neither, on its own, had 50 FTEs in 2019.

For ACA purposes, it is important to:

• Accurately count an employee's hours to determine whether an employer is an ALE (which is determined by calculating how many full-time employees an employer has)
• Add up the hours of part-time employees to reach the 50-FTE threshold
• Determine which hours of service should be counted to identify employees considered full-time employees
• Determine whether an employer has offered coverage to 95% of common-law employees who work an average of at least 30 hours per week (95% threshold)

Employer shared responsibility payments (ESRPs)

IRC Section 4980H provides for an excise tax (ESRP), commonly referred to as the employer mandate penalty. Under IRC Section 4980H, an employer can be subject to ESRPs under either IRC Section 4980H(a) or IRC Section 4980H(b).

Under IRC Section 4980H(a), all ALEs must offer "minimum essential coverage" to at least 95% of their full-time employees and their dependents each month or be subject to ESRPs based on the total number of their full-time employees¹ if a single full-time employee secures coverage through the ACA marketplace using the available premium tax credits (the A penalty). For 2020, this amount is set at $2,570 per employee for the year. The A penalty is enforced and assessed on a month-by-month basis, so the 2020 assessment amount is $214.17 per employee per month.

Under IRC Section 4980H(b), employers that fail to offer their employees affordable coverage are liable for ESRPs for each full-time employee who seeks and receives coverage through the ACA marketplace using the available premium tax credits. In that case, an employer would be liable for the penalty for each full-time employee who receives the premium tax credit (the B penalty). For 2020, that amount is $3,860 per employee for the year. The B penalty is assessed on a month-by-month basis, so the 2020 assessment amount is $321.67 per employee per month.

The 95% threshold and the ESRP assessments apply separately to each legal entity in a group (defined by each entity with a separate FEIN).

For purposes of IRC Section 4980H, the Treasury regulations allow employers to choose one of two methods for determining an employee's full-time status — the monthly measurement method or the look-back measurement method. While the details of those two methods are beyond the scope of this Alert, the monthly measurement method is a retrospective measure of the hours worked in a calendar month, while the look-back method averages hours worked in a measurement period to determine prospectively the employee's status in a prospective "stability period." The determination made for the stability period under the look-back method generally applies throughout that period regardless of the hours worked by an employee during that period. That status will remain throughout the stability period, unless and until the employee is terminated.

Determining full-time status

ACA regulations basically categorize leave into paid and unpaid, and hours within each category are treated differently when determining an employee's full-time status.

• Paid leave: hours an employee is paid or entitled to payment due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty, or leave of absence are added to hours worked for purposes of determining FTE status. In other words, time on a paid leave is included with hours actually worked when calculating the total hours the employee worked during the measurement period.
• Unpaid leave: In general, for these purposes, an employee is not credited with hours of service during an unpaid leave of absence.
• Special unpaid leave: jury duty, military leave, or FMLA leave² is not counted as hours worked for ACA purposes. Instead, the time on these special unpaid leaves is factored into the ACA determination by reducing the length of the measurement period by the time spent on one of these leaves (or the equivalent of counting the hours on the special unpaid leave). For example, if an employer has a 12-month measurement period and an employee was on unpaid FMLA leave for two months, the employer would calculate the employee's average hours over the 10 months worked in the measurement period (12 months minus two months on special unpaid leave). This special unpaid leave rule only affects employers using the look-back measurement method but has no effect under the monthly measurement method.

Impact of new leave enacted under the Families First Coronavirus Response Act (Families First Act)

Employers are asking whether emergency paid sick leave and public health emergency leave, both of which were contained in the Families First Act, will be treated as FMLA leave and/or sick leave (for additional discussion about these leaves, see Tax Alert 2020-0586). The new leave requirements apply to employers with under 500 employees, although larger employers may also be implementing similar types of programs for their employees. An employer that is considering expanding its leave programs should keep in mind the ACA requirements for determining FTEs. Employers may leverage the existing rules described previously for absences to determine how to account for employees' hours.

Emergency Paid Sick Leave: As with other types of paid leave, time an employee is out for reasons covered by this provision (described in Tax Alert 2020-0586) should be counted as hours worked for ACA determinations. Employees on this type of leave should have their hours tracked and included in hours worked in determining their full-time status.

Public Health Emergency Leave: Based on current definitions in the IRC Section 4980H regulations, this expanded FMLA leave does not fall under the FMLA definitions of special unpaid leave. To the extent this time off is unpaid, then no hours would be credited. With the requirements for emergency paid sick leave or employees to use available paid time off, however, this period will likely be paid, so those hours will need to be credited for these leaves.

Interaction of emergency paid sick leave and public health emergency leave: Employers must provide 10 days of emergency paid sick leave. Those days will be paid and required to be included in hours worked in determining an employee's full-time status. After the first 10 days, employers must pay employees for the remainder of the FMLA period under the public health emergency leave. This leave will also be counted as paid leave for the ACA and included in hours worked.

While the law calls for paying public health emergency leave after the first two weeks at two-thirds the rate of pay, it generally requires all hours normally scheduled to be worked to be paid. Accordingly, it does not appear that the hours would be prorated for the IRC Section 4980H full-time determinations. In other words, the hours would not be prorated but the full scheduled hours that are paid would be credited for this purpose.

This area is subject to further developments as regulations are expected to further define this leave and the required salary continuation.

Employers with 500 or more employees that adopt a policy mirroring the provisions of the Families First Act would not treat the unpaid portion of this leave as a special unpaid leave. There may be more guidance on that interpretation, as well.

In addition, other leave situations are arising to deal with the impact of COVID-19:

• Paid but not working: Some employers are continuing to pay their employees while their businesses are closed during various directives. There is no explicit guidance from the IRS on whether these hours would count as hours worked. Nonetheless, based on the current guidance and regulations, employers must treat this time as time worked and hours should be included in the ACA determination calculation pending further guidance.
• Furloughs: Employees that are not working and not getting paid can be considered as if they were on a furlough. Some employers are doing this to allow the employee to maintain health insurance. For ACA determination purposes, furloughs are comparable to unpaid leaves of absence and would not count as hours worked. Without further IRS guidance, a furlough would not be considered one of the special unpaid leaves (FMLA, jury duty, military leave) and therefore would not reduce the length of the measurement period when using the lookback method.
• Offers of coverage: Employers can be more generous with offers of coverage than the regulations stipulate. Employers that are implementing new unpaid leave policies do not have to remove the offer of coverage. For example, if an employee only averages 28 hours due to being on an unpaid leave due to COVID-19 at the end of the measurement period, employers can continue to treat him or her as eligible for health benefits. Before expanding eligibility provisions, employers should consult with their benefits counsel regarding their ability to implement such a change under their plan document and any insurance agreements, including stop-loss coverages.

Measuring full-time status

The question of ongoing full-time status for employees will turn on the measurement method the employer uses for determining its full-time work force.

Under the look-back measurement method, the change in hours over a few months may not be enough to move employees into a different (full-time vs not full-time) determination when averaged over the duration of the measurement period. Depending on the length of the crisis, however, some employers, such as health systems, may experience spikes in hours for some employees, so they will be determined to be full-time for the next stability period. The reverse is also true. For example, employers in the hospitality industry are likely to see employee hours decline, which could reduce the number of employees who will qualify as full-time in next stability period.

Under the monthly measurement method, a change in hours in a single month is more likely to change an employee's determination. For example, employees who have traditionally been part-time may now be working significantly more hours, which could lead to a full-time determination. If those employees work 130 hours or more in any month and are not offered qualifying health insurance coverage, they could subject the employer to ESRP liability. On the other hand, employees who are placed on unpaid furlough would have a reduction in hours.

Implications

If the employer uses the monthly measurement method, then its exposure to the A penalty could increase due to the employee's increased workload. The reason is that employees who were not offered health insurance may now be measured full-time. Those employees would be considered full-time but not under an offer of coverage. If there are enough so that the percentage of full-time    employees offered coverage falls below 95%, the employer would be subject to the A penalty.

The B penalty exposure of an employer using the monthly measurement method, however, may be $0 for employees on unpaid furlough. The reason is that employees who remain active under the monthly measurement method but have no hours of service will be "measured" to be not full-time for any month in which they have zero hours of service.³

Employers using the look-back measurement method are in a different situation. In that case, any employee who was determined to be full-time retains that status for the duration of the stability period. Therefore, an employee who is laid off or placed on an unpaid leave of absence remains a full-time employee until actually terminated from employment. If that employee loses the active offer of coverage and the price of the COBRA offer is unaffordable, then the employer could incur B penalties if that employee gets coverage through the ACA marketplace with the help of a premium tax credit.

The regulations and associated guidance allow an employer to change measurement methods, but only if the employer:

• Applies the new method prospectively
• Treats the employee as full-time during the transition period if the employee qualifies as full-time under either method

In other words, an employer using the look-back method cannot change the results of that method in 2020 by changing to a monthly measurement method now. Such a change would not reverse the full-time employee status of any employee during the current stability period. Thus, employers that used the look-back method may have unanticipated ESRP consequences due to a choice that looked like it would hold down ESRP liabilities under normal business conditions.

Staffing decisions

As businesses consider layoffs, furloughs, and other staffing changes in the face of the COVID-19 pandemic, they could be creating potential ESRP assessments. As noted, the ACA subjects certain employers to ESRP if they fail to offer affordable health care coverage to their full-time employees. In some cases, employees who are no longer actively working continue to be treated as full-time employees and thus could trigger ESRP assessments for their employers. Several states have already announced that they will be reopening their health-care marketplaces, giving employees who are no longer actively working an opportunity to purchase coverage and likely triggering an increase in the award of premium tax credits. Moreover, displaced workers may have access to off-cycle coverage through other states' marketplaces or the federal marketplace if they have a qualifying event, such as losing access to their employer's health plan. As a result, employers could have an increased risk of incurring ESRPs if these affected employees obtain marketplace coverage and receive a premium tax credit.

Consequences of layoffs and terminations

ESRPs are only triggered by "full-time" employees. Therefore, the question becomes what happens to an employee's status upon layoff, furlough, leave or termination of employment.

If an employee is terminated, the employer is not liable for ESRPs for that employee for any month that the employee is not an active employee. That is, in any month in which an individual is not considered employed on any day, the employee will not trigger ESRPs for the employer.

The more difficult situations arise in the treatment of employees on layoff, furlough, or leaves of absence. When full-time employees are laid off or placed on unpaid leave and lose employer-provided healthcare coverage, the employer can be subject to ESRP. Generally, employers that offered employees coverage for the portion of the plan year preceding a layoff or placement on unpaid leave will receive credit for a continuing offer throughout the benefit period under IRS and COBRA guidance, if the health coverage does not continue during the employee's absence. In other words, due to the COBRA offer, the employee is viewed as having been offered coverage for those months, at least through the end of the plan year. Therefore, if the employee remains a full-time employee, the employer's deemed COBRA offer will count towards meeting the 95% offer threshold and the A penalty should generally be averted.

Given the price at which COBRA coverage is generally offered, employees who lose their coverage (or offer of coverage) are unlikely to find COBRA coverage affordable. Therefore, the COBRA offer will not provide the employer protection from being assessed the B penalty. In that case, the issue will turn on whether the employee is considered "full-time" for purposes of IRC Section 4980H during the period of layoff or unpaid leave.

Implications

Placing employees on furlough could mean different things to different employers. In some cases, employees on furlough will maintain their eligibility for health care. This will protect the employer from exposure to the A penalty, as employees are still under an offer of coverage while maintaining their full-time status. Even if the employer only charges the employee a portion of the active premium and not the COBRA rate, the fact that the employee is not being paid during the furlough could cause that offer of coverage to be unaffordable. The employee may be able to enroll in marketplace coverage and receive a premium tax credit due to the unaffordable offer of coverage. This could result in a B penalty for the employer. Some employers are choosing not to charge the employee for their portion of the health insurance premium during the time of furlough. In those situations, the health insurance, at a cost to the employee of $0, is affordable and the B penalty would be averted.

Employer example

Health-care systems are facing extraordinary burdens during this COVID-19 pandemic. In addition to increased numbers of patients and those seeking care, hospitals and physician offices are facing critical shortages of supplies. HR departments are balancing taking care of their employees with the need to take care of the patients. With the increased workload for doctors, nurses, and other healthcare professionals, more workers may meet the hours-worked requirements to be considered full-time under the ACA.

If enough workers that are measured as full-time are not offered qualifying coverage, and the employer falls below the 95% offer threshold, then the employer could be subject to significant liabilities. Here is an example to illustrate the potential ESRP assessment for a health-care employer:

Employer (EIN) has 30,000 total employees (18,000 determined full-time and 12,000 not full-time) and uses the monthly measurement method. Employer currently offers qualifying health coverage to 17,600 of the full-time employees, bringing its offer percentage to 97.8%.

Of the 12,000 not full-time employees, 1,500 are doctors or nurses. During this pandemic, if just 600 of those doctors and nurses work enough hours to be determined full-time (130 hours or more each month) and were not offered benefits for that month, the employer's offer percentage would fall to 94.6%. Because the offer threshold falls below 95%, the employer could be subject to an A penalty of $3,983,562 (18,600 full-time employees times $214.17) each month.

If an employer is using the look-back method and this scenario lasts for several months, those health-care professionals that are typically not full-time could have enough hours over the full measurement period to be determined full-time. For a typical 12-month measurement period, an employee must work 1,560 hours to be determined full-time (12 times 130). If a healthcare professional typically works 100 hours per month but works 225 hours per month for three months due to the pandemic, he or she would end up with 1,575 hours and become a full-time employee. For the subsequent stability period, the number of full-time employees could significantly increase. If enough of those employees are not offered qualifying health insurance for that stability period, the employer could fall below the 95% offer threshold.

The look-back method affords an employer a prospective measurement, meaning that the employer can avoid IRC Section 4980H(a) ESRP liability by offering benefits to the newly determined full-time employees in the subsequent stability period. Under the monthly measurement method, however, full-time determinations are based on hours worked in any month. The determination is retrospective, so making new offers cannot avoid the ESRP liability for months in which these unanticipated hours were worked.

The ESRP assessments could be significant for just one month. If this pandemic, and the increased workload, continues for several months, organizations could be looking at potentially very substantial ESRP assessments.

What can employers do to mitigate risk? Aside from limiting the hours health-care professionals can work, employers could consider offering them qualifying health insurance. This may require a change to the plan document and a fair amount of administrative work (communications, benefits administration, payroll changes, negotiation with plan or stop-loss insurers, etc.) but it may be worthwhile to avoid potential multi-million-dollar liabilities.

Transmission deadlines

Employers should note several upcoming transmission deadlines. At this point, other than the New Jersey filing deadline discussed below, the filing deadlines for these ACA-related forms have not been relaxed.

Federal/Internal Revenue Service

The deadline for transmitting Forms 1094-C and 1095-C was March 31, 2020, for employers filing electronically. However, employers may have received an automatic 30-day extension by filing Form 8809 by March 31, 2020. This effectively moved the deadline to April 30, 2020.

New Jersey

On March 19, 2020, the New Jersey Department of Treasury website was updated to extend the filing deadline for Forms 1095-B and 1095-C due to the state from March 31, 2020 to May 15, 2020 (see Tax Alert 2019-1314 for additional information on filing with New Jersey).

Washington, DC

The deadline for uploading Forms 1094-C and 1095-C is June 30, 2020 (see Tax Alert 2019-1467 for additional information on filing with Washington, DC).

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ENDNOTES

¹ There is an offset for 30 employees per ALE group. If there is more than one legal entity in the ALE group, then the 30 are allocated among the group members. Therefore, in large groups, this offset might be as low as one employee for any individual ALE group member.

² The FMLA leave is based on specific definitions under the FMLA and does not include all sections. A section not included in the current definition of special leave for this purpose is the new FMLA leave reason added by the Families First Coronavirus Response Act.

³ One caveat is worth noting. Hours of service are credited under IRC Section 4980H for all paid hours whether those hours are actually worked or paid time off. Therefore, employees who go on paid leaves of absence will likely retain their full-time status if they are paid for the same number of full-time hours that they worked prior to the leaves.