The IRS has not made any changes to the ACA's hours of service threshold for offering health coverage or affordability calculations due to the COVID-19 pandemic.

With the enactment of the Families First Coronavirus Response Act (Families First or FFCRA) and new state leave laws, employers have many questions about how leaves due to COVID-19 will affect Affordable Care Act (ACA) hours of service and affordability calculations. The IRS has not made any changes to the ACA's hours of service threshold for offering health coverage or affordability calculations due to the COVID-19 pandemic. Nothing in the recently enacted stimulus laws, the FFCRA and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) amends the ACA's employer mandate or related IRS reporting requirements on Forms 1094-C and 1095-C. Unpaid leaves (including layoffs and furloughs that do not rise to the level of termination of employment), however, can pose unique challenges from an ACA perspective, particularly when it comes to employees' eligibility for benefits for employers who tie eligibility for medical benefits to an employee's ACA Full-Time status. Below are some points to consider for employers with employees on unpaid leave.

Rules for determining an employee's ACA full-time status haven't changed

  • Hours of service. ACA Full-Time status under the look-back measurement method is determined by calculating an employee's hours of service during his or her measurement period. An hour of service is defined as "each hour for which an employee is paid, or entitled to payment by the employer for a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence." Unpaid leave is a period in which an employee isn't credited with any hours of service. The impact of this on ACA eligibility depends on whether the unpaid leave is considered "Special Unpaid Leave."

Employers relying on the monthly method look to hours for which the employee is paid (or entitled to pay) in the current month. So, an employee who goes on an unpaid leave of absence (including a furlough or a layoff) would typically lose ACA Full-Time status for that month (depending on the length of the furlough).

  • Special unpaid vs unpaid leave. The ACA contains special rules for calculating eligibility when an employee is on unpaid leave due to jury duty, the Family and Medical Leave Act of 1993 (FMLA), or the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA). The period during which employees are on one of these special unpaid forms of leave can be excluded or imputed for purposes of ACA Full-Time status calculations for employers who utilize the look-back measurement method. This ensures that these periods of leave do not negatively impact an employee's eligibility determination under the look back measurement period.

Any of the expanded FMLA leave that is paid (even at a partial rate) is not considered Special Unpaid Leave under the ACA. Only unpaid FMLA is considered Special Unpaid Leave for purposes of the calculation. Under all other circumstances, periods of unpaid leave are included in an employee's ACA eligibility calculations.

Leave Type

How Hours are Credited for ACA Purposes

Paid

Credited to (or included in) the eligibility calculation just as any "hours of service" are credited

Special Unpaid Leave

(FMLA, USERRA, jury duty)

Weeks containing any unpaid, special leave are excluded from the eligibility calculation or may be imputed at a rate equal to the average weekly hours of service for weeks that are not part of a special unpaid leave.

Note: If an employee is on an unpaid, special leave for one day of the week, then that entire week is excluded from the ACA eligibility calculation.

Example (excluding hours from eligibility calculation):

  • Employee is on a 12-month measurement period (52 weeks) working 40 hours per week.
  • Employee goes on FMLA unpaid leave for 6 weeks
  • Eligibility calculation would include only 46 weeks at 40 hours per week (52 weeks – 6 weeks FMLA).

Unpaid (including furlough or layoff with no termination of employment)

Period employee is on unpaid leave is included in calculation with zero (0) hours for that period.

Example:

  • Employee is on a 12-month measurement period (52 weeks) working 40 hours per week.
  • Employee is on unpaid leave (not special) for 6 weeks
  • Eligibility calculation would include all 52 weeks (46 weeks at 40 hours per week and 6 weeks at 0 hours per week.

Stability periods under the look-back measurement method

For employers who tie eligibility for medical benefits to an employee's ACA full-time status and use the look-back measurement method, if an employee experiences a reduction in hours (even to zero in the event of a furlough) and is a stability period with an ACA full-time status, the employer is obligated to continue medical benefits while the employee is still active and in a stability period under the terms of their plan. If the employer terms the benefits and offers COBRA, they risk a penalty under 4980H if the employee goes to the Marketplace and receives a premium tax credit.

COBRA reduction in hours offer

If an employee were to become ineligible for group health benefits due to a reduction in hours, that would constitute a qualifying event that would trigger continuation of group health benefits under COBRA. Importantly, however, termination of coverage due to a reduction in hours is a COBRA event, and COBRA remains an offer of coverage. This mitigates a risk of an ACA penalty under Section 4980H(a). Employees who experience a reduction in hours and who have been offered COBRA would be treated as having received an offer of coverage for purposes of the 95% threshold under Section 4980H(a), regardless of whether they actually elect COBRA continuation coverage. However, because the premium amounts associated with COBRA reduction in hours offers are generally high, an offer of COBRA coverage will typically be unaffordable. A penalty under 4980H(b) though would only be triggered if the COBRA qualifying beneficiary declines the COBRA offer, goes to the Marketplace and receives a premium tax credit. Note that persons electing COBRA cannot trigger a penalty.

Break in service rules

The ACA contains special rules that allow an employer to treat an employee as a new hire in circumstances in which the employee has been on unpaid leave (regardless of whether the leave is considered special) for a certain period.

An employee who has been on unpaid leave for more than 13 weeks (26 weeks for educational organizations) may be treated as a newly hired employee upon their resumption of services (i.e. when they are first credited with an hour of service upon return from the leave). This would mean that an employee who was in a stability period could be placed back into an initial measurement period or other limited non-assessment period as of the date they resume services. Note that an employee's stability period remains until the employee resumes services, so terminating coverage for a full-time employee prior to his or her resumption of services may leave employers open to potential ACA penalties.

The ACA's Rule of Parity shortens the period an employee would need to be on unpaid leave for before the employee can be considered a newly hired employee. Under the Rule of Parity, an employer can treat an employee as a new hire if the number of weeks of unpaid leave is both (1) at least four weeks long and (2) exceeds the number of weeks of employment immediately preceding the period during which no services are performed.

Unpaid leaves may affect ACA affordability under the W-2 safe harbor

There are three safe harbors that are available to employers to demonstrate plan affordability under the ACA. These are W-2 (based on Form W-2, Box 1 wages), Federal Poverty Line (based on the Federal Poverty Level for a single individual), and Rate of Pay (based on the employee's hourly rate of pay). A reduction in hours (and a corresponding reduction in pay) should not affect affordability for purposes of the Federal Poverty Line safe harbor or the Rate of Pay safe harbor.

Having employees on unpaid leave, regardless of whether that leave is considered special or not, may have the impact of lowering an employee's Form W-2, Box 1 wages. This may mean that employers with employees on unpaid leave who typically use the W-2 Safe Harbor may want to consider whether coverage is more affordable under one of the alternative Safe Harbors. Notably, while this marginally increases the risk of penalty under Code Section 4980H(b), no penalty would apply for persons who remain enrolled in coverage, the penalty could apply for those who have declined coverage, enroll in the Marketplace and receive a premium tax credit.

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