Update: The post below has been updated.  After discussing this post with an alert reader, we have concluded that the correct reading of the regulations is reflected in Q8-10 below.  The good news is: we don’t think there is a hole in the play or pay regulations!  However, this reading of the rules results in John Boy (in our example) not getting coverage for more than two full years!  Please see below.

In a prior post we discussed the general rules for hours counting and what it means to be full time under the play or pay/shared responsibility rules under ACA (a.k.a. health care reform).  In this post, we address the special rules for new hires/new employees and how those rules overlap with the rules for ongoing employees.  As before, we retain our Q&A format.

Q1: Who is considered a new employee?

Someone who has not been employed for at least one standard measurement period (SMP) is a new employee.  (See our prior post for more detail on SMPs).

Q2: Do I have to count hours for all my new employees?

You don’t have to count hours for anyone if you just offer coverage to all your employees.  However, assuming you don’t want to do that, then to the extent you choose to count hours, you can only count hours for new employees who are either (1) seasonal employees or (2) variable hour employees.

Q3: Who is a seasonal employee?

Right now, we don’t know.  The definition is “reserved.”  The IRS has said any reasonable, good faith interpretation may be used.  However, it is not reasonable to treat an employee of an educational organization (e.g. teachers/professors) as “seasonal” even though they may not work a full 12-month year.  (Note that “seasonal employee” is different than “seasonal worker,” which is the term that applies for determining if an employer is subject to the play or pay/shared responsibility tax.)

Q4: Who is a variable hour employee?


Not this kind of imp.

A variable hour employee is someone who, as of his/her start date, you cannot tell whether that employee is reasonably expected to work an average of at least 30 hours per week during the initial measurement period (IMP).  This is a “facts and circumstances” determination, which basically means you have to take all relevant information into account and the IRS is unlikely to provide much, if any, guidance on what facts and circumstances are relevant.  However, the IRS has said that, beginning in 2015, you cannot take into account the likelihood that the employee may terminate employment before the end of the IMP, so at least you know that.

Q5: How long can an IMP be?

It can be between 3 and 12 months, as selected by the employer.

Q6: When does an IMP start?

It can start any time between date of hire and the first of the month following date of hire.  You could even pick two days in a month.  For example, you could say that the IMP for all employees hired on the first through 15th will be the 15th and the IMP for all employees hired after that will begin on the last day of the month.

Q7: What if I determine that my new seasonal or variable hour employee worked more than 30 hours/week or 130 hours/month during the IMP?

Then you have to treat her as full time (i.e. offer coverage for her and her non-spouse dependents) during the following stability period.  The stability period has to be at least six months long and cannot be shorter than your IMP.  However, there are special rules for when the person moves from being a “new” employee to an “ongoing” employee” discussed below.

Q8: And if I determine that he didn’t?

Then you can treat him as not full-time/not have to offer him coverage during the stability period.  In this case, the stability period is subject to a few rules:

(1)  it cannot be more than 1 month longer than the IMP

(2)  it cannot exceed the remainder of the SMP (plus any administrative period) in which the IMP ends.

So for example, say you have an SMP of October 15 to October 14 and an administrative period that runs through December 31.  Say you’ve also chosen an 12-month IMP and a 12-month stability period following the IMP.  John Boy is hired on October 31, 2013 and he’s a variable hour employee.  You measure JB’s hours from October 31, 2013 to October 30, 2014 and determine that he was not full-time.   Under rule (2) immediately above, John Boy’s stability period cannot exceed the remainder of the SMP (plus any administrative period) in which the IMP ends.  Shall we read this to mean that the period in which the IMP ends includes the associated administrative period, or that it does not?   October 30, 2014 falls in the administrative period following the 2013-2014 SMP, but it also falls within the 2014-2015 SMP that begins on October 15, 2014.  While the regulations are a bit unclear, we think the better reading is that the period in which the IMP ends does not include the associated administrative period, and therefore, that John Boy’s initial stability period does not end December 31, 2014, but can last the full 12 months.

Q9: Do I get any kind of administrative period for new employees?

Yes, it can also be up to 90 days, but there are a couple of catches.  First, you do not have to start your IMP on a date of hire (as noted above).  But if you pick a later date (like first of the month following date of hire), any days between date of hire and that later date count against the 90-day period.

Perhaps more important, however, is that the combination of your IMP and the administrative period for new employees cannot extend beyond the last day of the first calendar month beginning on or after the first anniversary of date of hire.  So in the example above with John Boy, the combined IMP and administrative period could not extend beyond November 30, 2014.  This creates an incentive to hire employees early in the month but after the first of the month to provide as much time as possible for the administrative period.  This is particularly true for employers who choose a date other than date of hire to start the IMP.

Q10: You mentioned some rules about new hires transitioning to ongoing employees.  Can you talk about that some more?

Basically, once an employee has been employed for one full SMP, he or she is an ongoing employee.  This means there could be significant overlap between the SMP and IMP and their respective stability periods.  There are essentially 4 scenarios:

(1)  Employee determined to be full-time during IMP and SMP – This is an easy one.  The employee must be offered coverage for the stability period following the IMP and the stability period following the SMP.  Going back to the John Boy example, assuming you took the maximum administrative period (through November 30), he would have to be offered coverage for the month of December 2014 and all of 2015.

(2)  Employee determined to be full-time during the IMP, but not during the SMP – This employee has to be offered coverage for the entire stability period following the IMP.  In the John Boy example, he would be offered coverage through November 30, 2015.

(3) Employee not full-time during IMP, but is full time during SMP – The employee does not have to be offered coverage until the stability period following the SMP.  In the John Boy example, the initial stability period would go through November 30, 2015.  At that point, JB has been through an SMP (October 15, 2014 – October 14, 2015), but his coverage (if elected) does not need to begin until January 1, 2016.  Note that under our facts, John Boy is not offered coverage for more than two years from his date of hire (October 31, 2013)!

(4)  Employee not full-time during either measurement period – This result is the one you think it is – no coverage during either period.

Q11: Can I have different IMPs and IMP stability periods, like I do for SMPs, for different categories of employees?

Yes, and they’re the same categories as we detailed in the prior post.

Q12: What if I determined that John Boy was full-time during the IMP and during the stability period he tells me he wants to go back to the prairie and only work part-time (because of the long commute)?

The same rules as we described in the prior post apply: he still must be considered full-time and eligible for coverage during the stability period.

Q13: Does the same rule apply if he is not full-time, but then I promote him to a full-time position during the IMP?

Here it’s a bit different.  Under these rules, you have to treat John Boy as a full-time as of the earlier of:

(1)  the first day of the fourth month following his promotion; or

(2)  The first day of the first month after the end of the IMP and any administrative period.

However, other health reform rules currently require you to offer coverage within 90 days of when someone becomes full-time, which will likely be less than the first day of the fourth month following the promotion.  Failure to comply with the 90-day rule could result in other penalties being assessed on the employer. It’s not yet clear how these rules interact, so the safest bet is to make the offer no later than 90 days following the promotion or the period described in (2), at least until the IRS clears up this confusion.

Q14: What if John Boy quits and then I rehire him?  How do I count hours?  What about leaves of absence?  I still have so many questions left unanswered!

This is already getting kind of long, so we’ll address those in a future post.

Related Links

Proposed Regulations under Code Section 4980H on Employer Shared Responsibility/Play or Pay Penalties

Technical Corrections to Proposed Regulations

IRS Q&A on Employer Shared Responsibility Penalties

Other Health Care Reform Posts

Disclaimer/IRS Circular 230 Notice