The new health care law, otherwise known as the Patient Protection and Affordable Care Act (PPACA), requires that, beginning after December 31, 2013, “applicable large employers” must provide affordable health coverage to their full-time employees.   Failure to do so may subject these employers to a shared responsibility payment, or an “assessable payment,” pursuant to Internal Revenue Code §4980H.

An “applicable large employer” is defined as “an employer who employed an average of at least 50 full-time employees on business days during the preceding calendar year.” A full-time employee with respect to a given month is defined as “an employee who is employed on average at least 30 hours of service per week.”

While these definitions may appear to be straightforward, the recent Notice issued by the Internal Revenue Service, together with the Department of Labor and the Department of Health and Human Services, indicates that the analysis is not so simple.

Notice 2011-36 was issued on May 2, 2011, seeking comments and providing suggested rules for interpreting and applying the meaning of “full-time employees” for purposes of IRC §4980H.

Notably, the Notice provides rules for determining whether an employer has “50 full-time employees,” which includes full-time equivalents. This means that, on a monthly basis, an employer must take the following steps to determine whether 50 full-time employees are employed:

1)                  Determine the number “full-time” employees. 
This group includes seasonal employees and all employees of a controlled group, an affiliated group, and a predecessor employer. This group does not include leased employees.

2)                  Determine the “full-time equivalents.”
This number is determined by aggregating the number of hours of service for all employees determined not to have a full-time status for the month, and then dividing these hours by 120. 

At the end of a calendar year, the employer must add together the 12 monthly calculations, and divide the sum by 12 to get the average monthly full-time employees for the prior year. If the final number is 50 or more, the employer is an “applicable large employer.” 

For example, if a business employs 40 full-time employees with 40 hours of service per week and 20 part-time employees with an average of 20 hours of service per week, the employer will still be considered an “applicable large employer.”   This is because each month, the employer will have to add approximately 13.3 “full-time equivalents” (approximately 80 hours worked per month by each part-time employee, multiplied by 20 part-time employees, divided by 120) to the 40 full-time employees, bringing the total “full-time employees” for purposes of health coverage obligations to 53.3. As this example demonstrates, an employer that relies on part-time employees may still be subject to the shared responsibility provisions of the PPACA.

The Notice provides for an exception in the case of seasonal workers. This seasonal employees exception applies where an employer’s workforce exceeds 50 full-time employees for 120 days or less during a calendar year and the employees in excess of 50 were employed during those days as seasonal employees. In this case, the employer is not considered an “applicable large employer.”

Employers “not in existence during an entire preceding calendar year,” are not exempt from assessment payment liability pursuant to the Notice, and will be considered an applicable large employer if the employer reasonably expects to employ an average of at least 50 full-time employees on business days during the current calendar year.

The Notice also indicates the intent of the IRS, DOL, and HHS to allow employers to measure 130 hours of service per month to determine full-time status, rather than 30 hours of service per week. Further, the Notice includes a safe harbor for determining an employee’s full time status for future months based on the employee’s status as a full-time employee in prior months, which is intended to make administration of this rule for full-time employees easier. 

In short, the proposed guidance set forth in Notice 2011-36 expands upon the inclusive definition of “full-time employees” set forth by the PPACA and reinforces the continuous burden imposed on employers to evaluate the “full-time” status of each of their employees.