Whenever Congress draws a line in the sand—such as with exposure for assessable payments under the Affordable Care Act’s employer shared responsibly rules—entities subject to regulation (here, applicable large employers) will inevitably seek ways to avoid having to comply. Also inevitably, some compliance strategies will be perfectly legitimate, while others will not. One approach that falls into the latter category involves capping annual hours of certain, “variable hour” and other employees at 1,560 hours. Simply put, the approach does not work. This post explains why.

The Affordable Care Act’s employer shared responsibility rules are codified in Internal Revenue Code § 4980H and fleshed out in excruciating detail in final regulations issued earlier this year. Employers that are subject to these rules (“applicable large employers”) are by now generally familiar if not conversant with the rule’s basic structure: An applicable large employer is subject to an assessable payment if one or more full-time employees is certified to the employer as having received an applicable premium tax credit or cost-sharing reduction and either:

• The employer fails to offer to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage (MEC) under an eligible employer sponsored plan, or

• The employer offers its full-time employees (and their dependents) the opportunity to enroll in MEC under an eligible employer-sponsored plan but the coverage fails to meet requirements for affordability and minimum value.

MEC includes group health plans that are self-insured or are offered in the large or small group market within a State. Code § 36B generally provides a premium tax credit to low- and moderate-income taxpayers who enroll (or whose family members enroll) in a qualified health plan (QHP) through a public insurance exchange. The credit subsidizes a portion of the premiums for the QHP. But the premium tax credit may not subsidize coverage for an individual who is eligible for employer-sponsored coverage that is both affordable and provides minimum value.

Code § 4980H(e)(4)(A) defines the term “full-time employee” to mean “with respect to any month, an employee who is employed on average at least 30 hours of service per week.” The final regulations provide two ways to determine an employee’s status as full-time: a “monthly measurement method” and a “look-back measurement method.” The monthly measurement method tests an employee’s full-time status month-by-month. The monthly measurement method works fine for employers who can reasonably determine on the employee’s start date whether the employee will work full-time. But for employers of part-time, temporary, and seasonal employees, whose full-time status at the start date is generally unpredictable, the final regulations make available the look-back measurement method as an alternative.

Under both the monthly measurement method and the look-back measurement method, a newly hired full-time employee must receive an offer of coverage by the first day following three full months of employment for the employer to avoid exposure to assessable payments.

Under the look-back measurement method, full-time status for newly hired “variable hour,” “seasonal,” and “part-time” employees is determined over an initial measurement period of up to 12 months, selected by the employer, during which coverage need not be offered (and with respect to which no assessable payments are due). If the newly hired variable hour, seasonal, or part-time employee works, on average, 30 or more hours per week (or 1560 hours in 12 months), then coverage must be offered for a corresponding “stability period” that is the same length as the measurement period, but no shorter than 6 months.

• An employee is a “variable hour employee”:

“if, based on the facts and circumstances at the employee’s start date, the applicable large employer member cannot determine whether the employee is reasonably expected to be employed on average at least 30 hours of service per week during the initial measurement period because the employee’s hours are variable or otherwise uncertain.” The determination of variable hour status is further subject to the application of a series of factors.

• A “seasonal employee” is an employee “who is hired into a position for which the customary annual employment is six months or less.”

• A “part-time employee” is an employee “who the applicable large employer member reasonably expects to be employed on average less than 30 hours of service per week during the initial measurement period, based on the facts and circumstances at the employee’s start date.” This determination is further subject to the application of factors established in the final regulations.

The look-back measurement method includes two sets of measurement periods. The first (described above) is the initial measurement period, which generally begins on an employee’s date of hire or the first day of the month following. There is also the “standard measurement period,” which is a fixed period (e.g., the calendar year or a plan year), which may also be as long as 12 months, and which is also determined by the employer. Once a newly hired variable hour, seasonal, or part-time employee has worked for one full standard measurement period, he or she loses his or her status as such and instead becomes an “ongoing employee.”

Ongoing employees are tested during each standard measurement period. If they work, on average, 30 hours per week (or 1,560 hours during a 12 month standard measurement period) during a particular standard measurement period, then they must be offered coverage during the corresponding stability period for the employer to avoid the prospect of an assessable payment.

Some employers have reportedly taken the position that, if they cap a newly hired employee’s hours at 1,560 or some lesser amount such as 1,500, they can avoid exposure under the Act’s employer shared responsibility rules. This approach—at least as applied to new hires— fundamentally misunderstands how the look-back measurement method is applied. That the hours of a newly hired employee might be capped at 1,560 in a 12-month initial measurement period does not mean that the employee is a variable hour employee.

Recall that to be considered a variable hour employee, the employer must be unable to “determine whether the employee is reasonably expected to be employed on average at least 30 hours of service per week during the initial measurement period because the employee’s hours are variable or otherwise uncertain.” But by capping employee hours at, say, 1,500 hours, the employer has eliminated any question as to whether the employees will work full-time during the initial measurement period (they will not), thus failing the threshold test of uncertainty. Such an employer has also bypassed and failed to consider the factors which the final regulations say employers must consider in making variable hour determinations.

Applying these rules to ongoing employees yields a different result. According to the final regulations:

“[A]n applicable large employer determines each ongoing employee’s full-time employee status by looking back at the standard measurement period. . . . If the applicable large employer member determines that an employee was employed on average at least 30 hours of service per week during the standard measurement period, then the applicable large employer member must treat the employee as a full-time employee during a subsequent stability period…” (emphasis added).

Presumably, the employer could cap an ongoing employee’s hours at 1,560 during any standard measurement period, in which case the ongoing employee would not be full-time. As a consequence, the employer would face no Code § 4980H exposure for failing to make the requisite offer of coverage. But if this employee was determined as of his or her date-of-hire to be full-time rather than, say, variable hour, the employer would need to withdraw the offer of coverage that it made with respect to the period prior to the employee’s transition to ongoing employee status. The withdrawal of coverage under these circumstances might not pose a problem for employer shared responsibility purposes, but it may raise issues under the Employee Retirement Income Security Act.

Edward A. Lenz, senior counsel of the American Staffing Association, co-authored this article.