Prepare for the complex layers the ACA will add to your payroll.
By Howard Tarnoff
Senior Vice President – Customer Success, Ceridian
The Affordable Care Act’s employer mandate, as known as play or pay, redefines full-time employment for hourly workers. A key component of the ACA, the employer mandate’s effective date was postponed last summer for one year until January 2015. The delay was a welcome reprieve. Organizations that do not offer employer- sponsored health insurance to employees fitting this new definition will be subject to hefty penalties—thousands of dollars per employee. And many payroll systems aren’t up to the task of conducting the complex, real-time calculations required to comply.
Let’s start with all the new definitions. For the purposes of healthcare coverage, the ACA redefines full-time versus part-time employees, and large versus small employers, among others. These new definitions and their related rules pertaining to the employer mandate are complicated.
Here is a rundown:
Full-time variable-hour employees. In redefining full-time for purposes of the employer play or pay mandate, the ACA identifies a new category of employees: variable-hour employees. Going forward, the ACA requires employers to calculate hours worked over a specific period to determine employment status. At large employers, variable-hour employees fitting the ACA’s definition of full-time are any who average 30 or more hours of service per week or 130 hours of service per month. Under the ACA, full-time variable-hour employees of large organizations are eligible to receive employer-sponsored healthcare benefits or minimal essential coverage (MEC).
Large versus small employers. Large employers are those employing at least 50 full-time and full-time equivalent (FTE) employees during the preceding calendar year. According to different calculations, full-time or full-time equivalent employees’ hours both count toward the total workforce that determines whether an organization is large or small as defined by the ACA.
Hours of service. Under ACA, hours of service factors into calculations related to these other definitions. For instance,hours of service may be each hour for which an employee is paid, or entitled to payment, for duties performed for the employer. Hours of service may also be each hour for which an employee is paid or entitled to payment during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty, or leave of absence.
Getting Payroll Right
Much of the data employers need in order to categorize themselves and their employees according to these new definitions is native to payroll. What isn’t native is affected by payroll. Put together, it’s a lot of data to track. To do so accurately, employers need to follow several interrelated steps, each with potential pitfalls and success both dependent on having the right technology in place.
Step One: Accurately collect and categorize hours. All ACA- defined large employers must properly categorize all their variable-hour employees’ hours as service hours or non- service hours.
Potential pitfalls: A time-tracking application may improperly categorize an employee’s hours as service hours or non-service hours. Even if it doesn’t, the data must
flow seamlessly into payroll and benefits. Plus, benefits calculations must link to any time and attendance pay codes native to the average hour calculation.
Step Two: Identify full-time employees. Large employers must determine whether or not a variable-hour employee is full- time. This can be determined by looking at the employee’s service hours and evaluating them against an average threshold of 30 hours per week or 130 hours per month. This should be done during a standard measurement period of three to 12 consecutive, preceding calendar months.
Potential pitfalls: Large employers may find themselves inadvertently using inappropriate measurement periods for their operating environments. They may also encounter difficulty in transitioning new hires seamlessly from an initial measurement period to the measurement period for ongoing employees since it’s different.
Step Three: Calculate and manage stability periods. Once eligible employees have indeed qualified for and enrolled in employer-sponsored healthcare benefits, employers are required to provide it over a defined stability period. Under the ACA, the stability period must be the greater of either six months or the length of one full measurement period.
Potential pitfalls: It is critical to have an effective procedure to date benefits elections properly. Plus, the timeframe of measurement periods for new hires varies considerably, creating further challenges for administrators.
Step Four: Evaluate health benefits affordability. Having calculated workers’ hours accurately and properly informed employees of their eligibility for healthcare coverage, employers must ensure that ACA rules deem the coverage provided affordable.
Potential pitfalls: The ACA considers MEC unaffordable if the employee’s premium cost for self-only coverage exceeds 9.5 percent of the employee’s modified adjusted gross income (MAGI). Since employers don’t have access to an employee’s MAGI, the Internal Revenue Service allows use of W-2 wages as a safe harbor. Lacking this information in a readily available data format can throw calculations into disarray.
The steps to complying with the employer mandate demand close synchronization of payroll activities with time and attendance, as well as benefits administration. An employer can easily run afoul of the requirements. And that’s because the vast majority of systems run these activities on separate applications, connected via interfaces that struggle to combine data in real-time. This complicates calculations to the point that they’re never quite current. Compliance is possible, yes, maybe even probable, but never certain.
Only true real-time calculations of the very latest data from all variables involved in play or pay enable an employer to comply at any given moment. And employers have the best chance of achieving those real-time calculations by replacingtheir existing systems with a single application. Separate data sets no longer struggle to communicate, because they’re no longer separate: Just one data set contains all information necessary for compliance. Calculations therefore reflect the very latest picture of the workforce. It’s a technological alternative able to handle the challenges of the ACA.