Measuring ACA Eligibility Through the Look-Back Method

Measuring ACA Eligibility Through the Look-Back Method

In the modern business market, you’re conditioned to look toward the future. We all are. And that’s one thing that can make successfully navigating the Affordable Care Act (ACA) more difficult, because it isn’t just enough to look to the future when it comes to your ACA compliance.

To comply with the law, in many cases you also need to look to the past to determine ACA eligibility of your employees.

Accurate eligibility measurement has become increasingly important as IRS penalty assessments can amount to millions of dollars. And, as we learned in our previous blog, the penalties accrue monthly and can quickly accumulate for each year you are out of compliance.

When Measurement is Needed
Under the Employer Shared Responsibility Provisions of the ACA, large employers must offer health coverage that meets Minimum Essential Coverage (MEC) requirements to 95% of their full-time employees or be exposed to possible penalties. It sounds easy enough, but when it comes to what constitutes a full-time employee, the answer can seem quite complicated.

Under the law, a full-time employee is one who averages 30 or more hours of service per week or 130 hours per month. This can be an easy calculation for employees who have a steady schedule. But for variable-hour employees, eligibility measurement is not always as straight forward.

As an employer, your company can determine your employees’ full-time status by counting each employee’s hours of service using one of two “equivalency” measurement methods: monthly and look-back. Today we’re going to focus on the look-back measurement method.

What is the Look-Back Method?
When using the look-back method, an employer “looks back” to previous hours of service to determine full-time status for a future period of time. Said another way, the look-back method is an approach for determining full-time status by tracking employee hours over a set period of time and then calculating the average number of hours worked over that period to determine full-time status.

There are three critical parts to look-back measurements:

1. Measurement Period
The measurement period is the period for which the employer “looks back” to historical hours of service. The look-back measurement period can be anywhere between 3 and 12 months long. Employers are allowed to choose the length of the look-back measurement period as long as it conforms with the minimum and maximum measurement standards.

There are two types of measurement periods: Initial Measurement for new employees and Standard Measurement for ongoing employees.

Initial Measurement period: New employees
To measure eligibility for new hires, you must consider if the employee is reasonably expected to work more than 30 hours a week. If yes, the employee and his/her dependents must be offered coverage within 90 days of hire.

If it can’t be reasonably determined that the new employee will work over 30 hours a week, then the employee may be classified as a variable-hour employee. In this case, you would begin tracking hours on a go-forward basis.  For new variable-hour and seasonal employees, you may use a look-back period of between 3 and 12 months that begins on any date between the first pay period the employee’s hours are recorded and the first day of the first month following the start date. If the employee’s hours meet or exceed a full-time average of 130 hours per month over the initial measurement period, they will be determined to be “full-time” and therefore eligible for coverage throughout the subsequent stability period — even if their hours are reduced during the stability period.

Standard Measurement period: Ongoing employees
Standard measurement periods are used for ongoing employees, meaning an employee who has worked one full standard measurement period.  In this case, employers must literally look back to average the work hours across the measurement period. If the employee averages 130 hours or more a month, the employee is considered full-time and eligible for benefits under the ACA.

While an employer can have different standard measurement periods for different categories of employees (different categories are limited to those described in 54.4980H-3(d)(1)(v)), measurement periods and eligibility determination must be made on a uniform and consistent basis for all employees in the same category.

Take a look at an example.

Example: Let’s say an employer uses a 12-month standard measurement period beginning November 1, 2018. As such, ongoing employees are measured from November 1, 2018 through October 31, 2019 of the following year to determine eligibility for the start of the January 1, 2020, plan year.

To calculate hours for ongoing employees, you average the work hours across the look-back period. In this example, our employee worked a total of 1,596 hours, resulting in an average of 133 hours per month.

Because the hours worked is greater than the required 130 hours the employee is determined to be full-time and eligible.

2. Wait Period
The second part to look-back measurement includes an administrative wait period before the healthcare benefits are implemented. This period can be no more than 90 days and is optional for employers.

Example: After employees are measured from November 1 through October 31, the company utilizes a wait period of 61 days (November 1 – December 31). In this time, the employer extends offers of coverage to individuals identified as full-time and allows for time for the employee to make benefit selections and enroll for coverage effective on January 1.

3. Stability Period
The third component is a stability period, the “lock-in” coverage period for employees who are determined to be full-time during either an initial or standard measurement period. The stability period cannot be shorter than the measurement period and must be between 6 to 12 months long. Often, it is the same length as the measurement period.

It’s important to note that if the employee’s hours meet or exceed the full-time average (130 hours per month) over the duration of the measurement period, they will be considered an ACA “full-time” employee and therefore eligible for coverage throughout the subsequent stability period — even if their hours are reduced during the stability period.

Example: Because our example employee worked an average number of hours that was greater than 130, she must be offered benefits for the stability period of January 1, 2020 – December 31, 2020.

Final Points of Consideration
Before we close, here are a couple of final considerations regarding the look-back measurement methods.

The IRS has stated the look-back measurement method may not be used to in the calculation of full-time employee counts for purposes of determining status as an Applicable Large Employer. Those calculation methods can be found on IRS website. Instead it can only be used for determining:

How Health e(fx) Can Help
While all of this may sound complicated, Health e(fx) can help you simplify your look-back measurement method process through our Health e(fx) Employer Solutions.

Health e(fx) Enterprise™ tracks all service hours worked for all employees within your organization and automates the look-back measurements for your employee populations for you—for both ongoing and new employees. We provide you a report detailing the average number of hours worked over the course of a standard measurement period and resulting eligibility status for each employee in your organization. The result is a solution that gives you an accurate understanding of your company’s look-back considerations, whenever you need it. So you can keep looking forward for your business.