September 28, 2017
Employers who sponsor a calendar year plan and who have adopted the look back measurement method will soon be reaching the end date of the standard measurement period. Just as in previous years, this has brought to my attention a lingering problem with the setup of many employers standard measurement periods. Unfortunately, many employers have setup standard measurement periods that start prior to October 3 of the particular year in question, in this case October 3, 2016. This article explains why starting a standard measurement period prior to October 3 creates a problem and addresses a few potential solutions.
The reason an employer’s standard measurement period cannot start prior to October 3 involves only one rule and simple math. When defining the administrative period the final regulations state “The term administrative period means an optional period, selected by an applicable large employer member, of no longer than 90 days beginning immediately following the end of a measurement period and ending immediately before the start of the associated stability period (emphasis added).” The final regulations are quite clear that the administrative period is restricted to 90 days.
A simple look at the calendar reveals that October has 31 days, November has 30 days, and December has 31 days. Combined these three months have 92 days. Therefore, an employer who has a standard stability period starting on January 1 and lasting until December 31, mirroring the calendar year, cannot start its standard measurement period until October 3. For a standard stability period mirroring the 2018 calendar year, the earliest a standard measurement period could begin is October 3, 2016 and end on October 2, 2017. This would leave a 90 day administrative period running from October 3, 2017 until December 31, 2017. If the standard measurement period starts any day prior to October 3, 2017, the rule restricting the administrative period to 90 days would be violated.
Despite the clear rules, employers are frequently adopting a standard measurement period that starts on October 1 and ends on September 30 of the following year leaving a 92 day administrative period. Some employers have setup standard measurement periods that begin before October 1, such as September 1, which there is no possible way to interpret as compliant with the final regulations.
Employers wishing to effectively use a standard measurement period of October 1 to September 30 may still be able to accomplish such a task by utilizing a rule discussing payroll periods in the final regulations. The final regulation state at section 54.5980H-3(d)(1)(ii):
This provision allows an employer to slightly adjust its standard measurement period to better align with the employer’s payroll periods. If combined with the earliest dates for a compliant standard measurement period for a calendar year plan, the rules may allow for the use of a standard measurement period of October 1 until September 30 of the following year. As a result of the IRS’ position not being entirely clear, great caution should be taken. How an employer may use these rules to its advantage can best be illustrated in an example.
Suppose ABC Inc. sponsors a calendar year plan and it adopted the look back measurement method. Furthermore, assume ABC has a semi-monthly pay period. ABC adopted a standard measurement period of October 3, 2016 through October 2, 2017, an administrative period of October 3, 2017 through December 31, 2017, and a standard stability period of January 1, 2018 through December 31, 2018. This standard measurement period setup complies with all of the rules.
Next, the employer could use the payroll period rule quoted above. In ABC’s case, the pay period that ends on the last day of the payroll period preceding the payroll period that included the date that would otherwise be the last day of the measurement period (October 2, 2017), in this case the October 1, 2017 through October 15, 2017 payroll period, could be excluded. However, for the October 1, 2017 through October 15, 2017 payroll period to be excluded, the measurement period that begins on the first day of the payroll period that includes the date that would otherwise be the first day of the measurement period (October 3, 2016), in this case October 1, 2016 through October 15, 2016, would have to be included in the standard measurement period. Shedding the complicated verbiage and combining the two rules, ABC would be measuring its employee’s hours of service from October 1, 2016 through September 30, 2017 when determining who is a full-time employee for the standard stability period that runs from January 1, 2018 through December 31, 2018. While it is not entirely clear that using these two rules together is compliant, it is a much better strategy and has a legitimate argument for being compliant compared to a standard measurement period beginning on October 1.
A better alternative is starting the standard measurement period on October 16 or November 1. Both of these start dates for a standard measurement period cause no problem with the rule limiting the administrative period to 90 days for calendar year plans. Furthermore, any debate as to whether the pay period rule can extend the administrative period to exceed 90 days is avoided. Understandably, some employers need all of the time possible to track their variable hour employees and complete the open enrollment process. If an employer does choose to have an administrative period right at the line, it is critical that the steps discussed in this article are followed so a rational explanation can be provided to the IRS in the event of an audit.
Furthermore, as detailed in our article Expensive Problems Occurring for Employers Who Don’t Have Clear Health Plan Eligibility Conditions, an employer must document the look back measurement method dates and time frames it adopts. If an employer adopts the strategy discussed in this article, the employer’s standard measurement period would be October 3, 2016 through October 2, 2017. The eligibility document discussing the employer’s look back measurement method should also discuss the employer effectively shifting its measurement periods to better align with the employer’s payroll periods. An employer who does not document its measurement periods will be in clear violation of the law and be at risk of suffering financial consequences beyond that of an IRS penalty as discussed in our previous article.
No employer with a calendar year plan should have a measurement period starting prior to October 3. As a result of the 90 day restriction on the administrative period, a standard measurement period beginning on October 16 or November 1 is preferred. However, should an employer wish to push the limits of the 90 day restriction, it can try to utilize the payroll period rule to effectively extend the measurement period to begin on October 1. Regardless of the dates selected for the measurement periods, all dates and time frames for the look back measurement method must be documented. The documentation point cannot be emphasized enough. If you have any questions, please feel free to contact us.
About the author – Ryan Moulder serves as General Counsel at Accord Systems, LLC and is a Partner at Health Care Attorneys P.C. Ryan received his LL.M. from Georgetown University Law Center and his J.D. from Saint Louis University School of Law. He has distinguished himself as a leader in the Affordable Care Act arena and has written and spoken on a variety of ACA topics as it relates to compliance for companies.
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