Employment Matters Blog

Affordable Care Act Checkup: 2014 Payroll

Posted in Affordable Care Act, Healthcare, IRS

Written by Patricia Moran

This past summer, the Obama administration decided to delay the “employer shared responsibility” portion (also known as the “employer mandate” or “pay or play mandate”) of the Affordable Care Act (the “ACA”) for one year until January 1, 2015. This delay, while welcome, has lulled many employers into a false sense of security; many assume that not much needs to be done in 2013 or 2014 to get ready for 2015.  In our view, nothing could be further from the truth.

Among other things, one thing that employers should be doing now is setting up payroll systems to track and record employees’ work hours starting in 2014. These records will serve two important purposes under the ACA.

  • First, An employer will be able to prove to the IRS whether it is or is not an “applicable large employer” subject to the employer mandate. An employer is an “applicable large employer” for a calendar year if it employed an average of at least 50 full time and full time equivalent employees on business days during the preceding calendar year. So, for 2015, the IRS will be looking at 2014 payroll data. “Full time” employees are those who work 30 hours of service per week. To find monthly “full time equivalent” employees, employers need to add up all the hours of the employees who worked less than 30 hours per week during that month and divide by 120.
  • Second, once an employer determines it is likely to be subject to the law, it will need good payroll records in order to identify its “full time” employees. Under the ACA, 95% of an employer’s “full time” employees and their dependents must be offered ACA-compliant health care coverage; if they are not, the employer may be subject to a tax penalty. The concept of “full time” is purely hours-based and there are no categorical exclusions. For example, employers will no longer be able to make blanket eligibility exclusions for temps, co-ops, casual employees and the like; if an employee works 30 hours/week under the ACA’s rules, he or she is full time, regardless of employment category. Further, for certain types of employees, employers may use a “lookback/measurement” methodology to identify which employees are and are not full time; absent additional guidance from the IRS, the first “measurement” periods will need to begin in 2014, further necessitating the existence of robust payroll records sooner rather than later.

As noted above, the “full time” standard is 30 “hours of service” per week. So, payroll systems will need to capture all relevant “hours of service.” Under the ACA, “hours of service” include: (1) each hour for which an employee is paid, or entitled to payment, for the performance of duties for the employer; and (2) each hour for which an employee is paid, or entitled to payment by the employer on account of a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or a leave of absence.

Finally, an employer will want to make sure that appropriate records are being used to track “hours of service”. For hourly employees, employers must count all actual hours of service from records of hours worked and hours for which payment is made or due. For non-hourly (i.e. salaried) employees, employers have three options:

  1. Count all actual hours of service from records of hours worked and hours for which payment is made or due;
  2. Count eight hours of service for each day for which the employee would be required to be credited with at least one hour of service (the “days worked equivalency”); or
  3. Count 40 hours of service per week for each week for which the employee would be required to be credited with at least one hour of service (the “weeks worked equivalency”).

Employers are urged to discuss these new ACA payroll requirements with their internal and external payroll managers to make certain that their payroll systems are properly tracking hours in 2014.