Top Risks Associated with Using ACA Monthly Measurement Vs. Lookback Measurement Period to Stay Compliant
Many of our customers have asked what are the pro’s and con’s around using the ACA Monthly Measurement Period versus the Lookback Measurement Period. ACA Monthly Measurement sounds simple but can quickly become very complex and unscalable. Let’s use examples to deep dive into some top risks associated with ACA Monthly Measurement versus the Lookback Measurement method.
Example #1: ACA Penalty—Employees not Offered Health Coverage
50 Person Company, Monthly Measurement – missed offering coverage for 1 month.
Let’s say your company is just over the cusp of the 50-full time employees reporting rule. You have one HR lead who is helping the management team track hours according to the ACA Monthly Measurement Period option. You believe the rules are straightforward, and your employees are ineligible if they work:
- Less than 30 hours per week
- Less than 120 hours in a 4-week month reporting period
- Less than 150 hours in a 5-week month reporting period
It’s January, your team is all on board, all of the part-time employees’ schedules are laid out, work tasks are determined, vacations are planned and all part-time people will be under the 30-hour work requirement. Then the usual work occurrences happen, some people become sick, a few employees need to attend special school activities, a customer crisis occurs and extra effort (hours) are needed and a product issue occurs and more hours are needed.
Suddenly all those good intentions at the beginning of the month are not a reality. At the end of the month to meet business objectives, three of your part time employees worked more than 30 hours per week and exceeded the monthly hours limit. The IRS ACA MEC sledgehammer fine could be imposed (also known as A penalties) for not meeting the 95% offer requirement, and it’s a per full time employee (minus the first 30) per month fine.
Looking at any number of real-life situations, this is problematic for a smaller 50 person company much less a mid to large sized company, as employees size grows so does the penalty risk. For more on penalties, see What You Need to Do When You Receive Letter 226J and how to respond to a 226J.
Example #2: Negative Impact on Employee Satisfaction
A 50 person company where employees go on and off benefits due to hours worked and eligibility.
Companies who face any amount of employee turnover know the HR and the Management teams usually focus heavily on employee satisfaction and retention. Using the ACA Monthly Measurement Period implies your company will be managing benefits monthly.
To illustrate the employee satisfaction risk, let’s continue what happened above, employees worked over the limit for January. Your company has set aside reserves with finance to cover the penalty amount. Since the work situation isn’t changing and no one wants another month with that ACA penalty, you hedge your bets. You offer these part-time employees benefits in February and March. Then in April it looks as if the work is slowing down, so you remove their benefits, which won’t help your employee satisfaction or retention efforts. Of course, in April the work load doesn’t go away, and those three employees worked over the weekly and monthly hours limits. Your company could be hit with another large penalty and you have some really frustrated (and un-insured) employees. You have paid thousands in fines, poor employee satisfaction and a lot of explaining to do.
Why Using the ACA Lookback Measurement Period Wins
The Lookback Measurement Method is a multi-level statistical analysis for an employee’s work hours. Many employers use the 12-month lookback measurement period, which then allows for the ups and downs in an employee’s work hours to be statistically averaged. With the Lookback Measurement Method, you receive some advanced warning to act and offer coverage to any part-time employees who have measured eligible before the IRS ACA penalties are incurred. So as seen in Example 1 above, if the part time employees work extra time just a couple of months, and the Lookback Method is used, there may be no fines and a window of trending time for management to take action to prevent ACA penalties. Also, no yo-yoing of giving benefits and then taking them away. If an employee is trending eligible for benefits, the Lookback Method starts to show which employees should be offered benefits and the company should have plenty of time to react and either provide benefits or take actions to properly manage work hours. Of course, to do this, the company must review information monthly.
Review Benefits Eligibility Monthly
If your Full Time Equivalent (FTE) sum of part-time employees results in an average of at least 50 full-time employees, the ACA MEC sledgehammer A-Penalties may apply. Key message, make sure your HR and finance teams are reviewing measurement details monthly. If the ACA Lookback Measurement Period Method is being used, the management team will have a chance to review and resolve or reduce the probability of any ACA MEC A-Penalties (NOTE: ACA B-Penalties may still apply, but they are less onerous).
Getting Help with ACA Lookback Measurement Period
When someone says “ACA Monthly Measurement Period” that may sound easy compared to “ACA Lookback Measurement Period”. And yes, after reading IRS web site documents, law, and other references, the Lookback Method details may appear more difficult. But you don’t have to do it all yourself. You can engage a partner, like Benefitfocus, who has invested in software, expertise and services to handle the complexities around the Lookback Measurement Period Method.
At Benefitfocus, as part of our business practices, we ingest the needed payroll data, benefits data, LOA information, COBRA data, and aggregate into our Cloud-based toolset to provide companies with an easy-to-use dashboard of their employee population and trending eligibility.
Summary Tips of ACA Monthly Measurement Vs. Look Back Measurement Period:
Monthly Measurement Period
- Keep your eyes wide open on the ACA penalty risks for just one or two months of missed IRS hourly rules.
- If employee retention or satisfaction is key to your business success, evaluate worst-case scenarios with your HR, finance and management teams to understand the impact of providing and taking health benefits away monthly.
- If you’re acquiring companies, work with experts on the subtle nuances of asset vs. stock acquisitions and what the acquiring entity must do for ACA compliance.
Lookback Measurement
- While it is more difficult, statistically speaking, this is often the best method for measuring benefits eligibility.
- The right ACA vendor can minimize the complexity of the Lookback Method with software, services and monthly reporting and reviews.
Want to learn more?
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The information provided does not, and is not intended to, constitute legal or tax advice and is not intended to address the situation of any plan, group or individual; instead, all information and content herein is provided for general informational purposes only and may not constitute the most up-to-date legal or other information.
