Proposed IRS Rule Defining “Full-Time” May Spell Relief for Employers

An unlikely white knight—the Internal Revenue Service (IRS)—may be riding to the rescue of employers with seasonal and/or high turnover. Those employers worry the new health care law’s employer mandate to provide coverage for full-time employees or face penalties could cripple their business. But the IRS’s Notice 2011-36 proposes new optional methods for determining full-time status.

The original legislation’s mandate—effective January 1, 2014—simply defined a full-time employee as an individual who works 30 hours per week. The optional methods would allow employers to:

1. Use 130 hours of employment per month as the basis for full-time employment status
2. “Look back” from 3 to 12 months to determine full-time status. Thus, for PPACA purposes, an employer may determine that an employee needs to work at least 130 hours each and every month for up to 12 months to qualify as full-time.

These proposed new methods of determining full-time status could allow employers to define many seasonal/high turnover employees as not full-time, eliminating the related employer penalties.

Sounds too good? Keep in mind that if an employer uses a very long “look back” period (e.g., 12 months), it must also provide employees with a transition or “stability period” during which coverage would not terminate if the employee’s hours dropped below 130 hours per month. The stability period would be a minimum of 6 months but no shorter than the look back period.

Lastly, these definitions have only been proposed by the IRS. They are taking comments from plan sponsors through June 2012.  The details of the final rules will affect how much relief they actually provide to any particular employer.  Hopefully, the final definition will not change too much from what has been proposed.