What Are the ACA Rehire Rules?
As part of the Affordable Care Act (ACA), there is a special rule which determines how employers count employees for purposes of deciding whether they are subject to a shared responsibility payment if they don’t provide affordable coverage to workers and their dependents.
This rule provides a limited exception to certain measurement rules in cases where an employee reaches a set period of service, stops working and is then rehired later. For example, ending service could occur due to a layoff and the employee may be subsequently rehired during a special enrollment period for coverage. The same may apply to a part-time employee worked full time for a period until a seasonal job was offered.
For the purpose of this rehire rule, a break in employment occurs if an employee has a period without any hours paid. An employee is not considered to have a break in employment if the period without hours paid is for holiday, vacation, medical leave or other department approved time off (unless the leave is designated as FMLA leave).
If there is a break in service of less than 13 consecutive weeks, then the employer may treat the employee as continuously employed during the break (e.g . , a pay period that ends on or after the employee’s last day of work to the pay period that ends on or after the employee returns to work).
The following table illustrates when the period without hours paid will be considered a break in employment for purposes of determining whether the employee has a new Stability Period.
A break in employment that is less than 13 weeks
A break in employment that is at least 13 weeks
Break in employment will not be treated as a new employee and will be treated as a Continuing Employee for all purposes.
Break in employment is a new employee. The employer may treat the employee’s hours of service during the 13-week break as zero.
A new Stability Period would be determined in accordance with the rules for "new employees."
This rehire rule was established to reduce incentive for employers to treat seasonal employees as variable-hour employees or to keep seasonal employees as full-time employees. The rule also allows employers to treat certain employees who have been rehired during a stability period as new employees and not have those hours or months counted in the measurement period used to establish eligibility for benefits.
Recognizing Applicable ACA Rehire Situations
Because the ACA rehire policy is relatively new and not deeply entrenched in American business lore, employers should be prepared to analyze specific employment situations to determine whether the rules apply. In general, the ACA rehire rules apply whenever an employee who previously worked for an employer is rehired after having previously been treated as an ongoing employee (i.e., satisfying the 130-hour average for the prior "employment period"). This means that a separation from service must occur in order for the policy to apply. For the purpose of this policy, a separation occurs when an employee has an absence from service for at least 26 weeks.
The following examples illustrate how the ACA rehire rules apply in varying circumstances:
Example 1: Jane Jones is an accounting clerk with XYZ Corp. She has been employed with the company for more than six months and is still actively employed. During the most recent open enrollment period, Jane added her new spouse to her health plan. Jane decided not to re-enroll her spouse during the current plan year. A year passes and Jane does not add her spouse. This does not constitute a separation in employment and the ACA rehire rules do not apply. Therefore, Jane must re-add her spouse to the plan when the next open enrollment period starts.
Example 2: Same facts as above, except Jane did not work for XYZ Corp. for five months. Because Jane had a five-month break in service, the 26-week standard is met. The rehire rules apply. Therefore, when Jane returns to work with XYZ Corp., she is considered a new hire and her spouse cannot be enrolled on the plan until the next open enrollment period.
Example 3: Same facts as above, except Jane took intermittent leave under the Family Medical Leave Act (FMLA) during the year. As a result of the FMLA leave, Jane worked only 720 hours during the past year and is currently not eligible for health coverage. Jane is out on FMLA leave and is still taking intermittent leave. After returning from leave, Jane works just enough hours during the first half of the calendar year to become eligible for health coverage. The 26-week standard for a separation in service does not apply since Jane did not take a continuous absence from work. Therefore, the ACA rehire rules do not apply and Jane is not considered a new hire, making her eligible for enrollment once she reaches eligibility criteria.
Impact of Breaks in Service and Rehired Employees
Generally, an employee who is terminated will not be considered to be employed or continuing employment until the date that he or she is rehired. That is, if an employee receives COBRA coverage due to termination of employment and subsequently returns in the same or similar position to the same employer, the impromptu interruption of employment may be treated as a break in service, even if the employee would be viewed as a continuing employee under general labor and employment law.
There are two scenarios in which the break in service rule would apply. First, when any break in service of at least 26 consecutive weeks occurs. Second, where the employee terminates, receives COBRA due to the termination and then does not elect COBRA coverage for which he or she is eligible, is then rehired and receives eligible health coverage within 13 weeks from the coverage termination date. Under the first scenario, the employee is treated as a new employee. Under the second scenario, the employee may treat the previous period of employment as an uninterrupted period of employment for purposes of determining the applicable stability period.
An employee does not incur a break in service when the employee satisfies the 13-week threshold for health coverage eligibility as if the employee had never ceased to be employed by the employer.
Employer Obligations Under the Rehire Rules
Employers have a range of responsibilities when it comes to rehiring under the Affordable Care Act. Depending on the circumstances, employers may have to take different steps in order to ensure compliance with ACA rules.
If a non-calendar year plan offers ongoing coverage and a former employee who terminated coverage under ACA rule is rehired during a stability period, the employer is not required to reoffer a plan that is affordable or provides minimum value right away. Under ACA rules, the former employee will receive credit for the number of months they were offered coverage in order to determine if the stability period should continue or if coverage should be offered. The employer must inform the individual during enrollment that they are eligible for coverage under their prior period of employment. In cases where an employee is immediately re-hired, the employer will have to inform the individual that they will not be offered coverage immediately and they will not have a waiting period for an offer of coverage.
One of the important considerations for employees returning to a company after a break in employment is whether they are returning to the same job as before. In this case , the department suggests that employers separate employees by measurement period into two groups: those with similar duties — and thus the same health plan eligibility criteria — and those with different duties. If an employee has different duties than they did before, they should be treated as a new employee.
The 30-day requirement for employers to provide health insurance upon rehire is not strictly enforceable under the ACA, as the 30 days can be measured from the date of rehire or the first day of the following month. This means that, in cases where providing coverage on the first day of the month is impractical, an employer can provide it within the next 30 days.
The Affordable Care Act has long-standing recordkeeping requirements for employers. Employers must keep health plans documents and eligibility records for at least six years. These records include: enrollment and disenrollment records, copies of plan documents, statements of policy, and other documents that provide evidence of plans offered. These records must be made available for examination upon request. They should be considered when determining compliance with ACA rules for rehires, particularly since an affordable health plan will have specific eligibility criteria that includes hours worked and breaks in service.
Compliance Considerations and Common Mistakes
Many employers make mistakes regarding their rehire processes that can lead to ACA penalties. The following are some of the more common pitfalls we see:
- Not knowing when a break in service occurs. Employers must stay current on when an employee’s employment period is considered to be terminated. For example, for salaried employees who are not working due to a leave of absence, this will generally occur when the leave time ends – not when the employee returns to active status. This is particularly true for state-mandated leaves or other broad-based leaves such as FMLA. If an employer fails to recognize a break in service, it may mistakenly utilize the period of time the individual was on leave (I.e., the period of time that "counts" towards affordability) to PACA affordability.
- Failing to have a documented rehire procedure. Many employers do not have a written rehire policy. Therefore, when a rehire issue arises, a level of confusion exists as to whether a particular individual is a rehire, and which measurement period or stability period (if applicable) should apply. As a result, it is difficult to take a proactive approach to ACA compliance and benefit calculation timing.
- Failing to properly designate a new stability period. Sometimes, the end of a stability period is treated as the opportunity to substitute a new stability period. Employers may treat the new stability period as beginning immediately after the old stability period, rather than upon the return to active employment, which is what the guidance requires. Failure to properly designate new stability periods can result in an employee remaining on the employer’s health plan and paying premiums at a reduced rate by utilizing the old stability period period as an affordability safe harbor, even after the employee has terminated or is no longer an FTE, resulting in potential penalties.
- Relying on documentation of hire as evidence of rehire. Some employers rely only on the fact that an employee is rehired as an FTE as evidence that the employee is not a new hire for ACA purposes. However, if an employee is rehired within 26 weeks of termination, and the period of employment is less than one day short of 26 weeks, the employee is treated as a continuing employee. This means that the break in service is treated as any other leave of absence, and the employee is subject to the same measurement period and stability period (if any) as if they had not experienced a termination of employment.
The best way to ensure compliance is to maintain proper documentation and allow for flexibility to account for an employee’s unique circumstances. For example, employers should consider the following:
Documenting all periods of employment. When an employee has a termination of employment, it is important to create a chronological summary of the individual’s employment history, including dates, assignments, periods of absence, and the type of employment: active, inactive, terminated, rehired, FTE, NFE, and the like.
Allow for the opportunity to correct mistakes. If the employer is not certain of its compliance regarding an individual’s employment status, it should attempt to make it right if the employee falls short of meeting the ACA affordability crop test. This means that the employee should be offered a qualifying plan for the months that the employee falls under the ACA affordability safe harbor, and be charged the employee tier premium level (which may be significantly lower than the applicable plan premium) for that month.
Train your HR and payroll teams. One of the most common mistakes employers make is that this information is not well-known to the employer’s HR and payroll teams. We have prepared related training documentation to help our clients address these issues proactively.
Recent Changes and Future Directions
In recent years, the ACA rehire rules have evolved to better balance the needs of employers with the requirements of the ACA. However, the basic premise behind such rules has not changed much – that is, to ensure that even intermittent employees have health care coverage when they need it most, while giving employers some flexibility in employee policies.
As it currently stands, ACA rehire rules allow employers to establish an "initial measurement period" of up to 12 months that can gradually transition to a "stability period" of up to 36 months. In addition, ACA regulations permit employers to address two specific situations that can periodically cause hiccups to ACA compliance: The most recent change, which came into effect on April 9, 2016, was actually inconsequential to our thinking. Until then, employers faced the quandary of determining how many hours an individual must average each week in order to be considered to be a full-time employee and, therefore, eligible for group health insurance. Recently, the IRS has finalized its proposed regulations that make it clear that if an employer establishes a "default" for an employee as a full-time employee who works 130 hours per month, the IRS will not challenge that approach. The new method clearly beats the old method because it reduces the administrative burden and financial complications for employers.
Despite these recent changes, we anticipate that more will be in the pipeline . One pending change to watch for is the possible switch in approach for ACA reporting requiring actual hours worked instead of simply reporting hours based on an employee’s monthly status as a full time or part time employee. Employers should think about this one carefully. How burdensome will it be to track those hours? Will it push us more towards determining whether an employee is a full-time employee or part-time employee before the employee actually starts? We are bound to see more on this in the future.
Another possible change to watch is the continued push toward reducing the duration of the "stability period." That is, some lawmakers have proposed requiring larger employers to offer health insurance within three months, instead of the current six month period, of an employee becoming eligible. The frustrating reality is that we probably won’t know whether a change like this would become effective until we learn the results of the November 2016 election. As is frequently the case in U.S. politics, partisan politics are never far out of mind when it comes to predicting what the ACA will look like in the future.
So, while we have no reason to believe that there will be any wholesale changes in the law, we can be assured that there will be some changes added to the mix. Whether or not those changes will be meaningful to employers is a completely different question.
