How the Affordable Care Act Will Affect Your Furloughed Employees
April 27, 2020
Furloughed Employee

Many businesses are finding themselves needing to lay off or furlough employees due to the COVID-19 pandemic. While layoffs are a permanent termination of services with an employer, a furlough is intended to be a temporary arrangement that is unpaid.

When an employee is placed on furlough, the continuation of benefits is up to the employer. Key to this consideration is the Affordable Care Act (ACA). Under the ACA there can be costly ramifications if the offer of health insurance isn’t extended for a furloughed employee who is deemed full time under the employer’s stability period.

What is the Stability Period Under ACA?
Applicable large employers (ALEs), those with 50 or more full time equivalent employees, need to offer their full-time employees affordable and adequate health insurance in order to avoid costly ACA penalties , often referred to as the “Pay or Play” penalties.

When determining whether an employee is full time or part time under ACA rules, employers can use either the monthly measurement method or the lookback measurement method.

  • Monthly measurement. Employers that consistently have no variable-hour employees often use the monthly measurement method, as this method simply classifies an employee as full time if they have 130 hours of service for a month.
  • Lookback measurement period. The lookback measurement period looks back at an employee’s hours of service over a specified period. If they work full-time hours over that period they are “deemed” a full-time employee in the following stability period regardless of the hours they work in the current stability period. In other words, the employee’s status is “locked in” for the next employer stability period based on hours the employee worked in their current measurement period.

A stability period typically mirrors an employer’s insurance plan year.

An Example
An employer uses a 12-month measurement period and a 12-month stability period for a calendar year health insurance plan. If an employee works at least 1560 hours January through December of 2019, the lookback measurement period, they will be deemed a full-time employee for the calendar year 2020, which is the employer’s stability period, regardless of the hours the employee works during calendar year 2020. This is because the employee is “locked in” to a stability period based on the hours they worked in their lookback measurement period.

How This Affects Furloughed Employees
Employees that are full time due to the stability period will remain full time even when furloughed unless they subsequently become terminated. It’s important to remember that while an offer of COBRA coverage is deemed an offer of coverage under the ACA, typically it is not affordable and could therefore cause unaffordability penalties under §4980H(b).

Potential Penalties
The §4980H(b) penalty for 2020 is $3,860 per year for each employee that goes to the Exchange and qualifies for a Premium Tax Credit (PTC). This penalty cannot exceed the §4980H(a) penalty potential.

The §4980H(a) penalty for 2020 is $2,570 per year per employee. This penalty is triggered if an ALE does not offer minimal essential coverage (MEC) to at least 95% of their full-time employees and at least one full-time employee goes to the Exchange and qualifies for a PTC.

Each employer, or group of related employers, receives the first 30 full-time employees free from the calculation of the §4980H(a) penalty. Therefore, an employer with 100 full-time employees that doesn’t offer MEC to 95% of their full-time employees would be subject to a $179,900 ($2,570 x (100-30 employees)) annual penalty if one full-time employee qualified for a PTC from the Exchange.

How to Avoid Penalties
There are a few rules within the ACA that may help organizations dealing with furloughed employees and the potential assessment of penalties.

The 13-week rule
Under the ACA there is a 13-week rule that states when an employee does not have one hour of service for a period of 13 weeks, they are considered a new employee upon resumption of services. Although furloughed employees that are in their stability period will need to have an offer of coverage during their entire furlough, regardless of the length of the furlough, they can be deemed a new employee and their waiting period can restart if they return to service after a 13-week unpaid leave. Educational organizations must use 26 weeks for purposes of this rule instead of 13 weeks.

Rule of Parity
In addition to the 13-week rule, there is a rule of parity that employers may choose to use. Under the rule of parity, if an employee has no hours of service for a period of at least four weeks and their period of absence, measured in weeks, was greater than their period of work, they will be deemed a new employee when they return to work.

Health Insurance Documentation
It’s also important for employers to review their health insurance plan document and their insurance policies to verify furloughs are covered and make any changes as needed so that the ACA penalties are not an issue.

An Example
What’s the effect of not offering health insurance to a furloughed employee that is deemed full time under an employer’s stability period?

XYZ Company offers all 100 full-time employees MEC. Due to a downturn in their industry, they furlough John Doe, a full-time employee on April 1, 2020, and do not extend group health insurance to him. John declines COBRA coverage as it’s unaffordable and instead goes to the Exchange and qualifies for a PTC. On September 15, 2020, John returns to work and enrolls in XYZ Company’s health insurance as of October 1, 2020.

XYZ Company will owe a §4980H(b) penalty of $1,930 ($3,860/12months x 6 months) because John was not offered affordable insurance while he was deemed a full-time employee. If John had been terminated on April 1, 2020, and re-hired on September 15, 2020, XYZ Company would not owe an ACA penalty as he would not have been considered a continuing employee. Likewise, if XYZ Company had used the monthly measurement method instead of the lookback method, they would not owe a penalty as John would not have had 130 hours of service in the months when he was furloughed.

Now let’s assume the same facts as above, except that XYZ Company did not meet the 95% test. Even if John is offered COBRA coverage, XYZ company would owe a §4980H(a) penalty of $89,950 using 100 employees less 30 “free” employees ((70 x $2570)/12months x 6 months) because they did not offer 95% of their full-time employees MEC.

If XYZ Company, in both cases shown above, would have continued John’s health insurance coverage during his furlough, he would not have had the need to seek another source of health insurance and the penalties would not have been triggered.

Importance of ACA When Considering Furloughs
Employers need to be aware of the potential ACA penalties when furloughing their employees. By offering health insurance to furloughed employees, you may be able to avoid ACA penalties. While the §4980H(b) is often affordable for employers, the §4980H(a) penalty often is not.

It’s important to understand how ACA will impact any decision you make with your employees.

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About the Author

Tonya Rule

Tonya M. RuleCPA

Partner/Affordable Care Act Practice Leader
Tonya has 20+ years public accounting experience providing tax and consulting services to individuals and businesses. She currently leads the firm’s healthcare reform specialty services and helps businesses with the rules surrounding the Affordable Care Act.