Key Decision Points in ACA Reporting Vendor Setup Questionnaires: Part I

Newfront has officially joined WTW, combining a technology-native approach with global expertise to better serve our clients. Read more

Key Decision Points in ACA Reporting Vendor Setup Questionnaires: Part I

By Brian Gilmore | Published September 4, 2020

Question: How should employers approach the basic ACA reporting questions in the setup forms used by most payroll or benefits administration systems?

Short Answer: The three key inputs are the measurement method, affordability safe harbor, and—for those employers utilizing the look-back measurement method—the measurement and stability periods.

Note: This is the first post in a four-part series addressing ACA reporting vendor setup questions.

General Rule: ACA Reporting

The ACA requires Applicable Large Employers (ALEs) subject to the ACA employer mandate to report whether they offered medical coverage (i.e., minimum essential coverage) that was affordable and provided minimum value to full-time employees. This reporting is generally handled via IRS Forms 1094-C/1095-C.

Although Congress effectively repealed the ACA individual mandate in the Tax Cuts and Jobs Act by zeroing out the tax penalty as of 2019, employers with a self-insured plan (and insurance carriers for a fully insured plan) are still required to report the months of coverage for the employee and any covered dependents. Self-insured ALEs report this coverage information—despite it no longer having any federal income tax consequence—in Part III of the Form 1095-C. Insurance carriers for fully insured plans report this coverage information on a separate Form 1095-B.

For more details from an employer perspective:

For more details from an employee perspective:

Key Decision Point #1: Measurement Method

The ACA employer mandate offers employers the option to choose between two alternative measurement methods to determine which employees are treated as full time (i.e., averaging at least 30 hours of service per week) for §4980H (employer mandate) purposes:

https://www.irs.gov/affordable-care-act/employers/identifying-full-time-employees

In general, employers must apply the same measurement method across all employees. For example, the employer cannot apply the LBMM to variable hour employees while applying the MMM to regular full-time employees.

However, employers are permitted to choose separate measurement methods for the following classes of employees:

Understanding the Monthly Measurement Method

The MMM is best thought of as the ACA’s default measurement method for determining employees’ full-time status. It is relatively simple and straightforward.

In short, the MMM provides that an employee is considered full-time for any given calendar month if the employee completes at least 130 hours of service.

Important Point: There is no measurement, administrative, or stability period under the MMM. It is simply a month-to-month approach.

The ACA reporting industry rarely discusses the advantages and disadvantages of each measurement method. Below is a high-level summary of some of the main considerations for the MMM:

Advantages of the MMM:

Disadvantages of the MMM:

Recommended For:

Understanding the Look-Back Measurement Method

The ACA did not originally contain a LBMM. Instead, it required ALEs to look at an employee’s full-time status each month to determine whether the employee averaged at least 30 hours of service per week—which the IRS now refers to as the MMM. (See IRC §4980H(c)(4)(A): “The term ‘full-time employee’ means, with respect to any month, an employee who is employed on average at least 30 hours of service per week.” (emphasis added)).

When the IRS first referred to the LBMM concept in Notice 2011-36 prior to issuing the proposed employer mandate regulations, the rationale was clear:

“A determination of full-time employee status on a monthly basis for purposes of calculating an employer’s potential §4980H liability may cause practical difficulties for employers, employees, and the State Exchanges. These difficulties include uncertainty and inability to predictably identify which employees are considered full-time and, consequently, inability to forecast or avoid potential § 4980H liability. This issue is particularly acute in circumstances in which employees have varying hours or employment schedules (e.g., employees whose hours vary from month to month or who are employed for a limited period)… One possible alternative would permit applicable large employers, at their option, to use a look-back/stability period safe harbor that would provide certainty as to which employees would be considered full-time for a particular coverage period.”

To summarize: The IRS gave birth to the LBMM as an optional alternative to the default MMM particularly to address concerns for employers with largely variable hour workforces.

As the final regulations were later issued in 2014, the IRS gave the MMM its formal name to reflect the default measurement method. Prior to the final regulations, the MMM didn’t even have a name. It was just the standard way of determining full-time status under the ACA. Only the LBMM initially needed a name because it was developed subsequently as an alternative to the standard statutory approach (the MMM).

For potentially dubious reasons, the reporting vendor industry has largely turned the ACA full-time employee determination on its head. ACA reporting vendors generally treat the LBMM as the default measurement method, while dismissing the MMM as an unusual and obscure alternative. In reality, both measurement methods are viable and reasonable, depending on the employer’s workforce characteristics.

The reporting industry rarely discusses the advantages and disadvantages of each measurement method. Below is a high-level summary of some of the main considerations for the LBMM:

Advantages of the LBMM:

Disadvantages of the LBMM:

Recommended For:

The Author

Brian Gilmore

Lead Benefits Counsel, VP, Newfront

Brian Gilmore is the Lead Benefits Counsel at Newfront. He assists clients on a wide variety of employee benefits compliance issues. The primary areas of his practice include ERISA, ACA, COBRA, HIPAA, Section 125 Cafeteria Plans, and 401(k) plans. Brian also presents regularly at trade events and in webinars on current hot topics in employee benefits law.

Connect on LinkedIn

The information provided here is of a general nature only and is not intended to provide advice. For more detail about how this information may be treated, see our General Terms of Use.