Compliance Q&A: Interns and Offers of Coverage

Summary

If the employer is an Applicable Large Employer (ALE), then interns hired to work full-time hours should be treated the same as other full-time hires and offered coverage after the standard waiting period. Otherwise, the employer is at risk for potential penalties under the ACA’s Employer Shared Responsibility mandate. There is a limited exception that may apply to employers using the look-back measurement method to determine the full-time status of their employees.

Details

Applicable Large Employer Status

Any post-ACA discussion on whether to make an offer of coverage must begin with determining whether an employer is an Applicable Large Employer (ALE). An ALE is an employer that averaged 50 or more full-time employees, including full-time equivalents, during the prior calendar year.¹

If the employer is classified as an ALE, it is subject to the Employer Shared Responsibility mandate, also known as “Pay or Play.” This means that the employer must make certain offers of health insurance coverage to its full-time employees and their dependents or risk significant tax penalties.

There are two potential penalties under the Employer Shared Responsibility mandate:

• Internal Revenue Code § 4980H(a) – failure to offer minimum essential coverage to substantially all of its full-time employees and dependents²
• Internal Revenue Code § 4980H(b) – failure to offer affordable minimum value coverage to full-time employees

How to Determine Full-Time Status of Employees

An employee is classified as “full-time” if they have at least 130 hours of service a month (or 30 hours per week). The IRS provides only two ways for employers to measure full-time status: the monthly and look-back measurement methods. An employer can only use different measurement methods for specific IRS designated classifications: salary versus hourly, employees whose primary places of employment are in different geographic locations, collectively bargained versus non-collectively bargained employees, or different groups of collectively bargained employees with separate collective bargaining agreements.

The monthly measurement method counts an employee’s actual hours of service each month. If a new employee works full-time hours, they must be classified as a full-time employee and offered coverage by the first day of the fourth month after hire to avoid potential tax penalties.

Under the look-back measurement method (LBMM), an employer can average an employee’s hours over a historical period of time (measurement period) to determine whether or not they should be classified as benefits-eligible for a future period of time (stability period). The LBMM classifies employees by full-time, variable-hour, seasonal or part-time employees.

An employee who is hired and expected to work full-time hours should be offered coverage by the first day of the fourth month after hire. However, ALEs who use the LBMM may use an initial measurement period to measure new variable-hour, seasonal, or part-time employees to determine full-time status for the following stability period.

The ACA does not provide for a “temporary” employee classification under either measurement method. If interns are hired and expected to work full-time, even if they’re only expected to only work for a limited duration, then the ALE would need to offer coverage to those full-time intern employees by the first day of the fourth calendar month following hire to avoid a risk of penalty. In other words, if interns are hired as full-time employees, they should be offered benefits on the same basis as any other full-time employee who is eligible for benefits, i.e., coverage that follows the standard waiting period.

Seasonal Employee Exception

If the employer uses the LBMM, there is a possibility that interns could be classified as seasonal employees and subjected to an initial measurement period even if they’re hired to work full-time hours.

Seasonal employees are those who are hired into a position for which the customary annual employment is six months or less, and for whom the period of employment begins each calendar year in approximately the same part of the year, such as summer or winter. If the intern is expected to work less than six months and fits the criteria above, they can be treated as a seasonal employee and subjected to an initial measurement period. That means coverage does not have to be offered after the standard waiting period. This is only an option if the employer is using the LBMM and the following requirements apply: 1) internships begin in approximately the same part of the year every year to handle a peak in business³and 2) internships are customarily six months or less.

If the seasonal employee exception applies, it would be unlikely that coverage would ever be offered since the employee’s seasonal assignment would have already ended before the end of the initial measurement period. Whether this exception applies is very fact-dependent, and it would be the employer’s responsibility to prove it applies if ever challenged.

Common Practices to Manage Interns and Benefits Offerings

Here are some common strategies employers use with interns and offers of coverage. Note that some of the points below raise compliance concerns.

• If interns are hired to work full-time hours, the employer will offer coverage after the standard waiting period. Often, short-term employees will not take coverage if offered because of the limited duration of the assignment or because they already have other coverage (particularly student interns).
• The employer will hire interns to work 25 hours or less. Assuming that plan documents provide that employees are eligible if they work 30 hours per week, the interns will never be benefit-eligible. By scheduling interns for 25 hours per week, there is still leeway to ensure that the employees do not work 30 or more hours per week on average for the month.
• If interns are hired to work full-time hours, the employer will employ the interns for less than 90 days, meaning the interns will never complete a 90-day waiting period.⁴
  • Different waiting periods for different categories of employees will raise red flags for nondiscrimination testing under Internal Revenue Code § 125 (if the employee premiums are being paid through cafeteria plan on a pre-tax basis), and Internal Revenue Code § 105(h) (if the plan is considered self-funded).⁵ While there may be workarounds to satisfy the Section 125 nondiscrimination concerns, differing waiting periods will usually cause a self-funded plan to fail Section 105(h) nondiscrimination testing.
• If interns are hired to work full-time hours, the employer may decide not to offer coverage to those employees.
  • The employer would accept the risk of paying a ‘Pay or Play’ Section 4980H(b) penalty if any of the full-time intern employees go to the Health Insurance Marketplace and receive a premium tax credit. As always, employers can decide to follow the requirements of the Employer Shared Responsibility mandate or run the risk of penalties. It is up to the employer whether they want to assume that risk. Depending on the length of service of the interns, it may be a low risk. It is very important to be aware of the employee population count. If there are a significant number of interns who are full-time employees, such that the number of full-time employees who are not offered coverage exceeds 5% of all full-time employees, the ALE would run the risk of incurring a Section 4980H(a) penalty.
  • If an employer chooses to exclude interns or any other classification of full-time employees from the plan, they should amend their plan document to reflect that exclusion. Any other benefits communications should be updated as well.⁶
  • Excluding certain classifications of full-time employees will also raise red flags for nondiscrimination testing under both Sections 125 and 105h.

Conclusion

If an intern is hired to work full-time hours, unless a limited exception applies, the employee should be offered coverage as any other full-time employee to avoid potential penalties under the ACA.