Employee Classifications Irrelevant in Determining Shared Responsibility Penalties

The IRS has clarified that an employer's internal classifications and work-time restrictions are not taken into account for purposes of determining the employer's shared responsibility and penalties. Specifically, IRS Information Letter 2016-0030 discusses an employer that "has developed a new policy restricting part-time and seasonal employees from working more than 29 hours of service in any week."

Background. The ACA's employer shared responsibility provisions and penalties apply to Applicable Large Employers ("ALEs"). ALEs are employers that had 50 or more full-time employees or full-time equivalent employees (collectively, "FTEs") during the preceding calendar year. Generally, a full-time employee is an employee who averages at least 30 hours of service per week. Hours of service include not only hours when work is performed but also hours for which an employee is paid or entitled to payment even when no work is performed (i.e., vacation, sick leave, holidays).

An employer will determine its monthly FTE count by adding: (i) each full-time employee, and (ii) the total number of hours worked during a month by employees who are not full-time, divided by 120. Monthly FTE for the year counts are then totaled and divided by 12. If the resulting number is 50 or more, the employer is subject to the penalties.

Although the hours of part-time and seasonal workers (with certain exceptions) are aggregated into the count when determining if an employer is an FTE subject to the shared responsibility penalties, only the actual full-time employees are counted when determining the extent of the penalties.

IRS Information Letter 2016-0030. The IRS confirmed that the amount of the employer's liability for the ACA's shared responsibility penalty is based on the number of employees who average 30 or more hours of service, regardless of their classification by the employer. Therefore an employee who works an average of 30 or more hours of service per week during any given month could potentially trigger (or increase) the employer's liability for the ACA's employer shared responsibility penalty, even if designated as a part-time or seasonal employee, and even if this employee should not have been allowed to work more than 29 hours per week under the employer's internal policies.