United States: The Affordable Care Act's Reporting Requirements For Carriers And Employers (Part 18 Of 24): Terminations, Changes In Status And Service Breaks Under The Monthly Measurement Method

The final regulations under Code § 4980H establish two—and only two—methods for determining an employee's status as full-time: the monthly measurement method and the look-back measurement method. Under the former (as the name suggests) an employee's status as full-time is determined month-by-month. An employee who works on average at least 30 hours per week, or 130 hours per month, is full-time. (An employer may alternatively use 120 hours per month in months with 4 weeks and 150 hours per month in months with 5 weeks.) The monthly measurement method is particularly well-suited to employers and industries with stable workforces and low turnover. In most instances, the reporting burdens for these employers will be relatively manageable. But even in this environment, employees will from time-to-time terminate, change status, or incur service breaks.

This post explores the reporting challenges associated with employee terminations, changes in status, and breaks in service under the monthly measurement method. Next week's post will do the same for the look-back measurement method.


As we have explained in a previous post, obtaining the information elicited by Part II of Form 1095-C (Lines 14, 15 and 16) is particularly challenging since the required data is unique to each employee and the reporting is done month-by-month. Part II furnishes the IRS with information relating to the administration of three separate provisions of the Internal Revenue Code, i.e., Code § 5000A (the individual mandate), Code § 36B (eligibility for premium subsidies), and Code § 4980H(b) (the second of the two layers of penalties under the employer shared responsibility rules).

  • Line 14 solicits information about what coverage the employer actually There are, of course, instances in which the failure to offer coverage in a month does not result in any exposure, e.g., the failure to offer coverage during a waiting period. Line 14 is agnostic on this score.
  • Line 15 asks for the "Employee Share of Lowest Cost Monthly Premium, for Self-Only Minimum Value Coverage." This enables the IRS to determine whether coverage is affordable.
  • Line 16 asks the employer to explain why it might not have exposure under Code § 4980H(b). The employer establishes this to be the case by providing the appropriate "Applicable Section 4980H Safe Harbor" code, if applicable. Where line 16 is left blank, the employer will incur a penalty under Code § 4980H(b) for the month if the employee has qualified for a premium subsidy from a public insurance exchange or marketplace.

For the balance of this post, we will assume that the employer is an applicable large employer (i.e., an employer subject to the employer shared responsibility rules) and that the employer makes an offer of minimum essential coverage to its full-time employees and their spouses and dependents that is both affordable (based on the W-2 safe harbor) and provides minimum value. We will also assume that the employer's group health plan under which the minimum essential coverage is provided covers only full-time employees. A transfer to part-time would, therefore, result in a loss of coverage. Lastly, we will assume that the plan imposes a 90-day waiting period and that the employer is not an educational institution. In sum, the employer in this case has adopted a compliance strategy that is intended to entirely avoid exposure under Code §§ 4980H(a) and (b). (That the employer is not subject to penalties under Code § 4980H(a) will be reported on Form 1094-C.)

The (Boring) Basics of Reporting

For 1095-C reporting purposes, the simplest case is an employee who is full-time for all 12 months of the calendar year. In the "All 12 months" box for Line 14, the employer would enter 1-series indictor code 1E (Minimum essential coverage providing minimum value offered to employee and at least minimum essential coverage offered to dependent(s) and spouse). And, in the "All 12 months" box for Line 15, the employer would insert the employee premium (i.e. his share of the lowest-cost premium for self-only coverage offered to him), which we have already assumed is affordable. If the employee accepted the coverage, the proper 2-series indicator code, in the "All 12 months" box, would be 2C (Employee enrolled in coverage offered). If the employee declined the coverage, the proper 2-series indicator code would be 2F (Section 4980H affordability Form W-2 safe harbor).

While the monthly measurement period reports whether the employer has made an offer of coverage, this does not require the employer to make a new offer every month. The final instructions to Form 1095-C explain the rules (pp. 14, 15): "An employer makes an offer of coverage to an employee if it provides the employee an effective opportunity to enroll in the health coverage (or to decline that coverage) at least once for each plan year." (Emphasis added).

Mid-year termination

Reporting in the event of a mid-year termination is not complicated, but the employer—or, more likely, the software solution that the employer is relying on—has a little more work to do when compared to the example above. For starters, here the employer can no longer use the "All 12 months" box for any of lines 14, 15 or 16. If employment terminated on, say, the last day of June, each of the months during the first half of the year would look like the previous example. For July to December, however, Line 14 would be coded 1H (No offer of coverage); Line 15 would be left blank, and Line 16 would be coded 2A (Employee not employed during the month). As a result of a change made in the final 2015 Instructions for Forms 1094-C and 1095-C (which we explained here), it does not matter whether or not the employee in this case elected or declined COBRA.

Things get marginally more complicated if the employee terminates mid-month, say July 15. Here, January through and including June would be similar to the immediately preceding example, as would August through December. But for July, Line 14 would be coded 1H (No offer of coverage), since the coverage was not offered for each day of the month. Line 15 would be left blank. And Line 16 would be coded 2B (Employee not a full-time employee). The instructions provide as follows in this case:

Enter code 2B also if the employee is a full-time employee for the month and whose offer of coverage (or coverage if the employee was enrolled) ended before the last day of the month solely because the employee terminated employment during the month (so that the offer of coverage or coverage would have continued if the employee had not terminated employment during the month).

Changes in status

Now let's assume that our full-time employee, who previously enrolled in coverage, transfers to a part-time position on July 1, and remains a part-time employee for the balance of the year. The employee would qualify for an offer of COBRA coverage. For January through June, the reporting treatment would be the same as the previous example involving termination. For the balance of the year, Line 14 would continue to be coded 1E (an offer of COBRA coverage to a former employee is ignored, but an offer of COBRA coverage to an ongoing employee counts as an offer of coverage). On Line 15, the employer would report the self-only COBRA coverage rate. If the employee accepted the COBRA coverage, Line 16 would be coded 2C; if declined, Line 16 would be coded 2B (Employee not a full-time employee).

A change from part-time to full-time also has reporting consequences. Flipping the facts, assume that the employee was part-time from January to June, and full-time from July through December. From January through June, Line 14 would be coded 1H (No offer of coverage); Line 15 would be left blank, and Line 16 would be coded 2B (employee not a full-time employee). For July, August and September, Line 14 would similarly be coded 1H (No offer of coverage); Line 15 would continue to be left blank, but Line 16 would be coded 2D (Employee in a section 4980H(b) Limited Non-Assessment Period). For the remainder of the year, for Line 14, the employer would enter 1-series indictor code 1E (Minimum essential coverage providing minimum value offered to employee and at least minimum essential coverage offered to dependent(s) and spouse). For Line 15, the employer would report the lowest cost employee premium for self-only coverage. If the employee accepted the coverage, Line 16 would be coded 2C (Employee enrolled in coverage offered); if the employee declined coverage, Line 16 would be coded 2F (Section 4980H affordability Form W-2 safe harbor).

Breaks in service

Generally, an employer is permitted but not required to treat an employee who is rehired after incurring a "break-in-service" as a new employee if the employee was not credited with an hour of service for at least 13 consecutive weeks. For educational institutions, a break must be at least 26 weeks. Under an alternative "rule of parity," a break in service is deemed to occur for periods shorter than 13 consecutive weeks if the employee was not credited with an hour of service for a period of at least four consecutive weeks, and that period is longer than the employee's previous period of employment immediately preceding the break. The break in service rules apply solely for the purpose of determining whether an individual should be treated as a continuing or new employee. They have no bearing on whether the employee is a full-time employee.

Returning to our example, assume that our employee works full-time from January to June and terminates employment on June 30, and that he or she was offered and elected coverage. The employee resumes full-time employment November 1, after a 4-month (i.e., longer than 13 weeks) break-in-service. Here, the employer has a choice. It can treat the employee either as a new, full-time employee or a continuing employee.

  • Treatment as a new employee

For January to June, Line 14 would be coded 1E (Minimum essential coverage providing minimum value offered to employee and at least minimum essential coverage offered to dependent(s) and spouse). For Line 15, the employer would report the lowest cost employee premium for self-only coverage. Line 16 would be coded 2C (Employee enrolled in coverage offered). For July, August, September, and October Line 14 would be coded 1H (No offer of coverage); Line 15 would be left blank, and Line 16 would be coded 2A (Employee not employed during the month). For the remainder of the year, Line 14 would be coded 1H (No offer of coverage) and Line 15 would be left blank. Line 16 would be coded 2D (Employee in a section 4980H(b) Limited Non-Assessment Period), since the employee would be in a waiting period.

  • Treatment as a continuing employee

For January to October, the reporting treatment is the same as in the case of treatment as a new employee. The employer would need to offer coverage no later than December 1, under a rule that says that coverage must be offered no later than the first day of the month following the resumption of services. For the month of November, the employer would use indicator code 2D (Employee in a section 4980H(b) Limited Non-Assessment Period) in Line 16 to demonstrate that the employer need not offer coverage in November (Line 14 would be coded 1H (No offer of coverage) and Line 15 would be left blank). For December, the employer would make an offer of coverage, which would be appropriately reflected in the coding.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Alden J. Bianchi
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