Summer hiring season is almost here – and with it comes the familiar influx of interns. For many employers, offering paid internships is a routine part of ramping up for the months ahead. But as with most things in the Affordable Care Act (ACA) world, what looks straightforward on the surface can quickly become more complicated.
A common assumption is that interns can simply be excluded from health plan eligibility. Not so fast. For applicable large employers (ALEs), missteps in classifying these workers can create meaningful exposure to employer shared responsibility penalties (ESRP) under the ACA.
Read on for a closer look at how ACA rules intersect with summer internship programs – and a few practical steps to help keep your approach on solid ground.
The Risk of Employer Shared Responsibility Penalties
The ACA requires ALEs to offer minimum essential coverage to at least 95 percent of full-time employees, i.e., those who work an average of 30 hours per week. The ACA provides two methods for determining an employee's full-time status: the monthly measurement method and the look- back measurement method. Many employers utilizing the look-back measurement method to determine full-time status do not consider the hours of interns under this method, and excluding interns from health coverage eligibility could trigger an ESRP in two ways.
First, if any employee receives a subsidy for coverage obtained in the Marketplace, the employer could face penalties for each full-time employee, minus the first 30, if the IRS determines that coverage was not offered to at least 95 percent of full-time employees. Second, if an intern receives a subsidy for Marketplace coverage and the employer's coverage does not meet the ACA affordability or minimum value requirements, a penalty may apply for each employee receiving a subsidy for coverage received on the Marketplace.
Classification as a Seasonal Employee
Under the ACA, new hires are generally classified as full-time, part-time, or variable hour employees based on the hours worked or the hours reasonably expected to be worked as of the hire date. Interns hired on a full-time basis in the summer would therefore ordinarily be considered new full-time employees. However, seasonal employees – even if hired on a full-time basis – do not trigger penalties if coverage is not offered to them. Accordingly, employers should consider classifying interns as seasonal employees to avoid the risk of ESRP.
A "seasonal employee" is defined as an employee hired into a position for which the customary annual employment is six months or less. The ACA regulations clarify that "customary" means the nature of the position is such that the employee typically works for a period of six months or less, and that the period should begin each calendar year in approximately the same part of the year, such as summer or winter. In certain unusual instances, an employee may still be considered seasonal even if employment extends beyond its customary duration in a particular year. For example, ski instructors at a resort with a customary employment period of six months who are asked to work an additional month due to an unusually long snow season would still be considered seasonal employees.
Under the final ACA regulations, new seasonal employees are treated the same as new variable-hour employees under the look-back measurement method. Therefore, employers may apply the initial measurement period to seasonal employees, even though they work more than 30 hours per week at the time of hire. Be aware that, while not commonly used, if the employer uses the Monthly Measurement Method (MMM) in lieu of the look-back method, then the seasonal employee classification would not serve to exclude summer interns hired on a full-time basis.
Interns Offered Permanent Positions
A seasonal employee may be promoted or transferred to a permanent position during the course of the internship, such as hiring the intern to a permanent position after graduation. Under the final regulations, if a seasonal employee experiences a change in employment status before the end of the initial measurement period such that the employee would not have been classified as a seasonal employee had they begun employment in the new position, the employer must begin treating the employee as full-time no later than the first day of the fourth month following the change in employment status. Alternatively, if earlier, the employer must treat the employee as full-time by the first day of the first month following the end of the initial measurement period (plus any applicable administrative period), provided the employee averaged 30 hours of service per week or more during the initial measurement period.
Recommended Next Steps
Employers bringing on summer interns should carefully review how interns are classified under the ACA. Plan sponsors should also review the terms of their plan documents to ensure that interns are not improperly excluded from eligibility for health coverage. Employers who currently exclude interns from the look-back measurement method, or from plan eligibility altogether, or who have received 226J letters of proposed penalty assessments from the IRS, should consult with benefits counsel to assess their exposure and implement appropriate classification procedures before the summer hiring season begins.
If you have questions about ACA compliance for your summer intern program or if you have received IRS 226J letters, please contact E. Rena Felton or a member of Baker Donelson's Tax Group.