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The Affordable Care Act (ACA) is in full swing. Companies should have provided employees with their 1095 forms for 2015 by March 31st, and the deadline of June 30th for filing with the IRS for electronic filers is fast approaching. The reporting requirements are complicated and for those who fail to report, the fines can be steep.

For federal contractors, the increased overhead cost associated with ACA compliance has been troubling.  Winning and maintaining contracts in an LPTA environment means cutting costs as much as possible.  Yet, a recent report by the Congressional Budget Office noted that, over the next 10 years, private health insurance premiums will increase by about 5 percent annually, which exceeds the expected gross domestic product growth by 2 percentage points over the same period.  Other reports suggest that by 2025, the cost for employment-based health coverage will increase by sixty (60) percent.  One cost cutting measure being weighed by some companies is to reduce employee hours to avoid ACA compliance.  But the risks may not be worth the reward.

Reducing Employees’ Hours Could Reduce Your ACA costs

As background, the ACA requires employers with 50 or more employees to offer affordable, minimum value coverage to full-time employees and their dependents or pay a penalty if they fail to offer such coverage and the employee then receives premium assistance from the federal government and obtains coverage through the Health Insurance Marketplace.  Full-time employees are defined by the ACA to include those employees who work thirty (30) hours or more per week.  Employers are not required to offer health insurance to employees working less than thirty (30) hours per week. Seemingly then, employers could glean two advantages by reducing employees’ hours below thirty (30) hours per week.  First, for employers hovering around the fifty (50) employee ACA coverage threshold, converting a class of full-time employees to part-time (i.e., less than 30 hours per week) might lessen the company’s “full time equivalent” count and actually take them below the fifty (50) employee coverage threshold.  Secondly, for larger employers, limiting some employees’ hours to less than thirty (30) per week means not having to offer health insurance to those now “part time” employees.  Either of these scenarios could present a significant monetary savings for a federal contractor on a tight budget.

But What About Employers’ ERISA Obligations?

ACA avoidance seems like a great cost reduction strategy, until you take a look at the Employee Retirement Income Security Act (ERISA).  Section 510 of ERISA prohibits employers from interfering “with the attainment of any right to which such participant may become entitled under the plan.”  Essentially, this provision means that employers cannot discriminate or retaliate against those employees who might seek to attain coverage under an employer sponsored health plan.  But would an employer’s decision to restructure its workforce to lower its health insurance costs under the ACA really violate this provision?  As it turns out, the answer is “maybe.”

A Federal Court Weighs In on the Issue.

Until now, whether a reduction of workers’ hours to avoid ACA coverage would create ERISA liability was a matter of academic conjecture.  However, a U.S. Federal District Court in New York has recently upheld the rights of employees to sue their employer for limiting work hours to under thirty (30)  per week in an effort to avoid having to offer them medical coverage. As the court observed, while the act of reducing employee hours does not violate any specific provision of the ACA, the Company’s employees have satisfactorily alleged that such a reduction creates a retaliatory cause of action under ERISA Section 510.

The case is not fully resolved; the employees have thus far only survived the employer’s motion to dismiss their claims. To be successful in their lawsuit, the employees must ultimately prove that the Company intended to interfere with their benefits by reducing their hours below thirty (30) per week. But given the Company’s stated rationale of trying to avoid ACA healthcare costs, the employees’ claim seems fairly strong. And the initial ruling from the Court suggests that it views intentionally reducing employees’ hours to avoid having to provide health coverage as an ERISA violation.

So What Should Employers Do?

Given ERISA section 510 and the pending litigation around this issue, employers would be wise to avoid basing workforce changes solely with the goal of lessening the impact of the ACA’s employer mandate.  Enacting workforce changes for reasons that have a broader business impact (and carefully memorializing those reasons) is a smarter way to proceed.  Some tips to keep in mind as your organization weighs workforce changes include the following:

  • Carefully evaluate the need for reducing employee hours and be mindful of the thirty (30) hour per week threshold. Any decision to reduce hours should be communicated to employees in writing and include clear and specific underlying business rationale for the changes.
  • Make sure public statements about the workforce change mirror internal statements to employees.
  • Avoid large, sweeping changes that occur at once. Such large-scale events tend to invite unwanted questions and scrutiny from both inside and outside the company.
  • Try to leave the hours for current full-time employees largely unchanged and focus, instead, on capping hours for newly hired employees or outsourcing new work to contractors.

There are certainly legitimate reasons to reduce employee hours – but doing it intentionally to avoid ACA obligations looks to be problematic. Employers would be well advised to proceed with caution in this area and to carefully plan for and communicate workforce reductions in ways that do not run afoul of ERISA.

C2 provides strategic HR outsourcing to clients who want to develop optimal workforce strategies and solutions to allow them to be more competitive and profitable. C2 blog posts are intended for educational and informational purposes only.