Employee Benefit Plan Review | March 2015 Reprinted with Permission

The ACA, Unpaid Leave and its Impact on Workforce PlanningBy Christopher Ryan and Sushma Tripathi

T he U.S. workplace is changing rapidly, and so are the tools and systems needed to manage it. Beyond the impact of increased diversity, flexible hours, and the ever-present

mandate to control labor costs, employers are now confronting complex compliance challenges that will fundamentally change human resource (HR) operations and metrics.

Although the effects of the Affordable Care Act (ACA) on employers are already well documented, the intricate relationship between the ACA and the Family and Medical Leave Act (FMLA) has received less attention, despite the daunting administrative requirements and risk of financial penalties from both the Internal Revenue Service (IRS) and the U.S. Department of Labor (DOL). Arguably, the compliance risk associated with sloppy HR recordkeeping has increased significantly. However, employers can help mitigate this risk through thoughtful integration and data flows of critical HR systems.

The ACA and FMLA Are Changing Workforce PlanningThe ACA laid out a framework for expanding affordable coverage to more Americans, by increasing coverage options through employer sponsored plans, private insurance, Medicare, and Medicaid. In this new ACA world, employers retain pre-tax status for group health plans, but the ACA mandates who must be considered “Full Time” for purposes of offering health coverage to avoid employer Shared Responsibility tax penalties. This new hours-of-service definition—sometimes referred to as the 30-hour rule—has created shifts in workforce planning.

Offering health benefits to part-time employees exceeding the 30 hours per week threshold can be expensive. Health benefits costs may constitute 10 percent to 25 percent of the total labor cost for part-time hourly workers. But limiting the hours of part-time employees to less than 30 per week has its own challenges, and employers must be mindful of potential legal violations based on interference with any right to receive benefits. Employers need to consider the trade-offs between higher benefits costs versus higher costs for staffing, scheduling, training, and turnover. Rather than cutting hours, some employers have converted a portion of their part-time workforce to full-time status, or have dropped health coverage for employees altogether.

The Role of Unpaid Leave in ACA ComplianceThe ACA requires organizations to take into account three types of special unpaid leaves—the Family and Medical Leave Act (FMLA), jury duty, and the Uniformed Services Employment

and Reemployment Rights Act (USERRA)—in order to calculate employees’ total hours of service. From a compliance perspective, jury duty is well understood, and USERRA, while helping to protect the reemployment rights of returning U.S. service members, typically involves only a small part of the workforce. FMLA compliance, however, is a different matter. Most employees in your workforce will experience the birth or adoption of a child, a personal illness or illness of a child, spouse, or parent. Most employees will have a qualifying FMLA event at some point in their lives.

Specifically, the FMLA provides up to 12 weeks of unpaid, job-protected leave for qualified events related to personal and family health and well-being. It also provides up to 26 weeks of unpaid job-protected leave for military caregivers. Employers who interfere or retaliate against a qualified leave may be subject to DOL inquiry, with potential for litigation, fines and penalties. FMLA inquiries by the DOL are at an all time high, and the DOL has a program to refer uninvestigated cases to third party lawyers through a program with the American Bar Association. In extreme cases, FMLA fines and court settlements have reached millions of dollars.

Expanded Use of FMLAKey demographic trends will likely drive higher usage of FMLA over time. The number of single households in the United States has grown significantly, while millions of baby boomers are reaching retirement age. In the future, the average U.S. worker is more likely to have family care obligations (elderly parents or children), but less likely to have assistance from a family partner.

Also, the average age of part-time workers will increase as fewer 18 to 24 year olds join the workforce over the next decade, even as demand for part-time employees increases. Part-time employment may become more prevalent and permanent in the future. Older experienced part-time workers may have increased expectations for benefits, paid time off, and family accommodation.

The Importance of Tracking Unpaid LeaveHistorically, FMLA tracking, especially for part-time and variable hour positions, has not been an operational priority. Frontline supervisors are focused on production and direct labor costs and may be drawing their labor from a flexible pool. For the HR department, unpaid leave tracking can be so labor-intensive that some companies err on the side of leniency to ensure compliance rather than through consistent tracking of eligibility and time off.

Given that FMLA hours are now directly part of ACA full-time status calculations, some employers may need to rethink their FMLA

Employee Benefit Plan Review | March 2015 Reprinted with Permission

The ACA, Unpaid Leave and its Impact on Workforce Planning Employee Benefit Plan Review

compliance policies. It is easy to envision a scenario under the ACA in which careless or inaccurate tracking of unpaid leave could place employers—and their employees—in a difficult situation. Consider the following example:

Todd, an hourly employee, requests a schedule change to leave work two hours early to care for or a family member on an as-needed basis. Todd and his supervisor come to an undocumented understanding and his supervisor clears his schedule as needed. When Todd clocks out for the day, however, the employer does not consider Todd’s early leave as qualifying unpaid leave. Prior to passage of the ACA, as long as both Todd and his supervisor support the arrangement, there is a small likelihood of negative consequences unless Todd’s peers are subject to a different standard.

Under the FMLA and the ACA, Todd will not be compensated for the hours he left work early, but the employer still needs to include these hours in Todd’s total hours of service for calculating ACA full-time eligibility. Although Todd was only paid for 28 hours of service this week, under the ACA, his hours of service totaled 30, requiring Todd to be offered health care coverage under the ACA.

Readers should note that the ACA has a precise definition for variable hour employees. In circumstances in which an employee’s work hours fluctuate with uncertainty around the 30-hour limit, the recorded special leaves hours become a part of ACA eligibility determination. Within a pool of variable hour employees, how many employees are making adjustments to their schedules that could be interpreted as a qualifying FMLA event?

Risk of Double Examination Employer compliance with ACA Shared Responsibility ultimately boils down to notices and tax filings, along with the potential for IRS inquiries, audits, and reconciliations. The employer is accountable for the accuracy and retention of all relevant HR records to complete IRS Forms 1094-C and 1095-C. These filings document the month-to-month ACA full-time status and coverage status for each employee, and the employers’ compliance with Shared Responsibility requirements. In the event of an IRS audit, the employer may be asked to demonstrate on a case-by-case, month-by-month basis how they determined ACA full-time eligibility, as well as proof that coverage was offered.

As part of the audit, the FMLA data and recordkeeping practices may be exposed. Any irregularities uncovered by the IRS investigation could trigger DOL inquiries as well as challenge the integrity of the employer’s ACA tax filings. Conceivably, an employer could wind up paying both ACA tax penalties and DOL penalties. Similarly, a DOL-initiated inquiry into FMLA practices could trigger an IRS audit. Noncompliance of either one could expose the other!

The Importance of Defensible Data The myriad data elements required in filling out Forms 1094-C and 1095-C are no easy task. These data elements may reside in HR systems that have traditionally been managed separately: payroll, benefits, time and labor, and leaves tracking.

But proof of compliance requires defensible data. In the event

of an audit, the auditor will be looking for a trail of transactions, events, and communications. The IRS also may ask the employer to reconcile discrepancies on a per-person basis. Without consistent information flow, the employer could be penalized for inaccurately reporting hours of service. Some issues to consider:

• Where does the data originate?• Where is the data housed? • Is there one consistent master record or is key data contained

in multiple systems? • Who in the organization will be responsible for responding to

IRS inquiries?

Keep in mind that assembling the required data may take weeks to compile and organize a response.

ACA compliance demands that employers access their data easily and accurately. Across the entity, consistency in recordkeeping is also critical. Mapping all source data from each HR system into the ultimate ACA tax filing process will uncover potential compliance vulnerabilities.

ConclusionACA and FMLA compliance present unique challenges to employers. An inquiry or audit of either statute creates risk of exposure to the other, and poor FMLA recordkeeping can challenge an employer’s ACA compliance accuracy, including the fundamental integrity of an employer’s ACA tax filings. The risk of double examination indicates that FMLA time-tracking is increasingly critical as ACA goes into effect. It is imperative that employers begin tracking unpaid leaves correctly now.

ACA compliance requires a multi-disciplinary approach, including a more holistic view of HR data requirements. The most effective HR systems provide:

• Transparency from data source to filing with full audit trail;• The ability to compile all necessary information for a specific

employee case;• Proactive notification of critical compliance thresholds; and • Payroll, benefits, time, and leave information to be

administered consistently across traditional functional boundaries.

In the new ACA world, HR can no longer operate in silos. HR systems must be viewed through the lens of human capital management, with interoperability across HR, benefits, finance, and operations.

Christopher Ryan is Vice President of Strategic Advisory Services at ADP. Sushma Tripathi is Vice President, Workforce Planning and Benefits Consulting of Strategic Advisory Services at ADP.