Proposals to Change the Affordable Care Act’s (ACA’s) Definition of “Full Time”

November 19, 2014 IF00064




November 19, 2014
Proposals to Change the Affordable Care Act’s (ACA’s)
Definition of “Full Time”
Background
Health Coverage of Part-Time Workers
Context. For the purposes of the Affordable Care Act’s
The Kaiser Family Foundation (KFF) publishes employer
(ACA; P.L. 111-148, as amended) employer penalty, “large
health insurance offer rates to part-time workers (defined by
employers” are defined as firms with 50 or more “full-time
their employers) among firms that offer health benefits.
equivalent” employees (FTEs). Total FTEs are calculated
by adding the total number of “full-time” workers (who
As shown in Figure 1, among firms that offer health
average 30 hours per week or more) plus the number of
benefits, the percentage of firms offering health benefits to
part-time, nonseasonal employees converted to FTEs.
part-time workers has remained relatively consistent in
recent years. There was no large drop in offer rates in 2014,
If a firm exceeds the 50-FTE threshold, then it could be
the first year individual insurance exchanges were open and
subject to a penalty if it does not provide health insurance
the baseline for measuring average work hours for the
plans that meet minimum standards of “affordability” and
employer penalty beginning in 2015. As of 2014, the KFF
“adequacy” set forth in the ACA. The penalty amount is
data indicate that the percentage of firms offering health
based on the number of full-time workers (not FTEs).
coverage to their part-time workers is in line with historical
trends.
For employers that do not meet the ACA’s requirements,
the Internal Revenue Service will begin enforcing the
Figure 1. Among Firms Offering Health Benefits, Percentage
penalty for firms with 100 or more FTEs in 2015 and for
Offering Health Benefits to Part-Time Workers, 1999-2014
firms with 50 or more FTEs in 2016 and beyond. The
penalty will only be levied on large employers that have at
least one full-time worker receiving a health insurance
premium credit in the individual insurance exchange
markets (part-time workers receiving a credit are not
included in the penalty amount calculation).
Legislative Proposals. The Save American Workers Act of
2013 (H.R. 2575) is one of several bills that would change
the definition of full time from 30 hours to 40 hours per
week. The House passed H.R. 2575 on March 3, 2014.
Why Are the Changes Being Proposed? Proponents of
changing the definition of full time from 30 hours per week
to 40 hours per week argue that the current 30-hour per-
week definition is unusually low compared with
“traditional” standards of full-time work in many industries.
A 40-hour work week definition could, arguably, reduce
employer’s calculations and compliance costs. Proponents
of the revision also contend that the 30-hour definition
Source: Kaiser Family Foundation, 2014 Annual Survey of Employer
encourages employers to reduce the number of hours
Health Benefits, p. 47.
allotted to some workers (thereby reducing their pay) to
decrease the number of full-time workers and lower
Analysis of Changing the Definition to 40
employers’ compliance costs. In addition, with fewer full-
Hours per Week
time workers, the size of an employer’s penalty would be
smaller because the penalty is based on the number of full-
Revenue Effects. The Joint Committee on Taxation (JCT)
time workers.
scored H.R. 2575 as costing $73.7 billion over 10 years. For
context, the Congressional Budget Office (CBO) and JCT
Some firms that have dropped health coverage for their
estimated in April 2014 that the employer penalty would
part-time workers claim these employees can purchase
raise $139 billion over 10 years.
more comprehensive or lower-cost policies in the individual
health exchanges. Depending on their income, some of
Compliance Costs. Larger firms have two main
these workers may be eligible for an insurance premium tax
compliance advantages. First, they typically have more
credit.
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Proposals to Change the Affordable Care Act’s (ACA’s) Definition of “Full Time”
technologically sophisticated ways of tracking the average
Other Policy Options
hours worked by each of their employees (or they contract
out their payroll analysis). Second, any compliance costs
Policies intended to reduce the severity of the employer
are likely to be a smaller share of larger firms’ revenue
penalty could decrease the compliance costs of the ACA,
compared with smaller firms. Because employers with
thereby reducing the distortionary effects the penalty might
fewer than 50 FTEs are exempt from the penalty, firms that
have on payrolls. However, these options could decrease
are near the 50-FTE threshold and firms that employ more
revenue and increase either the share of uninsured or the
than 50 FTE employees but do not have a simple method to
number of workers enrolling in individual exchanges.
track employees’ work schedules (especially if these
schedules vary from one week to the next) bear a
Change the Definition of Full Time to 35 Hours per
disproportionate share of the total compliance costs of the
Week. This option could more closely align the ACA to
FTE provision.
traditional definitions of full-time work but would still
require a significant change in work hours (from the typical
Firms have had several years to plan for the implementation
40-hour standard) to avoid the employer penalty. Based on
of the employer penalty. According to the ACA, employers
the Bureau of Labor Statistics data cited in Table 1,
were to measure their workers’ average payroll as of
employees who worked 35 hours or more per week in 2013
January 2013 to establish a baseline for compliance with
worked an average of 42.6 hours per week. As shown in
the employer penalty in 2014. On July 2, 2013, the Obama
Table 1, fewer workers are clustered around 35-hour than
Administration announced a delay in implementation of the
40-hour average work weeks.
employer penalty for all applicable firms until 2015. On
February 10, 2014, the Department of the Treasury further
Increase the Exemption for the Employer Penalty to the
delayed the employer penalty for firms with 50 FTEs to 99
First 50 Full-Time Workers. Currently, the employer
FTEs from 2015 to 2016.
penalty is triggered by the hiring of the 50th FTE worker,
but the first 30 full-time workers are exempt from the
Redefine Full Time as 40 Hours per Week. Changing the
penalty amount calculation. In other words, a firm that
definition of full time from 30 hours per week to 40 hours
employed 49 full-time workers and then hired a 50th full-
per week would shift, not eliminate, the incentive for
time worker would be subject to a penalty based (in part) on
employers to move more workers to part-time status, and it
20 full-time workers. This 30-worker exemption could be
may create greater incentive for firms not to offer health
increased to reduce the cliff that firms could face at the
insurance to their employees. More employers could be
hiring of their 50th FTE worker, thereby reducing the
inclined to shift workers to part-time status (in terms of the
marginal disincentive for firms near the 50-FTE threshold
ACA) under a 40-hour definition because the disruption to
to hire.
the employers’ workforce would be smaller when changing
work schedules from 40 hours to 39 hours than from 40
However, this option would have a limited effect on the
hours to 29 hours.
decisions of employers that are well above the 50-FTE
threshold. For these employers, the penalty paid on the first
As shown in Table 1, more workers are clustered around
20 full-time workers becomes smaller, relative to aggregate
the 40-hour-per-week threshold than the 30-hour threshold.
health coverage costs, as firm size increases. Additionally,
If the incentive to retain workers on full-time status is
this option would have little to no effect on employer
diminished, then the employer penalty could compel fewer
decisions to offer coverage to part-time workers because
firms to offer health care coverage relative to current law.
these workers are not used to calculate the penalty amount.
Table 1. Persons at Work in All Industries, 2013
Modify the Exemption to the First 30 FTE Employees in
Average Hours
Number of
Penalty Calculation. The employer penalty exemption
of Work per
Workers
Percentage
could be revised such that it was based on FTE employees
Week
(in thousands)
Distribution
to reduce the incentive for firms to hire more part-time
workers or change full-time workers to part-time status. In
1 to 14
6,563
4.7%
this case, hiring two part-time workers to substitute for one
15 to 29
17,014
12.2%
full-time worker would not change the calculation of the
penalty.
30 to 34
10,237
7.4%
35 to 39
9,645
6.9%
This option could be combined with the exemption increase
option, described above, to offset some of the revenue loss
40
60,891
43.8%
associated with increasing the exemption. For example, the
41+
34,577
24.9%
employer penalty could be revised to exempt the first 50
FTE employees instead of the current exemption of the first
Total
138,926
—
30 full-time employees.
Source: U.S. Bureau of Labor Statistics, “Labor Force Statistics from
Sean Lowry, slowry@crs.loc.gov, 7-9154
the 2013 Current Population Survey,” at
http://www.bls.gov/cps/cpsaat19.htm.
Jane G. Gravelle, jgravelle@crs.loc.gov, 7-7829

IF00064
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