In Notice 2015-87, the Internal Revenue Service (IRS) addressed various compliance topics under the Patient Protection and Affordable Care Act (PPACA) in a series of questions and answers.1 Q&A-14 focuses on determining an employee’s “hours of service” for purposes of the employer mandate when no duties are being performed by the employee.

The PPACA’s employer mandate defines full-time employees by their hours of service, which means each hour for which an employee is entitled to pay for performing duties; for paid time off; or for which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. According to the notice, hours of service include periods during which an employee is receiving disability payments (short-term or long-term), as long as the recipient remains an employee and the employer paid some or all of the disability coverage cost.

Thus, employers may need to treat certain disabled employees as full-time employees for purposes of the employer mandate, including the reporting requirements (such as Form 1095-C). Moreover, any change to the employment status of workers with disabilities could have consequences under the Americans with Disabilities Act (ADA) and must be considered carefully.

The notice generally applies for plan years beginning on or after January 1, 2016. The IRS intends to issue proposed regulations reflecting the concepts in Q&A-14, and it is uncertain whether the formal regulatory process will delay the compliance deadline. In similar situations, employers that rely on Notice 2015-87 and the IRS’s final PPACA employer mandate regulations until further regulations take effect are often deemed to be in good-faith compliance.

Hours of service

In defining hours of service, the PPACA regulations cross-reference the definition of “hours of service” under ERISA, and Q&A 14 clarifies how the definition under ERISA applies to the PPACA employer mandate. One issue that had been unclear was whether disability payments from a third party, such as an insurance company or trust, were considered to be paid by an employer. Under the notice, disability payments are deemed to be made by an employer regardless of whether the payment is owed directly from the employer or owed directly to a specific employee. For example, the payment might be made by an insurer for the benefit of a group of employees.

If the employee paid for the full cost of the disability coverage with aftertax dollars, then the disability payments would not give rise to PPACA hours of service. However, if an employee-pay-all plan is funded with pretax dollars, then the disability period would constitute hours of service.

The ramifications of this rule could be significant. If a worker is considered a full-time employee when the employer measures hours of service — for example, during the employee’s look-back measurement period — the employer must either offer him or her (and his or her dependents) minimum essential coverage that meets PPACA requirements or potentially face an employer mandate penalty. An employer using the look-back measurement method would remain obligated to offer health coverage throughout the disabled employee’s related stability period.


Many large employers continue medical coverage for individuals on long-term disability for some period of time, and most continue health care benefits for employees on short-term disability. Sometimes employers coordinate continuation of health coverage with eligibility for COBRA or Medicare. Independent of health coverage, employers may or may not continue employment status for people on long-term disability. Continuing employment status is often used to denote a right for the disabled employee to return to work.

The employment status of a worker with a disability may be indirectly related to (and in some ways distinct from) the employer’s policy for continuation of health care (and potentially other benefits) for employees on long-term disability. Thus, employers might wish to seek advice from employment legal counsel in considering any changes to their policy with respect to continuing (or discontinuing) employment for people on long-term disability.

ADA considerations

A key issue is whether terminating a disabled worker could violate the ADA. The ADA prohibits employers from discriminating against qualified disabled individuals who can perform the essential functions of the job with or without a reasonable accommodation. At first glance, it would appear that an employee who is totally and permanently disabled for long-term disability purposes (or for Social Security disability benefits purposes) would not be protected under the ADA because he or she cannot perform the essential functions of the job. However, employers must tread carefully, as some employees who claim long-term disability may still be entitled to protection under the ADA.

Based on current guidance from the Equal Employment Opportunity Commission and case law, employers may be required to offer disabled employees a leave of absence as a reasonable accommodation. So employers may need to evaluate individually whether a disabled employee can perform the essential functions of the job with or without reasonable accommodation, and whether to offer a leave of absence as a form of reasonable accommodation for a limited period, such as 12 months from the onset of the disability, before terminating employment.

Employers interested in implementing a uniform time frame for terminating the employment of disabled individuals, while ensuring a defensible policy under the ADA, could determine with legal counsel an appropriate length of time on long-term disability before termination that generally would suffice as a reasonable accommodation. Alternatively, an employer could establish a shorter baseline duration for termination but be prepared to evaluate on an individual basis whether an extension is warranted as a reasonable accommodation under the ADA.

Employer mandate considerations

Because long-term disability benefits may create hours of service under the PPACA, an employer’s policy on whether to continue or terminate employment after an employee qualifies for long-term disability benefits has become more important. From a PPACA employer mandate compliance perspective, the following options should be considered:

  • Unless employment is terminated, disabled employees must be treated as earning hours of service for purposes of the employer mandate.
  • If the employer terminates employment for a worker moving from short-term to long-term disability, the long-term disability period will not count as hours of service.
  • If an employer currently continues employment status for employees on long-term disability but intends to revise its policy, it must determine whether to apply the change prospectively or to change the status of employees already receiving long-term disability benefits.
  • Rather than terminating employment, employers could require employees to pay for long-term disability coverage with aftertax contributions. This would enable employers to continue the employment of disabled workers but avoid counting the disability period as hours of service under the employer mandate. Note that under this approach, the benefits would shift from fully taxable (when contributions are made by an employer or on an employee pretax basis) to nontaxable.

Unresolved issues

Method of counting hours while on disability

The IRS has not clarified how many hours an employer must count during short-term or long-term disability leave. For example, if an employee out on disability receives 60% of pay, can the employer credit 60% of the hours he or she would have reasonably been expected to work during that month (or 60% of the hours the employee averaged before the onset of disability)? The obvious advantage to this pro rata method is that employees who averaged less than 30 hours per week would not be considered full-time under the employer mandate.

Given the lack of official guidance, employers are urged to seek legal counsel’s opinion before proceeding. A conservative position would be to credit all hours of service while an employee is receiving disability payments (e.g., credit 100% of the hours that the employee would have reasonably been expected to work during a specific month, or 100% of the hours the employee averaged during a specified period of time prior to the onset of disability).

Applicability of special ‘change in employment status’ rule to disabled individuals

The general rule under the PPACA is that an employee who was deemed to be full-time during a measurement period retains full-time status and must be offered appropriate coverage during the related stability period, regardless of how many hours he or she worked during the stability period. There is an exception, however, if the employee’s position or status changes, and he or she subsequently works less than 30 hours per week for three consecutive months and going forward after that. In such a case, the coverage during the stability period could be terminated.

It’s uncertain, however, whether this same rule would apply to an employee going on disability during the stability period. An argument could be made that it would be inconsistent to allow an active part-time employee to be dropped from coverage due to a change in employment status, but not allow the same for someone who is not actively working for the employer due to a disability. But employers should confer with legal counsel before taking action.

PPACA exemption for retiree-only plans

Retiree-only plans (a group health plan covering fewer than two current employees as of the first day of the plan year) are exempt from PPACA market reforms. According to a FAQ posted on the Department of Labor’s (DOL) website, a plan covering both retirees and disabled employees will satisfy the retiree-only plan exemption from PPACA market reforms, pending future regulatory clarification.

A key question relates to qualification for this exemption if disabled employees are not terminated from employment. In other words, does continuing employment status while on long-term disability jeopardize the ability to claim the retiree-only plan exemption? Importantly, the DOL’s FAQ does not distinguish between terminated and active long-term disability recipients for purposes of reliance on the retiree-only plan exemption. Employers claiming retiree-only status for their plan covering disabled employees (with or without also covering retirees) should monitor future guidance.

Going forward

Employers should review Q&A-14 of the notice for guidance in determining how to comply with the PPACA employer mandate and its reporting requirements for 2015 and beyond, as well as in the design of their employment policies, disability income benefits and health care benefits for disabled employees.

Employers that do not terminate employment for disabled employees will need to consider the implications of that policy under the PPACA. They might also want to consider the broader financial and legal implications — such as the interplay with the ADA’s “reasonable accommodation” requirements — and the impact on coordination with Medicare benefits under the Medicare Secondary Payer rules.


1. See “New ACA Guidance for Employers,” Willis Towers Watson Insider, February 2016.