Rehiring employees may seem like a simple process, but under the Affordable Care Act (ACA), it brings unique compliance challenges. ACA rehire rules are designed to ensure that employers continue to meet their coverage obligations under the Employer Mandate.
Missteps in classifying rehired employees can result in costly penalties. This makes it essential for HR teams and benefits administrators to fully understand and correctly apply these rules.
Under the ACA Employer Mandate, applicable large employers (ALEs) must offer affordable health coverage to full-time employees or risk penalties. When an employee returns to work after a break in service, the employer must determine whether that employee is considered a new hire or a continuing employee. Misclassifying this status can trigger unintended gaps in coverage, reporting issues, and potential penalties under IRC §4980H.
If a previously full-time employee is incorrectly treated as a new hire and coverage is delayed or not offered, the employer could be found noncompliant. This is especially risky if the employee returns during a stability period when coverage should have been reinstated. Failing to correctly assess an employee’s rehire status can expose employers penalties. Specifically, both “A” and “B” penalties under the Employer Mandate.
Rehire classifications under the ACA
Rehired employees vs. continuing employees
When an employee returns after a break in service, they fall into one of two categories:
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- New employee — Treated as if hired for the first time, and a new measurement period can begin.
- Continuing employee — Retains the status they held prior to the break and may require immediate reinstatement of coverage.
Who qualifies as a “new” employee
An employee is considered a new hire if they had a break in service that meets certain duration requirements (covered below) or satisfies the Rule of Parity. As a new hire, the employer can apply the initial measurement period before offering coverage.
Who is considered a “continuing” employee
An employee is considered continuing if their break in service does not meet the criteria for a new hire. In this case, if the employee was previously eligible for or enrolled in coverage, it must generally be reinstated promptly upon their return.
Importance of proper classification for compliance and coverage reinstatement
Determining whether an employee is new or continuing is critical. A misstep can lead to a delay in coverage when it should have been reinstated, or premature coverage when not required — both of which can create compliance issues and reporting inaccuracies.
ACA guidelines define a “new” employee based on the length of a break in service:
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- For most employers, if the employee has a break of 13 consecutive weeks, they may be treated as a new hire.
- For educational institutions, the threshold is 26 consecutive weeks.
Once this break threshold is met, the employer can begin a new initial measurement period and is not obligated to immediately reinstate previous coverage.
The rule of parity
Even if the break is less than 13 weeks (or 26 for schools), the employee might still be considered a new hire under the Rule of Parity if:
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- The break is at least 4 consecutive weeks, and
- The break is longer than the employee’s period of prior employment
For example, a seasonal employee worked for 3 weeks, then took a 5-week break before returning. Because the break was longer than the initial 3-week employment period and exceeded 4 weeks, the employee may be treated as a new hire under the Rule of Parity.
Coverage and measurement period considerations
Crossing stability periods
If a full-time employee is rehired during a stability period (a fixed time when coverage must be maintained regardless of hours worked), and they haven’t had a qualifying break in service, coverage must generally be reinstated immediately — even if the employee is working reduced hours upon return.
Practical scenarios
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- Rehired after coverage ends — If the break in service qualifies the employee as a new hire, the employer can apply for a new waiting and measurement period.
- Rehired while still within the original stability period — If the employee is considered a continuing employee, their prior coverage must be reinstated to remain compliant.
Incorrect classification in either scenario can affect ACA reporting. Employers may be exposed to penalties if the employee goes without required coverage.
Practical Q&A
How to handle rehired employees who were NOT enrolled in coverage before?
If the employee is considered a new hire (based on the 13-week rule or Rule of Parity), the employer can treat them as a new employee and start a new measurement period. If considered continuing, and they were not previously eligible or enrolled, coverage is generally not required until re-measured.
What to do if they WERE enrolled previously?
If the employee is a continuing employee and was previously enrolled in coverage, the employer must reinstate coverage as of the rehire date or as soon as administratively possible to maintain compliance.
How to handle rehires who are no longer offered coverage despite prior eligibility?
This can raise red flags during IRS audits. If a continuing employee is no longer offered coverage without meeting the rehire criteria, the employer may be subject to penalties under the ACA Employer Mandate.
Compliance and risk management for ACA rehire rules
Properly managing ACA rehire classifications requires consistent processes and thorough documentation:
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- Keep detailed records of employee breaks in service.
- Use systems or third-party vendors that automate rehire classification and coverage tracking.
- Regularly review processes to ensure alignment with ACA rules.
Misclassifying rehired employees can lead to:
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- Penalties under IRC §4980H(a) or §4980H(b)
- Obligations to retroactively reinstate coverage
- Errors in ACA reporting that may result in IRS inquiries or fines
Understanding ACA rehire rules is essential for staying compliant with the Employer Mandate. Employers must apply the 13-week rule and Rule of Parity consistently and document decisions clearly. With the right tools and practices in place, you can avoid costly penalties and support accurate ACA reporting for your workforce.
The information contained in this article is provided for informational purposes only and should not be construed as legal advice on any subject matter. The reader should not act or refrain from acting on the basis of any content included in this article without seeking tax, legal, or other professional advice. The contents of this article contain general information and may not reflect current legal developments or address the reader’s situation. ebm disclaims all liability for actions the reader takes or fails to take based on any content within this article.
