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You're misunderstanding how the look-back measurement method works. While it's true that employees who were in a limited non-assessment period or otherwise not full-time for all months in the calendar year do not need a 1095-C, that would apply only to new hires. In other words, a new full-time hire can have a LNAP of the first three calendar months. A new variable, part-time, or seasonal hire can have an LNAP based on the initial measurement period and initial administrative period of up to 13 months (plus a partial month for a mid-month hire) combined. But ongoing employees will be in a stability period based on the prior year's standard measurement period. Their status in 2021 is kept "stable" during the stability period based on the prior standard measurement period. For ongoing employees, the most common approach for a calendar plan year would look like this: Standard Measurement Period: 12 months, ending with a two-month gap before the start of the stability period. Calendar Plan Year Standard Approach: November 1, 2019 – October 31, 2020 Standard Administrative Period: 2 months, comprising the two-month period between the end of the standard measurement period and the start of the stability period. Calendar Plan Year Standard Approach: November 1, 2020 – December 31, 2020 Standard Stability Period: 12 months, tracking the employer’s plan year. Calendar Plan Year Standard Approach: January 1, 2021 – December 31, 2021 So even though there's a 12-month measurement period, that would have completed prior to the start of the stability period that applies to determine employees' full-time status in 2021. Ongoing employees' full-time status for 2021 is determined by the standard measurement period that ran from the end of 2019 to the end of 2020. Employees who averaged 30 hours per week (i.e., reached 1,560 hours of service) during that period are full-time for the 2021 stability period. Here's a longer overview: https://www.theabdteam.com/blog/key-decision-points-in-aca-reporting-vendor-setup-questionnaires-part-iii/

I posted an extensive overview on this very topic. Copying the relevant part here for reference. Approach #3 is the employer "eating" the cost approach you referred to, which I think is fine (and common) as a corrective measure. https://www.theabdteam.com/blog/correcting-missed-cafeteria-plan-contributions/ Prior-Year Mistakes: Missed Cafeteria Plan Contributions from the Prior Plan Year Where an employer discovers that it is has inadvertently failed to take the correct elected employee salary reduction contribution amount through payroll in the prior plan year, the employer has three potential options available to correct the mistake: 1. Employee Pre-Tax Contributions in Year Two for Year One Missed Contributions There is no formal IRS guidance confirming that an employer can take employee pre-tax contributions in year two to address missed contributions for year one. However, we think this is a low-risk approach that is very unlikely to present any issues. In practice, this is essentially the same approach that employers will commonly apply to address employee pre-tax contributions for a period of leave where the employee is utilizing the catch-up payment option. In that case, employers generally feel comfortable taking an employee pre-tax contribution upon return from leave to cover the full period of the leave—even where that leave straddles two plan years. Again, although the IRS has not formally approved of that approach, it is a common practice that is generally considered low risk. Note that the pre-pay contribution option is not available to address a period of leave extending to a subsequent plan year because that would violate the Section 125 prohibition of deferral of income rules. For full details, see: 2022 Newfront Health Benefits While on Leave Guide Health Benefits During Protected Leave Furthermore, the employee pre-tax payment in year two approach may also be a good fit to address a situation where the employer discovers a missed contribution error late in year one and wants to spread the repayment over more pay periods than remain available in year one. Employers utilizing this pre-tax employee contribution option in year two to address missed contributions in year one will want to keep the following issues in mind: Although it is unlikely to present any issues with the IRS, there is no formal guidance approving this approach; If the correction relates to missed FSA contributions from year one, it may require a manual override in year two to exceed the annual limit because payroll systems generally are setup to prevent pre-tax FSA contributions in excess of the applicable annual limit; and Employees may terminate employment in year two prior to the full amount of missed contributions being repaid, which would require the employer to either a) absorb the cost, or b) attempt to seek repayment by check. Employers should notify employees of this approach in advance so they will be aware of the additional withholding from their payroll in year two to address the retroactive contributions from year one. Employees will have already authorized the full withholding by making the original election to contribute, and therefore employers do not need employees’ approval to proceed with the corrective measure to take the corrective pre-tax contributions in year two. Sample employee communication: During a recent system audit, we discovered that your [Enter Year] payroll contributions for [Medical/Dental/Vision/FSA/etc.] were underfunded. We will be correcting this error by taking your missed contribution amounts through [an upcoming pay period or upcoming pay periods]. These corrective contributions will be [a one-time or per pay period] amount of [Enter Amount] taken on a pre-tax basis. Please contact People Operations with any questions. 2) Employee After-Tax Contributions in Year Two for Year One Missed Contributions The more conservative approach would be to require that the employee make the missed year one contributions on an after-tax basis. Employees could make these after-tax contributions in year two through payroll or by direct payment (e.g., check). This approach is of course less advantageous from a tax perspective to both parties. Where utilizing after-tax payroll contributions, employers should notify employees of this approach in advance so they will be aware of the additional withholding from their payroll in year two to address the retroactive contributions from year one. Employees will have already authorized the full withholding by making the original election to contribute, and therefore employers do not need employees’ approval to proceed with the corrective measure to take the corrective after-tax contributions in year two. Sample employee communication: During a recent system audit, we discovered that your [Enter Year] payroll contributions for [Medical/Dental/Vision/FSA/etc.] were underfunded. We will be correcting this error by taking your missed contribution amounts through [an upcoming pay period or upcoming pay periods]. These corrective contributions will be [a one-time or per pay period] amount of [Enter Amount] taken on an after-tax basis. Please contact People Operations with any questions. 3) Convert Missed Amounts to Employer Contributions One final approach is for employers to simply forgive the missed employee contributions without requiring the employee to repay the missed amount. There should not be any issue with taking this approach in a corrective context to address a bona fide employer error. This approach is the costliest for the employer, but also the simplest and least likely to cause employee relations issues related to the mistake. Under this approach, the affected employees still need to have had the full elected coverage (e.g., premium only plan contributions for medical/dental/vision) or balance available for reimbursement (e.g., health FSA or dependent care FSA) in the prior plan year despite missing some amount of the contributions associated with that election. In other words, this approach is effectively the equivalent of converting the missed employee contributions to employer contributions as a corrective measure—the employer is covering the cost for the amount they failed to withhold from the employee’s paycheck. Sample employee communication: During a recent system audit, we discovered that your [Enter Year] payroll contributions for [Medical/Dental/Vision/FSA/etc.] were underfunded. We will be correcting this error by forgiving your missed contributions. Despite the error on our end, you still had access to the full benefits you elected for the [Enter Year] plan year. Please contact People Operations with any questions. Terminated Employees: How to Correct Where Salary Reduction Contributions No Longer Possible Where employees with missed contributions have already terminated from employment, payroll contributions are no longer an option. Employers could in theory request employees directly repay the missed amounts to the employer (e.g., by check). However, the practical reality is that it is unlikely the employer will ever recover these missed amounts, and therefore the best practice is generally to simply forgive the missed contributions as a corrective employer contribution. Overcontributions: Returned as Taxable Income Any amounts that an employer discovers were over-withheld from employees (i.e., salary reduction contributions in excess of the employee’s election) should be returned to employees as standard taxable income subject to withholding and payroll taxes. This may require corrections to the employee’s Form W-2 if discovered after the end of the year.