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January 15, 2015

Identifying Full-Time Employees Under the Affordable Care Act's Employer Shared Responsibility Penalty

Under the Affordable Care Act,1 large employers may have to pay a tax known as the employer shared responsibility penalty. Whether the penalty applies and how much it could be both hinge on how the law defines a full-time employee.

This Capital Checkup reviews detailed guidance from the Treasury Department and the Internal Revenue Service (IRS)2 on how employers will determine whether an employee is a full-time employee for purposes of the employer penalty. Human resource staff of large employers subject to the penalty must understand these rules for both penalty and reporting purposes.3 The regulations set out minimum standards for measurement of full-time status. Employers may always treat additional employees as eligible for coverage. It concludes with a list of action steps. (Another Capital Checkup provides background on the employer shared responsibility penalty and how the penalty is calculated.)

Hours of Service

Employees are considered full-time employees for purposes of the employer penalty if they average at least 30 hours of service per week or 130 hours of service per month. Hours of service include both hours paid based on performance of duties, as well as paid time for vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence.

Hours of service for hourly employees must be calculated from records of hours worked and hours for which payment is made or due. For employees not paid on an hourly basis, employers also have the option of using a days-worked equivalency, which credits the employee with eight hours of service for each day, or a weeks-worked equivalency, which credits an employee with 40 hours of service per week. In many cases, it may be difficult to track hours for employees. Treasury and the IRS are considering issuing additional rules for employees in challenging categories (e.g., adjunct faculty) or with hours that may be difficult to count (e.g., layover hours or on call hours). Until further guidance is issued, employers are required to use a reasonable method of crediting hours of service for these types of employees. One reasonable method to credit hours for adjunct faculty approved by the Treasury and IRS is to credit 2¼ hours of service for each hour of teaching or classroom time (to reflect time performing related tasks such as class preparation and grading), plus one hour for every additional hour outside the classroom performing required duties (such as required office hours or faculty meetings). However, this method is merely an option and is not required.

Two Methods for Determining Full-Time Employee Status

There are two methods for measuring full-time employee status:

  • Monthly Measurement Method  Under this method, an employer determines an employee’s full-time status by counting his or her hours of service for each calendar month. This method works best with stable workforces with predictable hours, where the employer is fairly confident that it knows which employees work full time and which do not.
  • Look-Back Measurement Method  Under this method, an employer determines the full-time status of employees by counting hours during a “measurement period” and treating an employee as full time or not during a subsequent and corresponding “stability period.” This method provides some predictability when work schedules are less certain, because it allows employers to identify full-time employees before the beginning of a potential coverage period.

An employer may use different measurement methods (monthly vs. look-back) for employees in the following categories: collectively bargained employees and non-collectively bargained employees; each group of collectively bargained employees covered by a separate bargaining agreement; salaried employees and hourly employees; and employees whose primary place of employment is in different states. The final rule does not permit employers to develop their own customized categories. For example, employers are not allowed to use the look-back method for variable hour and seasonal employees while using the monthly method for employees with more predictable hours. The only allowed categories for differentiating between measurement methods are the ones set out above.

As an example, an employer could use the monthly method for salaried employees, because these employees tend to have set work schedules, while using the look-back method for hourly employees, who are more likely to have fluctuating work schedules.

The Monthly Measurement Method

An employer using the monthly measurement method would count employee hours of service for each month. To avoid the penalty for new employees who are reasonably expected to work full time, an employer would need to offer coverage no later than the first day of the first calendar month immediately following a period of three full calendar months. The three-month period begins with the first full calendar month in which the employee is otherwise eligible for coverage. For example, a new full-time employee who begins work on January 15 would have to be offered coverage by May 1, and a new full-time employee who begins work on January 1 would have to be offered coverage by April 1.

The Look-Back Measurement Method

Under the look-back measurement method, an employer measures the hours of service of its employees over a measurement period. To avoid the employer penalty, the employer would then need to offer coverage during an associated stability period to employees who worked full time during the measurement period. Ongoing employees are measured during a standard measurement period. New employees who are reasonably expected to work full time (with the exception of seasonal employees) must be offered coverage by the first day of the fourth calendar month after their start date. Certain new employees (discussed below) may be measured during an initial measurement period during which their status as full time or not is unknown and they do not have to be offered coverage.

  • Ongoing Employees  An “ongoing employee” is generally an employee who has been employed by the employer for at least one complete measurement period.
  • Part-Time Employees  A part-time employee is a new employee who is expected to work on average less than 30 hours per week during the initial measurement period, based on the facts and circumstances at the employee’s start date.
  • Seasonal Employees  A seasonal employee is one who is hired into a position for which the customary annual employment is six months or less and occurs around the same time each year.
  • Variable-Hour Employees  A variable-hour employee is a new employee whose hours are expected to vary or otherwise be uncertain, and for this reason, the employer cannot determine whether he or she is reasonably expected to work on average at least 30 hours per week during the initial measurement period. This classification must be based on the facts and circumstances at the employee’s start date. In determining variable-hour status, an employer may not take into account the likelihood that an employee will leave before the end of the initial measurement period.

Employers that use the look-back method need to establish the following procedures:

  • Standard Measurement Period  Employers will establish a measurement period of not less than three but not more than 12 consecutive months. The employer must also establish when the measurement period starts and ends.
  • Stability Period  Employers must also establish a stability period. The stability period must be at least six consecutive calendar months (for full-time employees) and begin after the measurement period (and any applicable administrative period). The stability period must be no shorter than the measurement period. If employees do not meet the full-time standard during the measurement period, then they do not have to be treated as full-time employees during the associated stability period.
  • Consistency Rule for Categories of Employees  An employer may establish measurement and stability periods with different lengths or start/end dates based on the categories set out earlier (e.g., bargained vs. non-bargained).
  • Administrative Period  Employers may establish an administrative period of no more than 90 calendar days between the end of the measurement period and start of the stability period. During this administrative period, the employer determines which employees are eligible for coverage and notifies and enrolls employees.
  • Initial Measurement Period  For new variable hour, part-time and seasonal employees only, the employer may adopt an initial measurement period of between three and 12 months. The initial measurement period and administrative period together cannot extend beyond the last day of the first calendar month beginning on or after the first anniversary of the employee’s start date (at most, 13 months and a fraction of a month).

Employers may use a shorter transition measurement period for the first measurement period. This transition rule allows the employer to use a transition measurement period of fewer than 12 months with a 12-month stability period. This measurement period would apply to all employees employed on the first date of the transition measurement period (in 2013 or 2014). The transition measurement period must: (1) be a period of at least six consecutive months; (2) begin no later than July 1, 2014; and (3) end no earlier than 90 days before the first day of the plan year beginning on or after January 1, 2015.

For example, an employer with a calendar-year plan year could measure ongoing employees from April 15, 2014 through October 14, 2014. (For this purpose, an ongoing employee would be an employee working as of April 15, 2014.) This could be followed by an administrative period from October 15, 2014 through December 31, 2014. The first stability period would be the 2015 plan year (January to December 2015).

A table showing sample measurement periods for ongoing employees after the transition year is available as a supplement to this Capital Checkup.

Action Steps

Important action steps include the following:

  • Identify all common-law employees not currently being offered health coverage and determine whether any of them might be full-time employees under the Affordable Care Act. To get an estimate of how many employees likely work full time, look at the hours worked by employees who are not offered coverage over a 12-month period.
  • Decide how to measure employees. Employer can chose to use different measurement methods for different categories of employees (e.g., hourly employees and salaried employees, employees working in different states, collectively bargained employees and non-collectively bargained employees).
  • If using the look-back measurement method, determine the measurement, administrative and stability periods for ongoing employees; determine the initial measurement, administrative, and stability periods for new part-time, variable hour, and seasonal employees; decide whether to take advantage of the transition rule allowing for a shorter measurement period for the 2015 stability period for ongoing employees; and establish policies for classifying new employees as full-time, variable, part-time or seasonal employees.
  • Establish policies for crediting hours of service, including a method for crediting hours of service for categories of employees who not paid on an hourly basis and/or any whose hours are difficult to count.
  • Address implementation of measurement methods, which entails reviewing data-collection needs and processes, discussing requirements and service offerings with payroll vendors and testing the measurement process.

• • •

As with all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their legal counsel for authoritative advice on the interpretation and application of the Affordable Care Act and related guidance, including the guidance summarized in this Capital Checkup. Sibson Consulting can be retained to work with plan sponsors and their attorneys on compliance issues.


1 The Affordable Care Act is the abbreviated name for the Patient Protection and Affordable Care Act (PPACA), Public Law No. 111-148, as modified by the subsequently enacted Health Care and Education Reconciliation Act (HCERA), Public Law No. 111-152. (Return to the Capital Checkup.)

2 The final rule was published in the February 12, 2014 Federal Register. (Return to the Capital Checkup.)

3 The obligation to report who is a full-time employee to the Internal Revenue Service (IRS) will begin in 2016. Forms and instructions on reporting have been published in draft form, but are not yet finalized. Those draft forms and instructions are discussed in Sibson Consulting’s October 9, 2014 Capital Checkup. (Return to the Capital Checkup.)


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