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What is the definition of a full-time employee for the purpose of ACA?

Friday, November 14, 2014
Passed in 2015, the Affordable Care Act (ACA) was a health care reform that made numerous changes to the way employers provide health care coverage to their employees. One of these changes was the introduction of the ACA Employer Mandate, which while not directly requiring employers to offer their full-time workers health insurance, does impose heavy fines ($3,860 per uninsured full-time employee) on employers that fail to, thereby highly incentivizing compliance.

This mandate is applied to businesses with an Applicable Large Employer (ALE) status. This status occurs when a business has employed at least 50 full-time employees for more than 120 days within a calendar year. The mandate requires that all ALE companies supply Minimum Essential Coverage (MEC) to at least 95% of their full-time staff along with their dependents.

ALE status is also affected by part-time employees by the way of full-time equivalents. The number of full-time equivalent employees your business contains is found by adding up the total amount of part-time employee hours in a given month and then dividing by 120. Add this calculation to your number of full-time employees and this total number will be what determines your company’s ALE status.

Because there are different methods in determining whether an employee is full-time, this article will focus on the ACA definitions and regulations concerning what constitutes a full-time employee so you can know which employees you need to provide health care to.

Definition of a full-time employee

As of the passing of the ACA, the IRS defines a full-time employee as follows: “For purposes of the employer shared responsibility provisions, a full-time employee is, for a calendar month, an employee employed on average at least 30 hours of service per week, or 130 hours of service per month.”

Two methods for determining full-time employee status

Monthly measurement method:

In the event that the majority of your company is already determined or predicted to be full-time, this method is a simple and easy way to determine the full-time eligibility of workers whom you’re uncertain qualify as full-time.

This method consists of tracking whether an employee worked 30 or more hours a week for a given month, or 130 or more total hours in a given month.

As an example, suppose Summit Ice Cream (an ALE status business) takes on a new employee to work as support for their full-time staff. They are only called on a shift-by-shift basis when other employees need coverage. For the new employee’s first week, they work just 12 hours. But when two employees soon quit, the new employee ends up working 40 hours for the next three weeks.

At the end of the month, management uses the monthly method to ensure they’re in compliance with the ACA employer mandate. They see that although the new employee did not work 30 or more hours the first week, they did work 30+ hours for three subsequent weeks and their total hours for the month (132) exceeded the mandate’s 130 hour minimum requirement. Summit Ice Cream will need to offer the new employee health care coverage the following month, and for continued months if the new employee continues to qualify as full-time.

Look-back measurement method:

If your company has a blend of employees who work varying hours, then the look-back method will most likely be the easiest tool to determine which employees qualify for full-time.

This method involves three separate time periods:

Measurement period:

Supervisors set a time frame of their choice to examine past work periods. The time frame must be at least three months, and can be at most 12 months. This time frame will be the data set used by administration to calculate employees’ average hours across the period to determine who qualifies for full-time.

This leads into the administrative period, which is the duration in which supervisors examine the data and formulate coverage to employees who qualify. This period can last at most 90 days.

After the administration period for determination of which employees qualify as full-time, it then moves into the stability period. Employees who were found to be eligible for full-time are granted a stability period in which they are given the status of full-time for the entire duration of that set period. Management decides on a time frame for the stability period, which can range from six to 12 months. Changes in work hours that take place during the stability period will not affect an employee’s full-time status until the stability period has ended.

Employees who were found to be part-time enter into a stability period of their own, which cannot last longer than the measurement period. During this period, they are considered part-time for the duration of the period regardless of changes in hours. Once the period has ended, they can be reconsidered for full-time status.

Here’s an example that shows the benefits of the look-back method: Summit Ice Cream has back-of-house (BOH) and front-of-house (FOH) staff. While the majority of BOH staff are full-time employees, the majority of the FOH staff work irregular hours week-to-week.

Administration finds themselves constantly offering and then negating employee health care coverage every month due to the FOH staff. Their hours and invariable full-time statuses are messy, confusing, and take up unnecessary managerial work to figure out.

So, administration enacts the look-back method. They set up a measurement period of four months, and then add up each employee’s individual hours during that period. These totals are then divided by the amount of months in the measurement period, which in this case is four.

Half of the FOH staff are found to average 130 or more hours per month, so management enters these employees into a full-time stability period. For the duration of this period, which management set to last for six months, they’ll be considered full-time and will be offered health care coverage by Summit Ice Cream.

For the other half, whose average hours per month fell below 130 hours, management places these employees into a part-time stability period. They set this period to match the measurement period (four months), which is the maximum amount of time they can implement. These employees are considered part-time for as long as the stability period lasts.

Summit Ice Cream can now rest easy for the next four months before it reassesses its FOH staff for full-time status. They’ll now be able to use the monthly measurement method for any new hires as it will be more manageable and less frequently required.

Conclusion:

Determining full-time status can be difficult, but going through an audit by the IRS or having to pay ACA fines is undoubtedly worse.

It’s beneficial for every business to conduct periodic reviews to accurately report its number of full-time employees, and then offer health care coverage to the correct employees. This can be done using the monthly measurement or look-back method, or a combination of both for businesses with complex work forces.

If you as a business owner are ever uncertain about an employee’s full-time eligibility, or whether your business is an ALE, consider reaching out to ACA experts or the IRS to make sure you’re in compliance. You can also choose to outsource your payroll and leave the work of complying with ACA requirements to professionals so you can focus on other managerial decisions.


Heartland provides guidance on ACA-related employment through our HR solutions. Heartland is the point of sale, payments and payroll solution of choice for entrepreneurs that need human-centered technology to sell more, keep customers coming back and spend less time in the back office. Nearly 1,000,000 businesses trust us to guide them through market changes and technology challenges, so they can stay competitive and focus on building remarkable businesses instead of managing the daily grind. Learn more at heartland.us.