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What is the requirement for the look-back measurement method?

Friday, November 14, 2014
Employers must determine the correct full-time employee count during a calendar year to with the Affordable Care Act (ACA). If employees are classified and filed inaccurately to the IRS, the IRS may send you an ACA penalty notice. It’s never fun to see IRS Letter 226J show up, so employers beware.

Shared responsibility provisions in the Patient Protection and Affordable Care Act (PPACA) states applicable large employers must offer health care coverage with minimum value to employees who work an average of:

  • At least 30 hours of service per week, or
  • 130 hours of service per month

If an employer chooses not to offer this coverage, they may choose to pay the penalty. There are two methods to determine which employees are required by the Affordable Care Act to be covered by the employer:

  • The look-back measurement method
  • The monthly measurement method

Here, we’ll introduce the look-back method.

What is the look-back measurement method?

Regardless of whether your business offers healthcare or has chosen to pay the penalty, documentation of ACA tracking is still mandatory, and inaccurate data submitted to the IRS can result in ACA penalty notices. The look-back method allows employers to make employee status qualification calls based on a broad period of time.

How the method works

The look-back method does what the name suggests: employers “look back” over a defined period of time, called a measurement period, to determine the average number of hours worked by the employee. If they worked at least 30 hours per week on average, they must be offered health insurance coverage from their employer, as mandated by the ACA. However, this method cannot be used for employees hired to work full time and thus expected to work 30+ hours per week.

This method is primarily used for variable-hour and seasonal employees or those who otherwise work fluctuating hours of service each calendar month.

Which hours should be counted?

To make accurate measurements and qualifications of employee status, an employer must be aware of what is and is not considered an hour of service. It is important to be aware that in addition to actual hours spent working, an hour of service also includes each hour an employee is paid or entitled to payment by the employer for approved PTO. Both hourly and salaried employees can be measured using this method.

Full-time employees do not require measurement

If an employee is hired (and therefore reasonably expected) to work at least 30 hours per week, an employer must offer them coverage to begin on the first day after three months from their start date. These employees are considered full-time in the Integrity Data ACA Compliance Solution and do not require any testing period to determine their status.

Three parts to the look-back method

The key to this method is the ability to make an accurate count of full-time employees per calendar year. There are three parts to this measurement method that helps you both determine the full-time status of employees and establish how and when to offer coverage for those who qualify. The three parts of the method are:

  • The measurement period
  • The administrative period
  • The stability period

Measurement Period

To use the look-back method, the employer must establish a measurement period for the time looked back at. An employer will use this measurement period to calculate the hours worked on average within this period.

Once an employee has worked for the duration of at least one complete standard measurement period (length of which determined by the employer), they will be measured by the length of that standard measurement period. For new employees, this is considered the initial measurement period. Both measurement periods follow the same time restraints. However, the two (initial measurement and standard measurement periods) may be used differently by the employer depending on their needs.

The measurement period must be:

  • No fewer than 3 months
  • No more than 12 months

During this time, the employee’s hours must be counted and averaged. If they have worked on average 130 hours per tested month, the employer must offer health coverage. However, employers will often utilize an administrative period to get these materials together before coverage begins for the employee.

Administrative Period

The administrative period is an optional period of time during which the employer may determine which employees have satisfied the full-time requirement for coverage eligibility and share information about coverage options and enrollment materials to those employees. This period may last up to 90 days in addition to the initial measurement period and standard measurement period. For practicality, employers will often use only 30-60 days of this period.

A new employee’s initial measurement period and administrative period combined cannot exceed a time limit. The amount of time used between these cannot extend past the last day of the new hire’s first anniversary month.

Stability Period

The stability period is the period of time when the employer offers coverage to qualified employees, regardless of the amount of time they work during the stability period. This period of time must abide by the following constraints:

  • No fewer than 6 months
  • No less time than the corresponding measurement period
  • No more than 12 months

Once the measurement period is over, employees are locked into the employee status that they are identified as during that period. So if, for example, a new employee worked an average of 20 hours per week during their initial measurement period, they will not qualify for full-time employee status even if they begin working 30+ hours per week during the stability period. They are locked-in as a part-time employee in this case.

Similarly, if an employee qualifies for full-time employee status during their initial or standard measurement period, they remain eligible for coverage for the entire stability period regardless of their average hours worked per week following the measurement period.

Determine full-time status for salaried employees

For employees who are not paid on an hourly basis, such as salaried employees, there are three options for how to measure their employee status:

  • The same method as for hourly employees
  • Days-worked equivalency method
  • Weeks-worked equivalency method

If the employer chooses to measure salaried and hourly employees differently, here are the ways that the measurement can be done.

Days-worked equivalency method

To use this method, the employer credits the employee with eight hours of service for each day that the employee worked at least one hour. So, if an employee took half a day off for personal matters, the employer will count the entire 8-hour day for this calculation.

Weeks-worked equivalency method

For this method, the employer will credit the employee with a 40-hour week for each week that the employee worked at least one hour. For example, if an employee works one day of the week and then leaves town for an emergency, the employer will count the entire week as worked for this calculation.

After determining the employee status, health insurance coverage can be offered to qualifying employees.


The IRS has stated the look-back measurement method may not be used in the calculation of full-time employee counts for purposes of determining status as an Applicable Large Employer (ALE).

The look-back measurement method can only be used for determining:

  • To whom the employer must offer minimum essential coverage to avoid an employer shared responsibility payment; and
  • The amount of any potential liability for an employer shared responsibility payment

The look-back method is an efficient way for ALEs to determine which of their employees are full-time, especially in work settings where hours of service may vary week-to-week, so that they fall within ACA guidelines. By understanding the provisions and the steps necessary to follow them, an employer can prevent getting a hefty fine from the IRS.

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