ACA Full-Time: What is it and Why Does it Matter
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What constitutes a full-time employee under the Affordable Care Act? The answer is not as simple as it seems.
Getting this full-time employee count right matters under the ACA because it determines ALE status. The distinction is important. If your organization is classified as an ALE, or Applicable Large Employer, you will be subject to the ACA’s Employer Mandate. This requires employers to offer Minimum Essential Coverage (MEC) to at least 95% of their full-time workforce (and their dependents) whereby such coverage meets Minimum Value (MV) and is Affordable for the employee or be subject to IRC Section 4980H penalties.
An ALE is defined by the IRS as an organization that employs at least 50 full-time employees, including full-time equivalent employees, for more than 120 days during the preceding calendar year.
Under the ACA, a full-time employee is defined as someone who works 30 hours a week or 130 hours a month. For example, If Tommy Joe’s Restaurant employs 60 people and 40 of them are employees that work at least 30 hours a week or 130 hours a month, those 40 workers are considered full-time employees under the ACA.
Full-time employee equivalents are trickier to determine. In order to capture full-time equivalent employees, part-time employees’ hours must be added together on a monthly basis. This is done by taking the total number of part-time employees and adding their total hours of service for the month together. Then divide the total by 120. The result is your full-time equivalent count for the month. Add these to your full-time employee count to determine your ALE status for the month. Note that this process will need to be conducted on a monthly basis and averaged over the preceding year in order to determine ALE status for the current year.
You can learn more about determining ALE status by visiting this IRS link.
How does this apply to Tommy Joe’s Restaurant? Tommy Joe’s has 20 full-time designated employees under the ACA. In addition, the restaurant has 40 part-time employees who cumulatively worked a total of 4,000 hours for the month of August. Divide 4,000 by 120, and the result is 33.33. Twenty full-time employees plus 33.33 full-time equivalent employees equal 53.33 employees for the month of August.
In this case, Tommy Joe’s restaurant for the month of August has more than 50 full-time and full-time equivalent employees, making Tommy Joe’s an ALE.
Tommy Joe’s Restaurant also employed a number of seasonal workers during that summer. Seasonal workers are workers that perform labor or services on a seasonal basis for purposes of determining whether or not an organization is an ALE. In Tommy Joe’s situation, they employed 25 catering chefs for 90 days. Even though these employees worked on average a total of 150 hours a month, because they were employed for less than 120 days – they are not factored into the ALE determination.
To make sure your employees are classified correctly as either full-time or part-time, you must use one of two IRS approved measurement methods. These methods let employers identify their full-time workers to whom they need to extend an offer of coverage and by when that offer needs to be made.
The two different IRS approved measurement methods for determining ACA full-time employees are the Look-Back Measurement Method and the Monthly Measurement Method.
The Look-Back Measurement Method typically works best for variable-hour workforces that have a mix of full-time and part-time employees. The Look-Back Measurement Method allows employers to monitor and track their employee’s hours of service to determine if they are full-time or part-time under the ACA before extending an offer of coverage. In the case of Tommy Joe’s Restaurant, the employer would measure their employees’ hours of service over a pre-determined amount of time. This is called the measurement period. Tommy Joe’s would use the hours of service tracked during the measurement period to categorize their employees as either full-time or part-time. After the measurement period was complete, Tommy Joe’s would analyze the employee hours data to determine which employees it was required to extend offers of coverage. This is called the administrative period. Finally, Tommy Joe’s can extend offers of coverage over a pre-determined amount of time without worrying about variable fluctuations in an individual employee’s monthly hours. This is called the stability period. Since Tommy Joe’s has a workforce consisting mainly of high variable-hour workers, the Look-Back is ideal because it captures the average hours of service and applies them over a subsequent predetermined time frame.
The Monthly Measurement Method is designed for organizations that have primarily full-time workforces. An employee’s status is taken at face value, based on whether or not they provided a minimum of 130 hours of service a month or 30 hours a week. In Tommy Joe’s case, the Monthly Measurement method would be difficult to use since the majority of their workforce consists of variable-hour employees and on any given week an employee’s hours of service can fluctuate between part-time and full-time.
You can learn more about the two measurement methods and calculating ACA full-time status by clicking here.
Bottom line, determining ACA full-time status is critical and organizations need to do it right if they want to minimize their potential penalty exposure from the IRS. Currently the tax agency is issuing Letter 226J penalty notices for the 2017 tax year and other ACA penalty notices.
To learn more about compliance with the ACA, visit our ACA Resource Center by clicking here.
To learn more about ACA compliance for the 2019 tax year, click here.
For ACA reporting deadlines in 2020 for the 2019 tax year, organizations should review this link for important dates and requirements.
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