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Employers must understand how to determine if they are a large employer under the Affordable Care Act, and use this information when deciding to offer insurance.

Navigating health reform

The Affordable Care Act: Determining Large Employer Status

  • 4/24/2013
Update 7/8/2013: In July 2013, the Obama administration announced the employer mandate provision of the ACA would be delayed one year and not take effect until January 1, 2015.


The Affordable Care Act: Determining Large Employer Status

by Kelly Davis

Starting in 2014, employers with 50 full-time employees and full-time equivalents (FTEs) are considered a large employer and are required to offer affordable health insurance coverage to all of their full-time employees and dependent children or pay a penalty. Employers need to take action now and examine their workforce to determine if they will be subject to penalties in 2014.

Large employer status

To be subject to the employer-shared responsibility provisions and the play or pay penalties, an employer must have at least 50 full-time employees or 50 full-time equivalents during the proceeding calendar year. This also applies to new businesses.

A special six-month transition rule, applicable for 2014 only, allows employers to use any consecutive six -month period in 2013 when determining whether they are a large employer, versus using the full twelve months.

Defining full-time employees and equivalents

A full-time employee is a common law employee who has on average at least 30 hours of service per week or 130 hours in a calendar month.

The number of full-time equivalent employees is calculated by dividing the total hours of service of all part-time employees for a month, but not more than 120 hours for any one employee, by 120. This number is added to the number of full-time employees to determine if the grand total is at least 50.

Sole proprietors, partners, 2 percent S-corp shareholders, and leased employees are not considered employees and are therefore not counted. However, an employee serving as both an employee and a director for an employer is considered an employee.

Related businesses such as a controlled group, affiliated service group, or qualified separate lines of businesses (QSLOBs) are treated as a single employer under the Internal Revenue Code rules, whereas all employees of each entity and their hours of service must be taken into account when determining large employer status.

Hours of service

The “hours of service” are used to determine whether a worker is a full-time employee or a full-time equivalent, which includes:

  • All work for which an employee receives U.S.-sourced income. Therefore, hours of service does not pertain to foreign income or hours worked outside of the United States, regardless of the employee’s country of residence or citizenship.
  • Each hour an employee is paid or entitled to payment for performing duties for the employer.
  • Each hour an employee is paid or entitled to payment for periods of time that no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty, or leave of absence. All periods of paid leave must be taken into account.

An employer must calculate an hourly employee’s hours of service based on hours worked and hours of paid leave.

Determining full-time status

Employers may use the current month-to-month method or the look-back measurement method to determine an employee’s full-time status.

The current month-to-month method may be problematic, because most employers determine employee status at the end of a month. However, employers need to set an employee’s status at the beginning of the month to avoid penalties.

The look-back measurement method is a safe harbor method which involves counting hours of service to determine if an employee has averaged at least 30 hours of service per week. Employers choosing this method must use it for both ongoing and new employees.

The method varies based on whether employees are ongoing or new, and whether new employees are expected to work full-time or are variable or seasonal employees. There are also special rules for employees who take unpaid leave from work or who are rehired after a termination.

Seasonal, ongoing, and variable employees

Through at least 2014, employers are permitted to use a reasonable, good faith interpretation of the term “seasonal employee” when determining whether it is a large employer. A seasonal worker performs services at certain seasons or periods of the year that cannot be conducted throughout the year. For example, retail workers employed exclusively for holiday seasons are considered seasonal employees. If an employer has more than 50 FTEs for a period of 120 days or less due to seasonal workers, they can exclude the seasonal workers.

An ongoing employee has generally been employed for at least one complete standard measurement period. A variable employee is defined as someone the employer cannot reasonably determine will work an average of at least 30 hours per week during the initial measurement period, due to the employee’s hours being uncertain or variable.

Measurement periods

An ongoing employee’s full-time status is determined by examining a standard measurement period lasting between three to 12 consecutive calendar months. Employers must then calculate whether the employee averaged at least 30 hours of service per week during this period.

If an employee had at least 30 hours of service per week during the standard measurement period, they will be considered a full-time employee for the stability period, which has to be at least six calendar months following the measurement period and at least as long as the measurement period.

Employees that did not work full-time during the standard measurement period will also not be considered full-time employees during that time.

Additionally, employers may opt to use an “administrative period” between the measurement and stability periods to determine which ongoing employees are eligible for coverage and provide time for enrollment. This can last up to 90 days and must overlap with the prior stability period to prevent any gaps in full-time employees’ health care coverage.

Generally, the standard measurement and stability periods selected by the employer must be uniform for all employees. However, employers may apply different measurement, stability, and administrative periods for the following employees:

  • Each group of collectively bargained employees covered by a separate collective bargaining agreement
  • Collectively bargained and non-collectively bargained employees
  • Salaried and hourly employees
  • Employees whose primary places of employment are in different states

New employees expected to work full time

An employer will not be penalized for not offering coverage to new full-time employees during the first three calendar months of employment. This rule applies if the employee is expected to work full time right away, and the employer sponsors a group health plan and offers coverage on the date of or before the employee’s three month anniversary.

For 2014, a new employee who works at least 30 hours per week may be considered a variable hourly employee if he/she works these hours for a limited amount of time, and the employer cannot determine if the employee will work these hours for the entire initial measurement period. As of Jan. 1, 2015, employers must assume that employees will be employed for the entire initial measurement period.

Rehired or returning from leave

The proposed regulations include guidance for employers on how to classify an employee who comes back to work after leaving the position or having a period of absence. If an employee goes at least 26 consecutive weeks without working, he or she may be treated as a new employee.

Special unpaid leave

The proposed regulations include a method for averaging hours when measurement periods include special unpaid leave — leave under the Family and Medical Leave Act (FMLA) or the Uniformed Services Employment and Reemployment Rights Act (USERRA) and leave for jury duty. This method only applies to those treated as a continuing employee upon resuming work for the employer, and not to an employee who is treated as terminated and rehired.

Under the averaging method, the employer either:

  • Determines the average hours of service per week for the employee during the measurement period excluding the special unpaid leave period, and uses that average for the entire measurement period; or
  • Treats employees as credited with hours of service for special unpaid leave at a rate equal to the average weekly rate during the measurement period that was not special unpaid leave.

It is imperative that employers determine their large employer status and the number of full time employees when deciding whether they will continue to offer or drop coverage in 2014. Employers who have questions should contact advisors who are knowledgeable in health reform legislation and how it affects their business.


Kelly Davis, Employee Benefit Plans Manager or 602-604-3526