Call us: (414) 276-2850
The Affordable Care Act – Who is an Applicable Large Employer? Determining the Number of Full-Time Employees (Part 3 of 8), by Barbara Halpin
Believe it or not, it’ll be fairly complicated for some employers to determine if they’re an “applicable large employer” under the Act and will therefore face penalties if they don’t provide minimum essential coverage or do provide minimum essential coverage but that coverage is either unaffordable or doesn’t provide minimum value.
An applicable large employer is “an employer that employed an average of at least 50 full-time employees (taking into account full-time equivalents) on business days during the preceding calendar year.” In determining how many full-time employees an employer has, part-time employees’ hours are considered in the calculation. Part-time employees’ hours are computed on a monthly basis, by taking the total number of part-time monthly hours worked divided by 120 (which would be the equivalent of one full-time employee, or 30 hours per week). A “full-time employee” is someone who works 30 or more hours per week and the number of full-time employees excludes the full-time seasonal employees who work for less than 120 days during the year.
For an employee to even be considered in the calculation of employees, an employment relationship must exist. An employment relationship exists between an employer and an individual “when the person for whom the services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the detail and means by which that result is accomplished.”
If an employment relationship exists, the employer must calculate that individual’s hours into the calculation of the number of employees. In order to determine how many full-time employees an employer has, the employer must take into account the hours of service for all employees in the prior year, both full-time and part-time.
The key issue in determining how many employees an employer has is to determine what type of employee each employee is (believe it or not, the IRS needed 18 pages to define the term “full-time employee” under the Act in IRS Notice 2012-58.) First, how many full-time employees does an employer have? A full-time employee is an employee that works, on average, 30 or more hours per week OR an employer may choose to treat 130 hours of service in a month as the equivalent of 30 hours of service per week in the month.
Second, how many “full-time equivalent” (FTE) employees does an employer have? This is a combination of employees, each of whom individually is not treated as a full-time employee because he or she is not employed on average at least 30 hours of service per week. These employees, in combination, are counted as the equivalent of full-time employees solely for purposes of determining whether the employee is an applicable large employer. The employer must calculate the number of FTEs it employed during the preceding calendar year and each FTE is considered one full-time employee
The number of FTEs for each calendar month in the preceding calendar year would be determined using the following steps:
(1) Calculate the aggregate number of hours of service (but not more than 120 hours of service for any employee) for all employees who were not full-time employees for that month (employed at least 30 hours).
(2) Divide the total hours of service in step (1) by 120. This is the number of FTEs for the calendar month.
Therefore, to determine the number of full-time employees an employer has and if it might be accessed as penalty as an “applicable large employer” under the Act, the employer must count the number of full-time employees and FTEs. For example, say a Company has 35 full-time employees (they each work 30+ hours per week). In addition, the company has 20 part-time employees who all work 24 hours per week for a total of 96 hours each. These part-time employees’ hours would be treated as the equivalent of 16 full-time employees for that month, based on the following calculation: 20 employees x 96 hours / 120 = 16 full-time equivalents.
All employees (including seasonal) who were not full-time employees for any month in the preceding calendar year are including in calculating the employer’s FTEs for that month. Note that if an employer has over 50 full-time employees for 120 days or fewer during a calendar year, AND the employees in excess of 50 who were employed during that period of no more than 120 days were seasonal employees, the employer would not be an applicable large employer (the “seasonal employee exception”).
How an employer calculates an employee’s hours worked is also relevant because not all employees are hourly workers. For employees working on an hourly basis the employer is required to calculate actual hours of service for records of hours worked and hours for which payment is due (this includes hours for which an employee is entitled to be paid such as holidays, vacation and illness).
There are three methods for calculating the hours for non-hourly employees and employers need not choose the same method for every employee.
First the employer can count the actual hours of service from records of hours worked and hours for which payment is made or due for vacation, holiday, illness, etc.
Second, the employer can use a days-worked equivalency method whereby the employee is credited with eight hours of service for each day for which the employee would be required to be credited with at least one hour of service.
Third, the employer can use a weeks-worked equivalency of 40 hours of service per week for each week for which the employee would be required to be credited with at least one hour of service.
Note that an employer may not use a method that would understate the hours worked. For example, an employer isn’t permitted to use the days-worked equivalency method for an employee who works three ten hour days per week because this method would understate the employee’s hours of service as being 24 hours of service per week, which would result in the employee being treated as not a full-time employee.
Putting it all together
In order to determine the number of full-time employees in the preceding calendar year (and therefore whether an employer is a large employer under the Act for the current calendar year), following the following steps:
STEP 1 - Calculate the number of full-time employees you have (including seasonal employees) for each calendar month in the preceding calendar year.
STEP 2 - Calculate the number of FTEs (including seasonal employees) for each calendar month in the preceding calendar year.
STEP 3 - Add the number of full- time employees and FTEs calculated in steps (1) and (2) for each of the 12 months in the preceding calendar year.
STEP 4 - Add up the 12 monthly numbers in step (3) and divide the sum by 12. This is the average number of employer’s full-time employees for the preceding calendar year (remember to round down fractions).
STEP 5 - If the number of full-time employees in step (4) is less than 50, the employer is not an applicable large employer for the calendar year.
STEP 6 - If the number of full time employees in step (4) is 50 or more, determine whether the seasonal employee exception applies (as described above). If the seasonal exception applies, the employer is not an applicable large employer for the current calendar year. If the seasonal exception does not apply, the employer is an applicable large employer for the current calendar year.
More on this voluminous piece of legislation next week!