Articles & E-Books


Employer Shared Responsibility Under the Affordable Care Act - Determining Full Time Employees

Jun 12, 2014

The Employer Shared Responsibility rules are set forth in new Code Section 4980H and are often referred to as the “Employer Mandate” or the “Play or Pay Rules.” Under the rules, large employers (50 or more full-time equivalent employees) face penalties if they do not offer their full-time employees and their dependents affordable, minimum value health care coverage, but only if just one employee purchases health insurance on a state health insurance exchange (including a federally run state exchange) and the employee receives a premium tax credit or reduced-cost health insurance.

This Wipfli Alert is the second in a series dealing with the Employer Shared Responsibility rules. The first Alert gave an overview of the Employer Shared Responsibility rule and explained how to determine whether an employer is subject to the rule. It also covered some definitions of crucial terms used in the rules, such as minimum essential health coverage, minimum value coverage, and affordability, as well as various effective dates under transition rules.

This Alert will cover how to determine who your full-time employees are and thus who must be offered health coverage under the Employer Shared Responsibility rules:

  1. How do you count hours to determine full-time status of employees?
  2. What is the 90-day waiting period rule for health coverage?
  3. What is the look-back period, administrative period, and stability period?
  4. How do you count hours for new hires who aren’t full-time from their date of hire?

The Penalties

Remember from the prior Wipfli Alert on this topic that if an employer sponsors health coverage for medical care, insured or self-insured, that is affordable and minimum value coverage, there is no penalty if the coverage is offered to substantially all full-time employees. Employers can plan their cost sharing with employees to keep coverage affordable, and actuaries will certify coverage as minimum value, so then an employer’s ongoing responsibility under the rule is to monitor who are full-time employees and on what date they need to be offered health coverage to avoid the two potential penalties:

  1. If an employer does not offer coverage to 95% (indexed) of their full-time employees and dependents, it will be subject to a penalty of $2,000 times the number of full-time employees minus the first 30.
  2. If an employer meets the 95% rule, but the coverage is not minimum value or is not affordable, the employer could be subject to a penalty of $3,000 (indexed) times the number of full-time employees who purchase state exchange health coverage and who are also eligible for federal subsidies on that exchange coverage.


Most of this Alert will discuss how to determine who is a full-time employee. ACA also requires that dependents be offered health coverage. While the affordability and minimum value parts of the rules apply at the employee level (not the dependent level), an offer of coverage needs to be made to all dependents of the employee, and the employee can be made to pay for the entire cost of the dependent coverage.

Code Section 152(f)(1) controls the definition of “dependent” for purposes of who needs to be offered coverage. Recent guidance provides that:

  1. Spouses are not dependents for this purpose.
  2. Stepchildren and foster children are not dependents for this purpose.
  3. Children are dependents regardless of tax dependent status (i.e., even if married) up through the month in which they attain age 26.

Offer of Coverage

Full-time employees must be given an opportunity to enroll or decline enrollment in health coverage at least once per year. Annual notice of the ability to enroll can be given to employees electronically. Evergreen elections are permitted as long as the employee has the ability to opt out of coverage once per year. Failure to offer coverage for one day in a month that an employee should have been offered coverage results in a failure to offer coverage for the entire month (i.e., resulting in a full month’s penalty). For termination of employment, COBRA rules take over. If an employer drops an employee from coverage for failure to pay the employee portion of the premium, there is no penalty to the employer, but COBRA-like grace period rules apply.

So Who Are Full-time Employees?

Guidance permits three methods for determining full-time status of employees. One method must be chosen. They are not optional.

  1. Monthly measurement period
  2. Look-back measurement period
  3. Combination method—can use one method for one group of employees (e.g., hourly) and look-back method for another group of employees (e.g., salaried)

Monthly Measurement Period

Under the Monthly Measurement Period method, an employee must first meet the eligibility and waiting periods for coverage, and then the employer determines full-time status by looking back at the current month’s hours. It is the least complex method, but it is not useful for avoiding penalties because it is difficult to determine eligibility for health coverage on a month-by-month method. The method looks to see if an employee had 130 hours in a month. If so, the employee is full-time, on a retroactive basis, so he or she should have been offered coverage from the first of the month. If you have part-time employees who go up and down around the 30-hour-per-week level, you can’t use this method because you would have eligibility for coverage changing monthly. 

Look-back Measurement Period

Under the Look-back Measurement Period method, the employer measures hours for employees who are not full-time. If a non-full-time employee averages 30 hours per week (or 130 per month per the regulations) over a chosen look-back measurement period, the employee is “locked in” as a full-time employee. If the employee does not meet the level of hours, the employee is “locked in” as a part-time employee. This method provides the most certainty about who is full-time and who is part-time, and this is the only method that can guarantee the employer will not be subject to a Shared Responsibility penalty. The method is somewhat complex, requiring a significant amount of recordkeeping and hours tracking. 

Combination Method

The Combination Method could be useful in some situations to use a different method for different groups:

  1. Collectively bargained vs. non-collectively bargained
  2. Each collectively bargained group covered by a separate bargaining agreement
  3. Salaried vs. hourly
  4. Employees in different states

This may be the most complex overall method for a company.

The Look-back Measurement Period Method

The Look-back Measurement Period Method is probably the most logical method for most employers to use to determine full-time status of employees. IRS guidance that explains this method starts with some new categories of employees for employers to sort their employees into so they can then apply the applicable rules to each category:

  1.  Ongoing employees are those employees who have been employed for one complete look-back period:
    •  Full-time
    •  Part-time, includes variable-hour and seasonal employees
  2.  New employees:
    • New, full-time
    •  New, variable-hour (i.e., new IRS term for part-time)
    •  New, seasonal

Full-time Employees

Ongoing full-time employees will maintain full-time status as long as they continue to work an average of 30 or more hours per week or 130 or more hours per month. (Note that the law provides for 30 hours per week for full-time status, but IRS regulations provide for 130 hours per month.)

New full-time employees must come into the plan under the new 90-day rule. Regulations provide that you can have a one-month probationary period, so coverage must be in effect no later than the first day of the fourth full calendar month following the date of hire. New full-time employees are those who are hired with the expectation of averaging at least 30 hours per week. New full-time employees start as full-time and maintain their full-time status based on monthly hours until they become an ongoing full-time employee (i.e., they have been employed for one full look-back period).

Non-full-time employees

 The look-back measurement period method is then used to determine full-time status for any employees who are not hired as full-time employees (i.e., 30 hours per week or 130 hours per month). There are three periods of time involved in the look-back method:

  1. Standard measurement period—This is the look-back period during which you calculate average hours per week/month.
  2. Administrative period—This is the period of time after the measurement period that allows the employer to calculate hours, send enrollment materials, and complete the enrollment process for employees electing coverage.
  3. Stability period—This is the period of time in which part-time or full-time status is locked in for purposes of offering health insurance.

Standard Measurement Period

The employer elects a period of time (3 to 12 months) to look back and counts hours and calculates average hours for determining full-time and part-time status. The most common period being used is the 12-month period before the open enrollment period starts for a plan year. For ongoing employees, the standard measurement period (SMP) applies. 

Initial Measurement Period

For new variable-hour, part-time, and seasonal employees, an initial measurement period (IMP) begins on any date between the employee’s start date and the first day of the next calendar month. Starting to count hours for an IMP from the first day of the month following a hire date permits an employer to minimize their IMPs to just 12 per year, rather than having an IMP for each new hire. A new employee’s IMP will run concurrent with the first full SMP that occurs after an employee’s hire date. When the IMP ends for a new employee, that employee switches over to the concurrent SMP for the remainder of that SMP, and thereafter the employee is treated as an ongoing employee utilizing the SMP for each year. We will discuss counting hours in more detail below.

Administrative Period

The employer chooses the time period after the SMP and IMP that is needed to calculate hours to see who is full-time, send enrollment materials, and complete open enrollment. The maximum length for an administrative period is 90 days; however:

  • The IMP for a new employee, plus the administrative period, cannot extend past the last day of the  first month following an employee’s one-year anniversary.
  • Thus, the employer cannot make a new employee who is determined to be full-time wait more than 13 months plus a fraction of a month before coverage starts.
  • This means that the administrative period following an IMP should not exceed one month if you want to use a 12-month IMP. You could still use a two- or three-month administrative period following an SMP in your methodology.

Stability Period

The employer will have a standard stability period (SSP) that is used in conjunction with the SMP and an initial stability period (ISP) that is used in conjunction with the IMP. The stability period is the time period that full-time or part-time status is locked in based on the SMP or IMP used. In general, the standard measurement period is the same length as the look-back measurement period.
If the measurement period is shorter than six months, the stability period will be different for full-time and part-time employees, which will cause mismatched measurement periods, adding complexity:

  • Full-time employees’ stability period must be at least six months.
  • Part-time employees’ stability period cannot be longer than the measurement period (can be plus one month for new seasonal and variable-hour employees).

Different periods can be used for different groups of employees as itemized under the Combination Method above.

Be aware that there are special rules for employment status changes, rehired employees, leaves of absence, and other employment break periods, including some special rules for educational institutions.

Counting Hours

Employers will need to determine methods for counting hours for employees for whom they have not historically tracked hours. Documentation regarding hours worked will be an employer’s proof of full-time or part-time status in the event there is a dispute with the IRS that an Employer Shared Responsibility penalty applies. IRS guidance provides the methods for counting hours:

  1. Hourly employees—Actual hours must be used, based on payroll records.
  2. Non-hourly employees—There are three methods:
    • Actual hours—A reasonable basis for counting hours must be used.
    • Daily equivalency—Eight hours are credited for each day an employee works at least one hour.
    • Weekly equivalency—Forty hours are credited for each week an employee works at least one hour.

No other methods or equivalencies can be used, but actual hours are subject to some interpretation, and the IRS provides some examples of how to estimate actual hours for certain industries and certain types of positions or work arrangements. Actual hours include worked hours and non-worked hours for which an employee is paid (i.e., vacation, holidays, sick days, jury duty, and paid leaves of absence are counted as actual hours).

The best method for tracking hours, of course, is to utilize time sheets or time clocks. Online and smartphone versions that make this task much easier for mobile work forces are now available. 

If you need assistance with determining the process for your company or with calculations, please contact your Wipfli relationship executive