Who is Considered an “Employee?”

Who is a Full-time Employee?

A full-time employee is an employee who was employed on average at least 30 hours of service per week, or 130 hours of service in a calendar month.

All periods of paid leave must be taken into account; there is no limit on the hours of service that must be credited.

Also, all hours of service performed for entities treated as a single employer under the Code’s controlled group and affiliated service group rules must be taken into account. For example, an employee who, for a calendar month, averaged 25 hours per week at one employer and 15 hours per week at an employer in the same controlled group would be a full-time employee for that calendar month.

However, hours of service performed as a bona fide volunteer (for example, a volunteer firefighter) or as part of a governmental work-study program are not counted. Also, in determining an employee’s full-time status, hours of service are not counted to the extent the compensation for those hours constitute foreign source income. This rule applies regardless of the employee’s citizenship or residency status. Thus, U.S. citizens working abroad generally will not qualify as full-time employees for purposes of the employer penalty. However, all hours of service for which an individual receives U.S. source income are hours of service for purposes of the employer shared responsibility rules.

Methods for Measuring Full-Time Status

The ACA suggests that the determination of full-time employee status, and application of the employer shared responsibility penalty, involves a month-to-month analysis. However, the IRS recognizes that applying these rules on a monthly basis could cause practical difficulties for employers, particularly with respect to employees with varying hours or employment schedules, and could result in employees moving in and out of employer coverage on a monthly basis.

To address these concerns, two methods for determining full-time employee status are available—the monthly measurement method and the look-back measurement method. These methods provide minimum standards for identifying employees as full-time employees. ALEs may decide to treat additional employees as eligible for coverage, or otherwise offer coverage more expansively than would be required to avoid a penalty.

In general, an ALE must use the same measurement method for all employees. Thus, an ALE generally cannot use the monthly measurement method for employees with predictable hours of service, and the look-back measurement method for employees whose hours of service vary. However, an ALE may apply either the monthly measurement method or the look-back measurement method to the following groups of employees:

Monthly Measurement Method

The monthly measurement method involves a month-to-month analysis, where full-time employees are identified based on their hours of service for each calendar month. This method is not based on averaging hours of service over a prior measurement period. This month-to-month measuring may cause practical difficulties for ALEs, particularly if there are employees with varying hours or work schedules, and could result in employees moving in and out of coverage on a monthly basis.

An ALE will not be subject to an employer shared responsibility penalty with respect to an employee for not offering coverage to the employee during a period of three full calendar months, beginning with the first full calendar month in which the employee is otherwise eligible for coverage. For this rule to apply, health plan coverage must be offered no later than the first day of the first calendar month immediately following the three-month period (if the employee is still employed on that date), and the coverage must provide minimum value. This rule applies only once per period of employment of an employee.

Look-back Measurement Method

To give ALEs flexible and workable options and greater predictability for determining full-time employee status, the IRS developed an optional look-back measurement method as an alternative to the monthly measurement method. The details of this method vary based on whether the employees are ongoing or new, and whether new employees are expected to work full-time or are variable, seasonal or part-time employees.

The look-back measurement method involves:

• A measurement period for counting hours of service (called a standard measurement period or an initial measurement period);
• A stability period when coverage may need to be provided, depending on an employee’s full-time status; and
• An administrative period that allows time for enrollment and disenrollment.

An ALE has discretion in deciding how long these periods will last, subject to specified IRS parameters.

ALEs can use the look-back measurement method for new variable hour employees, seasonal employees and ongoing employees. As long as the ALE complies with the requirements, it will not be subject to penalties for these employees. However, if an employee is expected to work full-time, the ALE must offer coverage to that employee by the end of the first three calendar months of employment.

Employees of Educational Organizations

For breaks in the academic year that are paid leave periods (for example, winter or spring breaks), an ALE must credit employees with hours of service based on the rules described above.

With respect to new employees who are reasonably expected to be full-time, the ALE must offer coverage to that employee by the end of the first three calendar months of employment. Educational organization ALEs cannot take into account the potential for, or likelihood of, an employment break period in determining their expectations of future hours of service.

With respect to employees of educational organizations that use the look-back measurement method, special averaging methods apply for employment break periods. An “employment break period” is a period of at least four consecutive weeks (disregarding special unpaid leave), measured in weeks, during which an employee is not credited with an hour of service. Special unpaid leave includes leave under the Family and Medical Leave Act (FMLA), the Uniformed Services Employment and Reemployment Rights Act (USERRA) and jury duty.

An educational organization must apply one of the following methods to employment break periods related to or arising out of non-working weeks or months under the academic calendar. Under these special averaging methods, for an employee returning from absence who is treated as a continuing employee, the educational organization either:

• Averages hours of service per week for the employee during the measurement period excludingthe employment break period, and uses that average as the average for the entire measurement period; or
• Treats employees as credited with hours of service for the employment break period at a rate equal to the average weekly rate at which the employee was credited with hours of service during the weeks in the measurement period that are not part of an employment break period.

These two alternative methods are intended to be different expressions of an equivalent calculation, therefore having the same results. However, the educational organization is not required to credit an employee in any calendar year with more than 501 hours of service for any employment break period (although this 501-hour limit does not apply to, or take into account, hours of service required to be credited for special unpaid leave).

This employment break rule applies only for educational organizations that are using the look-back measurement method for an employee who is treated as a continuing employee upon the resumption of services. This rule does not apply for an employee who is treated as terminated and rehired. In addition, the employment break period rule does not apply under the monthly measurement method.

Rehired Employees

In addition, special rules apply for how to classify an employee who earns an hour or more of service after the employee terminates employment (or has a period of absence). This break-in-service period applies for both the look-back measurement method and the monthly measurement method.

In general, if an employee goes at least 13 consecutive weeks without an hour of service and then earns an hour of service, he or she may be treated as a new employee for purposes of determining the employee’s full-time status. However, in order to avoid the treatment of employees of educational organizations as new employees resuming services after a scheduled academic break, the break-in-service period for employees of educational organizations is 26 weeks, instead of 13 weeks.

The educational organization may apply a rule of parity for periods of less than 26 weeks. Under the rule of parity, an employee is treated as a new employee if the period with no credited hours of service:

• Is at least four weeks long; and
• Is longer than the employee’s period of employment immediately before the period with no credited hours of service.

For an employee who is treated as a continuing employee, the measurement and stability periods that would have applied to the employee had he or she not experienced the break in service would continue to apply upon the employee’s resumption of service.

Adjunct Faculty Members

The final regulations recognize that hours of service for adjunct faculty members are particularly challenging to identify or track, and that the final regulations’ general rules for determining hours of service may present special difficulties with respect to these employees. The IRS continues to consider additional rules for determining hours of service for adjunct faculty members.

Until further guidance is issued, employers of adjunct faculty are required to use a reasonable method of crediting hours of service that is consistent with the employer shared responsibility rules. A method of crediting hours is not reasonable if it takes into account only a portion of an employee’s hours of service with the effect of characterizing, as a non-full-time employee, an employee in a position that traditionally involves at least 30 hours of service per week.

With respect to adjunct faculty members of an educational organization who are compensated on the basis of the number of courses or credit hours assigned, the IRS has determined that, until further guidance is issued, one (but not the only) method that is reasonable for this purpose would credit an adjunct faculty member of an institution of higher education with:

• 2 1⁄4 hours of service (representing a combination of teaching or classroom time and time performing related tasks, such as class preparation and grading of examinations or papers) per week for each hour of teaching or classroom time (in other words, in addition to crediting an hour of service for each hour teaching in the classroom, this method would credit an additional 1 1⁄4 hours for activities such as class preparation and grading); and, separately
• An hour of service per week for each additional hour outside of the classroom the faculty member spends performing duties he or she is required to perform (such as required office hours or required attendance at faculty meetings).

This example is not intended to constitute the only reasonable method of crediting hours of service. Whether another method of crediting hours of service is reasonable is based on the relevant facts and circumstances.

Although further guidance may be issued, this method may be relied upon at least through the end of 2015. If future guidance modifies an employer’s ability to rely on this method, the period of reliance will not end earlier than Jan. 1 of the calendar year beginning at least six months after the date the guidance was issued (but in no event earlier than Jan. 1, 2016).

Student Employees

The term “hours of service” does not include any hour for services to the extent those services are performed as part of a federal work-study program or a substantially similar program of a state or political subdivision. The federal Work-Study Program, as a federally subsidized financial aid program, is distinct from traditional employment in that its primary purpose is to advance education. This exclusion is intended to avoid having the employer mandate interfere with that goal.

However, there is no general exception from the definition of “hours of service” for student employees (including paid interns or externs). Thus, all hours of service for which a student employee of an educational organization (or of an outside employer) is paid or entitled to payment in a capacity other than through the federal work study program (or a state or local government’s equivalent) are required to be counted as hours of service for purposes of the employer shared responsibility rules.

With respect to internships and externships, there is no special rule for student employees working as interns or externs for an outside employer. The IRS is concerned about the potential for abuse if hours of service for which interns or externs receive, or are entitled to receive, compensation from the employer could be excluded from the definition of hours of service. Thus, the general rules apply. However, to the extent that the student does not receive, and is not entitled to, payment in connection with those hours, services by an intern or extern would not count as hours of service under the general definition contained in the regulations.

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