By: HUB’s EB Compliance Team
Under the Affordable Care Act’s (ACA) employer mandate, applicable large employers are generally required to offer at least one health plan that provides affordable, minimum value coverage to their full-time employees (and minimum essential coverage to their dependents) or pay a penalty. One of the challenges employers therefore face is determining which employees are considered full-time under the ACA.
Employee status
Employees are considered full-time under the ACA if, at the time they are hired into their position, they are reasonably expected to work an average of 30 hours per week or 130 hours per month. Employees who are classified as full-time at hire can be subject to a waiting period before becoming eligible for medical coverage so long as the waiting period does not exceed 90 days.
Employees are considered variable hour (also referred to as part-time by many employers) if, based on the facts and circumstances on the employee’s start date, it cannot be determined whether the employee is reasonably expected to work, on average, 30 or more hours per week. To determine if a variable-hour employee qualifies as full-time and is thus eligible for benefits, employers use either the monthly measurement method or the look-back measurement method.
Step one is determining which measurement method the employer will utilize. Step two is understanding which hours "count" during the ACA measurement period. This is one of the most operationally complex aspects of an employer’s ACA compliance. This article will therefore focus on which hours employers need to include in their applicable measurement periods.
The foundational rule
Under Treas. Reg. §54.4980H-1(a)(24), an "hour of service" for ACA employer mandate purposes includes two distinct categories:
- Hours worked: Each hour for which an employee is paid, or entitled to payment, for the performance of duties for the employer; and
- Hours of paid non-work time: Each hour for which an employee is paid, or entitled to payment, for a period during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty, or leave of absence.
The key phrase — "paid, or entitled to payment" — is the dividing line between hours that must be counted and hours that may not need to be counted. This phrase applies broadly and captures far more than just hours physically worked.
Paid leave categories: all count as hours of service
When an employee receives pay (or is entitled to pay) during a period of absence, those hours must be credited regardless of the reason for the absence. The following categories of paid time off all generate hours of service:
- Vacation and Paid Time Off (PTO)
- Sick Leave
- Holidays
- Jury Duty (Paid)
- Military Leave (Paid)
- FMLA Leave (Paid)
- Bereavement Leave, Personal Days, Floating Holidays and Other Paid Leave
Unpaid leave: the general rule and the "special unpaid leave" exception
As a general matter, unpaid leave does not generate hours of service under the ACA because the employee is not "paid, or entitled to payment" during the absence. However, the ACA regulations also created a critical exception for three categories of unpaid leave under the look-back measurement method.
Special unpaid leave
Under Treas. Reg. §54.4980H-1(a)(44), the following three types of unpaid leave receive special treatment under the look-back measurement method:
- Unpaid leave under the Family and Medical Leave Act of 1993 (FMLA)
- Unpaid leave under the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA)
- Unpaid jury duty leave
These absences are designated as "special unpaid leave." When an employee is on special unpaid leave during a measurement period, the employer must neutralize the impact of that leave on the employee's average hours of service using one of two methods:
Method 1 — Exclude and Re-Average: The employer excludes the period of special unpaid leave from the measurement period entirely and calculates the employee's average hours based only on the remaining weeks or months. For example, if an employee takes 3 months of unpaid FMLA during a 12-month standard measurement period, the employer averages the employee's hours over 9 months rather than 12 months.
Method 2 — Impute Hours: The employer credits the employee with hours of service during the special unpaid leave at a rate equal to the average weekly hours the employee worked during the non-leave portions of the measurement period. For example, using the same facts as above, if an employee averages 32.25 hours per week during the 9 months they worked, they would be credited with this number of hours per week during the 3 months they were on FMLA.
Both methods produce the same mathematical result for purposes of the full-time determination. The employer may choose either method, but should apply its chosen approach consistently.
Short-term and long-term disability (STD/LTD)
The treatment of disability leave for ACA hours of service purposes turns on a critical question clarified by IRS Notice 2015-87 (Q&A-14): who funded the disability arrangement? This same analysis applies to both STD and LTD.
Employer-funded, employer-contributed plans and pre-tax employee-funded plans: If the employer pays for the disability coverage, or if the employee pays or contributes to premiums on a pre-tax basis, disability payments are treated as payments by the employer. Each hour for which the employee receives STD or LTD benefits counts as an hour of service, even if the employee receives less than full pay. An employee receiving 60% wage replacement is still credited with full hours of service (e.g., 40 hours per week) for the entire disability period.
Post-tax employee-funded plans: If the disability arrangement is funded entirely by the employee with post-tax contributions and the employer makes no contributions, disability payments do not generate hours of service.
Workers' compensation: Periods during which an employee receives workers' compensation wage replacement benefits do not generate hours of service, regardless of funding source. However, keep in mind that hours paid under workers’ compensation may still be counted if FMLA leave is running concurrently.
For LTD specifically, this creates a significant compliance challenge: as long as the employment relationship continues and the LTD plan is employer-funded, the employee keeps accumulating hours of service with no cap or time limit per the guidance. The employer must continue to count those hours and offer coverage if the employee qualifies as full-time. Terminating the employment relationship ends the hours-of-service obligation, but it may also raise separate employment law risks. Employers should consult with their employment counsel on these matters.
Practical compliance steps
- Configure hours-tracking systems (typically payroll systems or HRIS) correctly. Ensure that paid leave categories — including STD, LTD, PTO and sick leave — are counted toward ACA hours of service where required.
- Audit your STD/LTD funding structure. Determine whether your disability plans are employer-funded, employee-funded or a combination. This drives whether disability payments create hours of service.
- Track special unpaid leave separately. For employers using the look-back measurement method, FMLA, USERRA and jury duty unpaid leave must be tracked and excluded or imputed during measurement period calculations. Failure to do so can cause employees to incorrectly lose full-time status.
- Monitor employees on extended disability leave. Employees on employer-funded LTD who remain employed continue to accrue hours of service indefinitely. Develop protocols for periodically reviewing these employees' ACA status and coverage obligations.
If you have any questions, please contact your HUB advisor. View more compliance articles in our Compliance Directory.
NOTICE OF DISCLAIMER
Neither Hub International Limited nor any of its affiliated companies is a law or accounting firm, and therefore they cannot provide legal or tax advice. The information herein is provided for general information only and is not intended to constitute legal or tax advice as to an organization’s or individual's specific circumstances. It is based on HUB International's understanding of the law as it exists on the date of this publication. Subsequent developments may result in this information becoming outdated or incorrect, and HUB International does not have an obligation to update this information. You should consult an attorney, accountant or other legal or tax professional regarding the application of the general information provided here to your organization’s specific situation in light of your or your organization’s particular needs.