What Is A Large Employer?
To qualify as a large employer, an employer must employ on average at least 50 full-time employees, including full-time equivalents (FTEs), on business days during the preceding calendar year. Full-time means 30 or more hours of service each week. Hours worked by employees with fewer than 30 hours per week must be counted—and then divided by 120 per month—to determine the number of FTEs. The number of FTEs is then added to the actual full-time employee count.
Employers will determine each year, based on their current number of employees, whether they will be considered a large employer for the next year. For example, if an employer has at least 50 full-time employees, for 2013, it will be considered a large employer for 2014.
All employers that employ at least 50 full-time employees, including FTEs, are subject to ACA’s pay or play rules, including for-profit, nonprofit and government employers. (Delayed until 2015)
Employers with Employees Working Abroad
A company that employs U.S. citizens working abroad generally will be subject to the pay or play rules only if the company had at least 50 full-time employees (including FTEs) determined by taking into account only work performed in the United States.
Employers with Seasonal Workers
If an employer’s workforce exceeds 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 time were seasonal workers, the employer does not qualify as a large employer. The proposed regulations allow an employer to apply either a period of four calendar months (whether or not consecutive) or a period of 120 days (whether or not consecutive) to determine if it qualifies for the seasonal worker exception.
New Employers
An employer not in existence during an entire preceding calendar year is a large employer for the current calendar year if it is reasonably expected to employ an average of at least 50 full-time employees (taking into account FTEs) on business days during the current calendar year.
Counting Full-time Employees, FTEs and Hours of Service
Employers average their number of full-time employees and FTEs across the months in a year to determine if they meet the large employer threshold. The averaging method takes into account fluctuations that many employers experience in their workforce numbers each year.
A common law standard applies to define the terms “employee” and “employer.” Under this standard, an employment relationship exists when the person for whom the services are performed has the right to control and direct the individual who performs the services with respect to the result to be accomplished, along with the details and means by which it is done.
Leased employees are not considered employees of the service recipient for purposes of ACA’s shared responsibility provisions. Also, a sole proprietor, a partner in a partnership and a 2-percent S corporation shareholder are not counted as employees.
However, aggregation rules apply for companies under common ownership. All employees of a controlled group of businesses under Internal Revenue Code (Code) sections 414(b) or (c) or an affiliated service group under Code section 414(m) are taken into account to determine if an employer is subject to the pay or play rules. If the combined total meets the threshold, each separate member of the group is subject to the pay or play rules, even those companies that on their own do not have enough employees to meet the threshold.
Full-time Employees
Under ACA, a full-time employee is an employee who was employed on average at least 30 hours of service per week. The proposed regulations treat 130 hours of service in a calendar month as the monthly equivalent of 30 hours per service per week.
FTEs
An employer must calculate the number of FTEs it employed during the preceding calendar year and count each FTE as one full-time employee for that year. The proposed regulations provide a calculation method for FTEs. Under this method, all employees who were not full-time employees for any month in the preceding calendar year are included in calculating the employer’s FTEs for that month by:
- Calculating the aggregate number of hours of service (but not more than 120 for any employee) for all employees who were not employed on average at least 30 hours of service per week for that month; and
- Dividing the total hours of service determined above by 120.
The result is the number of FTEs for a calendar month.
Fractions are taken into account in determining the number of FTEs for each calendar month. However, after adding the 12 monthly full-time employee and FTE totals and dividing by 12, all fractions would be disregarded. For example, 49.9 full-time employees (including FTEs) would be rounded down to 49 full-time employees and FTES and the employer would not meet the large employer threshold.
Hours of Service
To determine an employee’s hours of service, an employer must count:
- Each hour for which the employee is paid, or entitled to payment, for the performance of duties for the employer; and
- Each hour for which an employee is paid, or entitled to payment by the employer, on account of a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military leave or leave of absence.
Under the proposed regulations, 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 all entities treated as a single employer under the Code’s controlled group and affiliated service group rules must be taken into account. However, if compensation for hours of service is foreign source income, those hours of service should not be included in an employee’s hours of service.
Hourly Employees
For employees paid on an hourly basis, an employer must calculate hours of service from records of hours worked and hours for which payment is made or due for vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence.
Non-hourly Employees
For employees not paid on an hourly basis, employers are permitted to calculate hours of service by:
- Counting actual hours of service from records of hours worked and hours for which payment is made or due;
- Using a days-worked equivalency method under which an employee is credited with eight hours of service for each day with an hour of service; or
- Using a weeks-worked equivalency method under which an employee is credited with 40 hours of service per week for each week with an hour of service.
Employers may use different methods for non-hourly employees based on different classifications of employees if the classifications are reasonable and consistently applied. Employers may change methods each calendar year. However, employers may not use the days-worked or weeks-worked equivalency methods if those methods would substantially understate employees’ hours of service.
