Under the Affordable Care Act, beginning in 2014, a "large employer" will be required to offer minimum essential health care coverage for all "full-time employees" or will pay a penalty tax for failing to offer such coverage. This advisory focuses on two issues:

• Which employers are considered "large employers" for this purpose, and
• Which employees are full-time employees for this purpose.

Are you a large employer?

A large employer is one who employs, on average, at least 50 full-time employees on business days during the preceding calendar year. In general, a full time employee is an employee who works on average 30 hours per week. Determining the number of full-time employees for this purpose means counting full-time equivalent employees, which includes full-time and part-time employees. Consequently, an employer cannot avoid being considered a large employer simply by making its employees part-time employees. 

To determine the average number of full-time employees in the preceding calendar year, the IRS has proposed a method under which the employer will count the number of full-time employees during each calendar month of the preceding year and then will divide that number by 12.  In general, if the average number of full-time employees for the preceding calendar year is at least 50, the employer is a large employer for the current calendar year.

Which employees are full-time employees for whom coverage must be offered?

Once an employer is determined to be a large employer for a given year, it must offer eligible employer-sponsored health coverage to its full-time employees or pay a penalty tax. For this purpose, a full-time employee is an employee who works on average 30 hours per week. This does not include full-time equivalents, so part-time employees are not considered. In contrast to the determination of whether an employer is a large employer (which looks back over the past 12 months), the determination of the number of full-time employees for purposes of the penalty tax is made on a monthly basis.

To avoid the practical difficulties of determining the number of full-time employees on a month-to-month basis, the IRS has issued guidance providing a safe harbor that allows employers to identify full-time employees by calculating employees’ hours during a specified standard measurement period and then locking in that status, whether full-time or not, for a separate specified stability period. The standard measurement period must be not less than three and not more than 12 consecutive calendar months. The employer may choose the months when the standard measurement period begins and ends (such as the plan year or the calendar year), but it must be the same for all employees in the same category. For ongoing employees, if the employee works an average of 30 hours per week during the measurement period, the stability period must be the longer of six months or the measurement period. If the employee does not work an average of 30 hours per week during the standard measurement period, the stability period is a period not longer than the standard measurement period. For new employees, the stability period must be the same as that for ongoing employees.

Some things for employers to consider

• Is the employer close to the 50-full-time-employee threshold? For 2014, the employer will need to look back at its full-time equivalents in 2013.
• If the employer is at the 50-full-time-employee threshold, it may be subject to the penalty tax.
• The employer should consider its employee population, including which employees it currently covers, and should consider whether it wants to continue to offer coverage to these employees in 2014.
• The employer should consider what measurement and stability periods it would like to use in determining which employees are full-time employees for purposes of offering coverage or paying the penalty tax.