In informal guidance released in May 2014, the IRS provided additional clarification on how to count full-time employees for purposes of determining who is an applicable large employer. This is important because the employer shared responsibility mandate only applies to “applicable large employers,” which are defined as employers with 50 or more full-time and full-time equivalent (“FTE”) employees.

Prior Understanding of Calculation for Applicable Large Employer Determination

Previously, it was assumed that for this calculation a full-time employee is an employee who is employed an average of 30 or more hours per week and that employers may use 130 hours of service in a calendar month as the equivalent of 30 hours per week.
As indicated above, the calculation for applicable large employer also takes FTE employees into account. In order to determine the number of FTEs for each month during the previous calendar year, the employer must look at all employees (including seasonal employees) who were not full-time employees during each month. The number of FTE employees for a given month is then determined by:
1. Calculating the aggregate number of hours of service (but no more than 120 hours of service for any employee) for all non-full-time employees for that month, and
2. Dividing the total hours of service calculated above by 120.
The resulting number, which may be rounded off to the nearest hundredth, is the number of FTE employees for that calendar month. The prior understanding was that only employees working 130 or more hours per month were full-time employees, and all employees working 129 hours per month or less were included as part of the FTE determination.

IRS Clarification on who is a Full-Time Employee for Applicable Large Employer Determination

However, during the Q&A session of the American Bar Association’s Tax Section’s Employee Benefits Committee meeting on May 9, 2014, IRS officials stated that the IRS disagrees with the notion of using either the 130-hour monthly equivalency or 30 hours per week for the applicable large employer determination. The IRS officials noted that the statute requires employers to use 120 hours. So, to count employees for purposes of determining whether an employer is an applicable large employer, each employee who works at least 120 hours counts as one full-time employee. It does not matter if the employee worked 121 hours or 250 hours that month, the employee counts as one full-time employee. While the statute uses 30 hours per week when it addresses who is a full-time employee for purposes of deciding who must be offered coverage to avoid penalties under the employer mandate, for purposes of the applicable large employee determination, neither 130 hours nor 30 hours per week is a relevant concept according to the IRS. For a copy of the May 9th American Bar Association Q&As, please on click here.

For employees who did not work at least 120 hours in a month, the IRS officials reiterated that an employer counts those employees as a fraction, where the numerator is each employee’s actual hours for the month and the denominator is 120.

Example: Assume that Acme employed 25 employees who each worked 120+ hours a month in 2016. In our example, the 25 employees are classified as full-time employees. In addition to these full-time employees, Acme employed 60 part-time employees who worked 60 hours each month in 2016. To determine the number of FTE employees that Acme employed in 2016, Acme aggregates all the hours of service for all part-time employees (3,600) for each month and divides by 120. The resulting number, which is 30, represents Acme’s FTE employees for each month, since in our example we assume that every part-time employee worked the same hours in each month of 2016. In this example, Acme would be considered an applicable large employer for 2017 because Acme’s average monthly full-time and FTE employees in 2016 is greater than 50. To be specific, for 2016 Acme’s average full-time (25) and full-time equivalent employees (30) for each month is equal to 55.


In all practical terms, the change in how applicable large employer status is calculated should not affect whether any employer is or is not an applicable large employer. This is because regardless of whether an employer identifies its full-time employees based on 120 hrs/month or 130 hrs/month, once the employer adds in the calculation of full-time equivalents based on hours of non-full-time employees, employers will reach the same result. It may, however, be inconvenient for administrative purposes if an organization is
identifying full-time employees for coverage purposes based on 130 hours per month but also has to track full-time employees for purposes of identifying applicable large employer status based on the 120 hours per month standard.

Gallagher Benefit Services, through its compliance experts and consultants, will continue to monitor developments on healthcare reform legislation and regulation and will provide you with relevant updated information as it becomes available. In the interim, please contact your Gallagher Benefit Services Representative with any questions that you may have.