Why Measurement Matters
Under the employer mandate, an Applicable Large Employer (ALE) may owe a penalty if it doesn’t offer coverage to its full-time employees. Those are employees who average 30 or more hours per week, or 130 or more hours of service per month.
IRS rules give ALEs two methods for identifying full-time employees:
- Monthly Measurement Method
- Look-Back Measurement Method
Hours of service include hours worked plus paid hours not worked, such as vacation, holidays and sick leave.
Monthly Measurement Method
Under the Monthly Measurement Method, full-time status is determined month by month, based on the employee’s hours of service in that month.
- 130 or more hours in a month: full-time for that month
- Fewer than 130 hours: not full-time for that month
This method is simple and is often used for employees with steady, predictable schedules. For employees whose hours vary, status can change from month to month, which can mean frequent changes in eligibility.
Look-Back Measurement Method
The Look-Back Measurement Method measures hours over a longer period, then locks in the employee’s status for a set period afterward. It’s commonly used for employees whose hours vary, such as part-time, variable-hour or seasonal employees.
For ongoing employees, the employer uses a standard measurement period that applies to everyone in the same employee category, on the same schedule. Many employers line it up with their plan year, so status is set before open enrollment.
For new hires, it can’t be used to delay coverage for someone the employer expects to work full-time. See New Employees below.
The Look-Back Measurement Method has three parts:
- Measurement period: The employer tracks each employee’s hours for 3 to 12 months. If the employee averages 130 or more hours a month, they’re treated as full-time.
- Administrative period: An optional break of up to 90 days after the measurement period, giving the employer time to review hours and enroll eligible employees.
- Stability period: The employee’s status from the measurement period is locked in for this period, no matter how many hours they actually work. Employees found to be full-time stay full-time, even if their hours drop. Employees found not to be full-time stay that way, even if their hours go up. For employees found to be full-time, the stability period must last at least six months, and at least as long as the measurement period.
New Employees
- New employees expected to work full-time are generally treated as full-time from the start. Coverage is generally offered after a waiting period of no more than 90 days.
- New employees whose hours are genuinely uncertain, meaning the employer can’t tell at hire whether they’ll average 30 or more hours a week, may be measured over an initial measurement period of 3 to 12 months when the employer uses the Look-Back Method. This also applies to new part-time and seasonal employees.
Employees Who Return After a Break (“Break-in-Service”)
Generally, an employee who returns after 13 or more consecutive weeks with no hours of service (26 weeks for educational organizations) may be treated as a new employee. After a shorter break, the employee is generally treated as continuing and keeps their prior status.
Keep in mind: These are the ACA’s measurement rules. For fully insured plans, carrier rules on rehires and reinstatement may also apply. How an employer handles returning employees is typically spelled out in its own plan documents, such as the ERISA plan document and SPD. Because these rules can be complex, employers should review their approach with their own legal counsel or ERISA attorney.
Choosing and Documenting a Method
An employer chooses its measurement method in advance and applies it consistently. It can’t switch methods employee by employee.
Employers may use different measurement methods or periods for certain categories of employees:
- Hourly vs. salaried
- Collectively bargained vs. non-collectively bargained
- Employees of different entities, such as companies in a controlled group
- Employees located in different states
Within each category, the same method has to be applied uniformly.
Because the measurement method affects who is eligible for coverage, it’s typically described in the employer’s ERISA plan documents, such as the plan document and Summary Plan Description (SPD).
Important: This information is provided for general educational purposes. It is not legal or tax advice. How these rules apply depends on each employer’s specific circumstances, so employers should review their situation with their own legal counsel, ERISA attorney, CPA or tax advisor.