L O C K T O N C O M P A N I E S

Benefits Insight & Guidance

August 2016

AUTHOR

MARK HOLLOWAY, JDSenior Vice President

Director of Compliance ServicesLockton Benefit Group

WHAT QUALIFIES AS HOURS OF SERVICE

TO DETERMINE FULL-TIME STATUS UNDER

THE ACA?One of an employer’s more complex undertakings, thanks to the Affordable Care Act (ACA), is to determine if an employee is an ACA full-time employee (FTE), thus triggering an employer obligation to offer health insurance or risk a penalty. This determination is particularly relevant with respect to:

� Employees with a variable work schedule (variable hour employees).

� Part-time employees.

� On-call employees.

� Employees who may slide between full-time and part-time, on-call or “per diem” status.

Full-time status requires averaging at least 30 “hours of service” per week over an averaging period, although an employer can use 130 hours per calendar month as a substitute measure of FTE status, if it applies the alternative on a reasonable and consistent basis. The employer chooses the averaging period, within guidelines established by federal agencies.

We’ve previously discussed the agencies’ methodology for determining full-time status. Because we have covered those rules elsewhere, we’ll focus this discussion on the cornerstone of that methodology.

What is an Hour of Service?

Here are the fundamentals:

� Generally, hours of service are hours for which the employee is paid or entitled to payment (including paid vacation or other paid absences, like sick time).

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� For employees paid on an hourly basis, the employer must calculate the actual hours of service from records of hours worked and hours for which payment was made or due.

� For employees paid other than on an hourly basis (such as salaried employees), the employer may track actual hours or apply an equivalency method under which the employer credits the employee with eight hours of service for each day, or 40 hours of service for each week, for which the employee would be entitled to be credited with at least one hour of service if he or she were an hourly employee. The employer cannot apply the equivalency if the result is to understate the employee’s actual hours of service.

� For employees whose hours are difficult to count and who are compensated other than on an hourly basis, such as commissioned salespeople and others, the employer may use any reasonable method for tracking hours of service that does not understate the hours of service with which the employee should be credited. For some categories of such employees, such as on-call employees, adjunct faculty, and employees in the transportation industry, IRS regulations provide specific safe harbor rules described in the charts that follow.

� If an employee has hours of service for more than one employer in a controlled group, those hours are aggregated.

� Hours compensated with non-US source income are disregarded. Non-US source income is income from sources outside the US, typically construed as compensation for service performed abroad, even if paid through US payroll.

There are some limited exceptions to the general rule that employees must be credited with hours of service for periods for which they are paid or entitled to payment. For example, hours of service need not be credited to employees who receive payments while on certain types of leave, most notably disability leave where the payments are not taxable to the employee.

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Similarly, while employers can often disregard unpaid hours when calculating an employee’s average hours of service, the employer may be required to ensure that certain periods of unpaid leave do not work to the employee’s detriment, in a calculation of that average.

The chart below addresses these and other issues:

Nature of the Payments or the Employee’s Service

Included in Hours of Service?

Service compensated on an hourly basis Yes

Service compensated on other than an hourly basis (salary, commissions, piece-work compensation, etc.)

Yes

Paid vacation Yes

Other paid time off (paid holiday, layoff, jury duty, or military or other leave)

Yes

Sick pay, short term or long term disability benefits that are taxable when paid

Yes. These benefits are taxable where the cost of coverage is paid by the employer or via pretax payments by the employee. Disability benefits paid after employment has terminated are ignored (e.g., long-term disability benefits, in most instances).1

Short term or long term disability benefits that are nontaxable when paid

No. These benefits are nontaxable when the premium is paid after-tax by the employee. Arguably, the same result applies (don’t take the payments into account) if the employer pays the premium and then taxes the employee—i.e., imputes taxable income—on that amount.

Workers’ compensation No, but see “Special Rule for Unpaid Leaves” if workers’ compensation leave operates concurrently with unpaid FMLA leave.

State-mandated disability benefits (e.g., nonoccupational disability benefits that are mandated by California, Hawaii, New Jersey, New York and Rhode Island)

No

Unemployment compensation benefits mandated by state or local law

No

Severance benefits No, because the benefits are paid after employment has terminated.

On-call hours Yes, for on-call hours for which the employee is paid, or for which the employee is required to remain on the employer’s premises, or for which employee’s activities while on call are substantially restricted and prevent him or her from using the time for his or her own purposes. In other cases, the employer must determine the on-call employee’s hours of service using any reasonable method.

Layover hours (e.g., by employees in transportation industries)

Yes, if employees are paid for the hours beyond the compensation they would otherwise receive, or if the hours are counted by the employer toward the hours of service required of employees in order to earn their regular compensation. The IRS may allow other reasonable methods for counting hours of service.

Volunteer hours These hours are disregarded if the bona fide volunteer’s service is for a governmental entity or an entity exempt from federal income tax pursuant to Tax Code section 501(c)(3), and the volunteer’s only compensation is reimbursement of expenses and reasonable benefits (for example, service awards) typically paid by similar organizations.

1 Where the benefits amount to a mere fraction of the employee’s regular pay, the employee should be credited with the hours he or she would have worked. For example, a regular, full-time employee who routinely works eight hours per workday and who receives taxable sick pay or disability benefits should receive credit for eight hours of service per workday for which the benefits are paid, even if the benefits only replace 80 percent of the employee’s regular pay.

Benefits Insight & Guidance

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Not Legal Advice: Nothing in this Benefits Insight & Guidance should be construed as legal advice. Lockton may not be considered your legal counsel and communications with Lockton’s Compliance Services group are not privileged under the attorney-client privilege.

Hours worked by adjunct faculty members employed by higher education institutions

An IRS safe harbor method allows the employer to credit the employee with at least 2.25 hours of service for each hour of teaching or classroom time (the 2.25 hours include the hour of classroom time) to account for class preparation time, grading papers, etc. But these faculty members must also be credited with actual hours for required office hours or required attendance at faculty meetings.

If the employer declines to use this safe harbor, it may use any reasonable method for tracking hours of service that does not understate the hours with which the employee should be credited.

Work-study hours No, if the hours are worked by students as part of a federal, state or local work-study program.

Hours worked by members of certain religious orders

No, if the hours are worked by members of a religious order where the members are under a vow of poverty and the work is of the sort usually required of an active member of the order.

Jury duty (unpaid) See “Special Rule for Unpaid Leaves.”

Military leave/USERRA (unpaid) See “Special Rule for Unpaid Leaves.”

FMLA leave (unpaid) See “Special Rule for Unpaid Leaves.”

Special Rules for Unpaid Leaves

If during a measurement period an employee has less than 13 weeks of special unpaid leave (unpaid FMLA, USERRA, or jury duty leave), the calculation of the employee’s average hours of service over the measurement period can’t be adversely affected by the leave. The regulations require the employer to either remove the period of special unpaid leave from the measurement period, or credit the employee, during the leave, with the hours of service he or she would have accumulated if it wasn’t for the leave. These “deemed” hours are equal to the hours per week the employee averaged in the measurement period, disregarding the period of leave. For educational institutions, the “less than 13 weeks” becomes “less than 26 weeks.”