Navigating the rules around full-time employee classification under the Affordable Care Act (ACA) is essential for any employer looking to stay compliant and avoid costly penalties. The ACA requires certain employers to offer health coverage to their full-time employees — or risk penalties under the employer shared responsibility provisions, commonly referred to as the “pay or play” mandate. Understanding the ACA definition of a full-time employee, how full-time status is calculated, and how its monitored is key to determining Applicable Large Employer (ALE) status and ensuring compliance with ACA requirements.
What is an Applicable Large Employer (ALE)?
An employer is considered an Applicable Large Employer if they have 50 or more full-time and full-time equivalent (FTE) employees. This threshold is assessed on a calendar year basis and must be met for more than 120 days during the year.
ALE status is significant because it determines whether an employer is subject to the ACA’s employer mandate. Once an organization qualifies as an ALE, they must offer health coverage that meets certain standards to avoid penalties.
ACA definition of full-time employee
The ACA definition of a full-time employee is someone who works 30 hours or more per week, or 130 hours per calendar month. This differs from the traditional 40-hour definition many employers may use for benefits or overtime eligibility.
For ALEs, the law requires that they offer Minimum Essential Coverage (MEC) to full-time employees, and that this coverage is both affordable and meets minimum value standards.
What are full-time equivalent (FTE) employees?
FTEs are not actual individuals but rather a calculated number that helps determine whether an employer meets the ALE threshold. The formula is:
Total monthly hours worked by all part-time employees ÷ 120 = FTE count
Example:
If part-time employees collectively work 4,000 hours in a month:
4,000 ÷ 120 = 33.3 FTEs
If the employer also has 20 full-time employees, their total employee count for ACA purposes is:
20 full-time employees + 33.3 FTEs = 53.3 → ALE
This calculation is essential to determine whether an employer must comply with the ACA mandate.
Methods for determining full-time employee status
Employers have two main methods to determine whether employees qualify as full-time under the ACA: the Monthly Measurement Method (MMM) and the Look-Back Measurement Method (LBMM).
Monthly Measurement Method (MMM)
Under this method, an employee is considered full-time if they work 130 or more hours in a month. Coverage must be offered within 90 days of hire, and there is a Limited Non-Assessment Period (LNAP) of up to three months where penalties will not apply.
This method works best for workforces with consistent and predictable schedules. Employers must apply this method consistently across similar employee classifications.
Look-Back Measurement Method (LBMM)
The LBMM is suited for employees with variable, seasonal, or part-time schedules. Employers select a measurement period (between 3 and 12 months) to track hours.
If an employee averages 130 or more hours per month during this period, they are considered full-time for the following stability period. This must be at least 6 months and no shorter than the measurement period.
This method allows employers to “lock in” an employee’s full-time or part-time status for a set period, helping to manage coverage obligations.
How to handle new, variable, and seasonal employees
New employees
For new employees who may not have a consistent schedule, employers can use an Initial Measurement Period (IMP) followed by an Initial Stability Period. The IMP starts either on the hire date or the first day of the following month.
Once the IMP concludes, the employee’s status is reassessed. They transition to “ongoing” status, subject to the standard measurement and stability periods.
Seasonal employees
Seasonal employees who work fewer than 120 days in a calendar year may be excluded from the ALE calculation. However, if they exceed ACA hour thresholds, their hours must still be tracked.
If a seasonal employee is rehired after a break of 13 weeks (or 26 weeks for educational institutions), the employer may treat them as a new employee for measurement purposes.
ACA employer mandate penalties
Failing to comply with the ACA employer mandate can result in two types of penalties:
- 4980H(a) penalty: Applies if an ALE fails to offer coverage to at least 95% of its full-time employees. The penalty is triggered even if just one full-time employee receives a Marketplace subsidy.
- 4980H(b) penalty: Applies if the coverage offered is unaffordable or does not meet minimum value, and a full-time employee receives subsidized coverage.
Employers can use safe harbors to demonstrate affordability, including:
- W-2 wages
- Rate of pay
- Federal poverty line
Penalty amounts are indexed annually, so staying up to date is essential.
Best practices for ACA full-time classification
- Maintain accurate, monthly records of employee hours across your HR tech stack
- Choose and consistently apply one measurement method (MMM or LBMM) per employee classification
- Monitor hours for part-time, seasonal, and variable-hour staff
- Review ALE status annually and adjust tracking and compliance practices as your workforce changes
The information contained in this article is provided for informational purposes only and should not be construed as legal advice on any subject matter. The reader should not act or refrain from acting on the basis of any content included in this article without seeking tax, legal, or other professional advice. The contents of this article contain general information and may not reflect current legal developments or address the reader’s situation. ebm disclaims all liability for actions the reader takes or fails to take based on any content within this article.
