The Affordable Care Act (ACA) brought new responsibilities for employers, especially when it comes to determining full-time employee (FTE) status and offering health coverage. One of the more complex areas of ACA compliance is handling special unpaid leave as defined by ACA guidelines. If not managed correctly, these leave scenarios can skew ACA calculations and expose employers to compliance risks and potential penalties.
Understanding how special unpaid leave impacts ACA tracking and reporting is essential for maintaining accurate records, preserving employee eligibility, and avoiding costly missteps.
Meeting ACA expectations during leave
Under the ACA, employers must offer coverage to employees who average 30 hours per week or 130 hours per month. This threshold defines full-time status under the employer shared responsibility provisions.
But what happens when an employee goes on extended or unpaid leave? If employers simply count hours worked, long leaves can pull average hours below the full-time threshold — potentially resulting in a misclassification that triggers non-compliance with ACA rules. That’s where special rules come into play.
Types of leave of absence
Special unpaid leave (IRS-specified)
Certain unpaid leaves are given special consideration by the IRS because they are protected under federal law:
- Family and Medical Leave Act (FMLA)
- Jury duty
- Military leave (USERRA)
These leaves must be treated carefully in ACA calculations to ensure a fair assessment of an employee’s status.
Non-protected leave
Other types of unpaid leave — such as personal leave not covered by federal protections — do not receive the same treatment. Time away under non-protected leave can affect average hours and may cause a shift in employee classification if not properly monitored.
IRS-approved methods for calculating hours during special leave
To ensure fairness in assessing full-time status, the IRS provides two calculation methods for special unpaid leave.
Option 1: Exclude leave period from measurement period
Employers can remove the period of special unpaid leave from the measurement period entirely. This shortens the total time used to calculate average hours, preventing the leave from lowering the employee’s average artificially.
Option 2: Impute hours during special leave
Alternatively, employers can credit hours to the employee as if they had worked during the leave. Typically, this means using the employee’s average hours before the leave and applying that average during the absence.
When and how to apply each method
Employers may choose either method, but must apply it consistently and with proper documentation. Switching methods on a case-by-case basis may result in compliance issues or claims of unfair treatment.
Documentation requirements and consistency
Employers should retain detailed records showing:
- The type and duration of leave
- The method applied
- The rationale behind the decision
Consistency in applying these methods is key to defending compliance practices in the event of an audit or IRS inquiry.
Handling ACA calculations for different employee types
Salaried employees
For salaried employees, it’s typically safe to assume a standard 40-hour workweek unless the employee’s schedule or job duties indicate otherwise.
Hourly employees
For hourly employees, employers must rely on actual hours worked — or credited, in the case of special leave. Accurate and up-to-date time records are essential here.
Importance of maintaining accurate time records
Time tracking systems must be able to reflect special leave accurately and support the chosen IRS calculation method. This data is crucial when defending ACA compliance efforts.
Applying the ACA look-back measurement method
Many employers use the look-back measurement method to determine if variable-hour employees are full-time. When employees take special unpaid leave during a measurement period:
- The measurement period can be adjusted (shortened or credited) based on the leave.
- Employers must take care to “protect” the employee’s average hours, ensuring a fair assessment.
This adjustment helps maintain compliance without artificially inflating or deflating an employee’s full-time status.
Example scenarios and calculations
Let’s say an employee averaged 32 hours per week before taking 8 weeks of FMLA leave. Using:
- Option 1 (Exclude): The employer removes the 8 weeks from the measurement period. Average hours are calculated using only the time worked.
- Option 2 (Impute): The employer credits 32 hours per week during the 8 weeks of leave. These hours are added to the calculation to reflect typical work patterns.
Both methods would likely result in the employee maintaining full-time status—but the key is consistent application and documentation.
In either scenario, employers must also determine if coverage should be continued during the leave or reinstated immediately upon return, depending on plan terms and leave protections.
ACA reporting and compliance tips
- Align leave handling with ACA reporting on Forms 1094-C and 1095-C
- Maintain a clear, written policy for handling different types of leave
- Apply policies consistently across all employee types and situations
- Consider regular audits to catch and correct errors before filing
- Keep detailed documentation of leave decisions and ACA calculations
Missteps in leave handling can trigger IRS inquiries or penalties. Proactive management can reduce risk and ensure accurate coverage offers.
Handling special unpaid leave as defined by ACA guidelines
Special unpaid leave as defined by ACA guidelines can complicate tracking, but with the right knowledge and processes, employers can handle it smoothly. By using one of the IRS-approved methods — and applying it consistently — employers can ensure compliance, safeguard employee eligibility, and avoid costly penalties.
When in doubt, consult ACA experts or consider technology solutions that automate hour tracking and reporting across leave scenarios. Getting it right matters — and your compliance strategy should reflect that.
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.
