As you juggle the many new compliance provisions going into effect this year as part of the Affordable Care Act (ACA), there’s one small detail that could have a big impact on your business: the full-time equivalent employee (FTE) calculation.
Why is it so important to get your FTE calculation right?
The FTE number is crucial because other health care reform requirements hinge on that number. Here are four reasons to make sure your numbers add up:
- To know if you’re required to provide health insurance to employees. Under the ACA, employers with 50 or more full-time equivalent employees must offer affordable health coverage that provides minimum value to full-time workers in 2015, or pay a new “Shared Responsibility” assessment (penalty) to the IRS. However, transitional relief has been issued for mid-sized employers with more than 50, but fewer than 100 full-time employees in 2015. These employers are not required to offer insurance until 2016.
- To determine if you qualify for tax credits. To qualify for the Small Business Tax Credit, you must have fewer than 25 full-time equivalent employees. If you have several part-time employees, you might still qualify for the tax credit even if you have more than 25 employees total. For example, if you have 48 employees that each work half-time, you may have 24 FTEs and should qualify for the credit.
- To see if your business can access the Small Business Health Options Program (SHOP) Marketplace. SHOP is open to employers with 50 or fewer FTEs.
- To avoid penalties for misclassified workers. Independent contractors aren’t covered – as long as your “independent contractor” classification holds up. The IRS and Department of Labor are cracking down on businesses that misclassify employees as independent contractors. Many have already been reclassified – and that means those businesses now have a higher number of FTEs. Make sure your independent contractors really are independent, because fighting and losing a worker status battle could cripple your business.
Important FTE definitions:
- Full-time employees are those who work an average of 30 hours or more per week and more than 120 days per year.
- Part-time employees are those who work on average less than 30 hours per week and more than 120 days per year.
- An FTE is the equivalent of one person working full time: 30 hours/week x 4 weeks/month = 120 hours/month, or 1,440 hours/year. So, one person working full time gives you one FTE, and two people each working 15 hours per week also add up to one FTE.
- Seasonal workers who have traditional "seasonal" employment and work fewer than 120 days per year are generally excluded from the FTE calculation.
Tips and resources to help you calculate FTEs:
- If you know your total number of labor hours for your part-time employees for one year, divide that number by 1,440 (120 x 12) and round down to the nearest whole number to get your FTEs. For example, if your total labor hours for January through December 2013 were 13,500, you would have nine FTEs (13,500 ÷ 1,440 = 9.375).
- For variable-hour employees, the IRS has issued Notice 2012-58 to help employers classify these employees through the end of 2014.
- To determine if you qualify for the Small Business Tax Credit based on your FTE count, access this IRS FAQ page.
- To find out if you can access the SHOP, use this SHOP FTE calculator.