Full-Time Equivalent Employees: Affordable Care Act vs. Small Business Health Care Credit
Changes are coming to the business world. You may have many questions regarding the Affordable Care Act and want to know all that you can to be prepared for the changes. The issue is complicated and understanding the basic elements will be key. One important term is “Full-time equivalent” employees.
What is a full-time equivalent employee?
A full-time equivalent employee is the number of full-time employees you would have if instead of employing part-time employees, you hired the number of necessary full-time employees to work the same amount of hours. It is based on the number of hours your employees work.
How do I know how many full-time equivalent employees I have?
Determining the number of full-time equivalent employees is crucial. When the Affordable Care Act comes into play, the number can mean the difference between incurring penalties or not. You may have also received the small business health care credit if you offered health insurance in the past and had fewer than 25 full-time equivalent employees; this is also a credit going forward. Unfortunately, the calculation is different for the Affordable Care Act and the Small Business Health Care Credit.
Affordable Care Act Calculation:
Under the Affordable Care Act, a full-time equivalent employee is calculated on a monthly basis. Any individual who works more than 30 hours a week in a given month is considered a full-time employee. Part-time employees must have their monthly hours calculated and then divided by 120. The 120 figure is based on thirty hours a week for four weeks in a month. Then, the equivalents are added to the number of full time employees to get a monthly total. The number of employees per month are added for each month, carrying over fractions, i.e., 4.5 monthly full-time equivalents. Then the total is divided by 12 months.
Small Business Health Care Credit:
To receive the small business health care credit, you must have fewer than twenty-five full-time equivalent employees. A full-time employee is based on working 2,080 hours a year. To do this calculation, add the total hours for all employees, capping off employees at 2,080, and then divide by 2,080 to get your final figure. Please note that seasonal employees working less than 120 days in a year are excluded from the calculation.
It will be important in the coming year to know the correct calculation to use if you are close to qualifying for the small-business health care credit or close to the penalty limits for the affordable care act.
If you need assistance calculating your number of full-time equivalent employees, please contact our office at (802) 878-1963.
Davis & Hodgdon Associates has been assisting businesses in the Burlington Vermont Metro area for more than 20 years. The firm provides tax planning and compliance as well as a complete menu of business services including succession planning to businesses of all sizes.
Alyssa McBride, Associate Accountant
Davis & Hodgdon Associates CPAs