Full-time equivalent (FTE)
Full-time equivalent (FTE) is a measure that converts employees’ hours into a number of full-time employees, so several part-time employees can count as one.
- LAW
- 26 CFR 54.4980H-2(b) and (c)
- BOUNDARY
- 120 hours per employee in each month
- FORMULA
- Non-full-time hours of service ÷ 120
- WATCH FOR
- Counting only full-time employees toward 50
Under the Affordable Care Act (ACA) employer mandate, FTEs count toward one question only: whether you are an applicable large employer (ALE). For each month of the prior calendar year, you add your full-time employees to your FTEs, then divide the 12-month total by 12 and round down. A result of 50 or more makes you an ALE for the current year, subject to the ACA’s employer shared responsibility and reporting rules, unless the seasonal worker exception applies. An employer that did not exist last year follows its own rule.
How do you calculate FTEs for the ACA employer mandate?
The ALE count is built month by month from hours of service, then averaged across the prior calendar year. Seasonal workers count in both the full-time figure and the FTE figure.
- 01
Count full-time employees. For each month, count employees who averaged at least 30 hours of service a week; 130 hours in the month generally counts as the equivalent.
- 02
Total everyone else’s hours. Add the month’s hours of service for all other employees, counting no more than 120 for any one employee.
- 03
Divide by 120. The result is that month’s FTEs; keep the fraction (you may round it to the nearest hundredth).
- 04
Average the year. Add the 12 monthly totals of full-time employees and FTEs, divide by 12, and round down to a whole number.
- 05
Compare with 50. At 50 or more, you are an ALE for the current calendar year unless the seasonal worker exception applies.
Which hours count toward FTEs?
FTEs are built from hours of service, which include paid leave, not only hours worked. An hour of service is each hour you pay, or owe pay, for work, and each hour you pay, or owe pay, for listed time away. Full-time status for this test is set month by month: the look-back measurement method cannot be used to decide ALE status. An employee who has medical coverage for a month through the military (TRICARE included) or a VA health care program is left out of that month’s count.
- Hours paid, or owed, for work performed
- Paid vacation and holidays
- Paid illness or incapacity, including disability
- Paid layoff
- Paid jury duty and military duty
- Paid leave of absence
- Bona fide volunteer hours for a government or 501(c) tax-exempt employer
- Federal Work-Study hours, or a similar state or local program
- Hours whose pay is income from sources outside the United States
How can 40 full-time employees make you an ALE?
Counting only full-time employees can hide ALE status, because part-time hours add FTEs. In two IRS examples, each company has 40 full-time employees in every month of the prior year, and each part-time employee has 60 hours of service a month. Fifteen part-time employees add 7.5 FTEs a month and leave the count at 47. Twenty add 10 FTEs and reach 50.
| EACH MONTH OF THE PRIOR YEAR | COMPANY X | COMPANY Y |
|---|---|---|
| Full-time employees | 40 | 40 |
| Part-time employees at 60 hours | 15 | 20 |
| FTEs (part-time hours ÷ 120) | 7.5 | 10 |
| Average, rounded down | 47: not an ALE | 50: an ALE |
Does every rule count FTEs the same way?
FTE counts differ from rule to rule, so a figure from one cannot stand in for another. In headcountHeadcount. Headcount is the number of people you employ at a point in time, with each employee counted once whatever hours they work.Click to open the term planning, an FTE is a budgeting unit: an employee scheduled for half of your full-time week is 0.5 FTE. The small business health care tax credit uses its own yearly count, built on 2,080 hours and with its own exclusions. The ALE count runs month by month: full-time employees, plus everyone else’s hours, capped at 120 each and divided by 120.
Frequently asked
- 26 CFR § 54.4980H-1 - Definitions.
- 26 CFR § 54.4980H-2 - Applicable large employer and applicable large employer member.
- Determining if an employer is an applicable large employer
- Small Business Health Care Tax Credit Questions and Answers: Determining FTEs and Average Annual Wages
General information, not legal or tax advice. Apply current federal and state rules with qualified guidance.