By now you know that if you employ at least 50 full-time employees (or full-time equivalents), you are subject to the Employer Shared Responsibility provisions under section 4980H of the Code (often called the pay or play penalties). Also, to comply with the reporting requirements in the final regulations, Applicable Large Employers (“ALEs”) will need to identify their full-time employees. When calculating the hours of service performed by their employees, ALEs may need to determine if persons receiving short-term or long-term disability benefits are full-time employees for purposes of the ACA.
In Notice 2015-87, the Internal Revenue Service provided further guidance on what constitutes an hour of service under the Employer Shared Responsibility provisions. Specifically, the IRS provided guidance on whether an employee who is not working, but is receiving certain disability payments, should be credited with hours of service. In part, the regulations provide that an hour of service is each hour for which an employee is paid or entitled to payment during the applicable computation period.
For purposes of calculating hours of service, an individual receiving payments from a short-term disability (“STD”) or long-term disability (“LTD”) arrangement might be treated as a full-time employee. Two of the determining factors are whether the recipient of disability payments retains his or her status as an employee and who paid for the disability arrangement. However, hours of service will only result from disability payments made to a person who has not terminated employment with the employer. If the person retains their status as an employee, there are no limits on the number of hours that may be credited during the period that the employee is receiving disability benefit payments. Unless the exception explained below applies, each hour of service an employee receives either STD or LTD is counted as an hour of service. This result is the same even if the employee is receiving less than 100% of regular compensation (e.g. an employee receiving STD equal to 60% of their compensation for 40 hours per week would still be credited with 40 hours of service).
Some types of disability and wage replacement benefit payments will not result in hours of service. If the employee pays for the disability arrangement with after-tax dollars and the employer makes no contributions to the arrangement, benefit payments will not result in hours of service. Also, periods in which an employee is not working, but is receiving workers compensation wage replacement benefits will not result in hours of service.
Therefore, unless the exception above applies, an employee receiving 130 or more hours of LTD or STD will be a full-time employee if you are using the monthly method. And if you are using the lookback method, hours the employee receives on LTD or STD must be counted in the average.
These rules are complex and compliance can be complicated by employees receiving payments from a disability arrangement.