Question: What is the monthly measurement method for determining employees’ full-time status under the ACA employer mandate?

Short Answer: The monthly measurement method is one of two alternative approaches permitted under the ACA for Applicable Large Employers (ALEs) to determine employees’ ACA full-time status. Unlike the more complex look-back measurement method, the monthly measurement method adopts a relatively simple approach that treats employees as full-time for any given calendar month if they complete at least 130 hours of service.

General Rule: The ACA Employer Mandate

The ACA employer mandate rules apply to employers that are “Applicable Large Employers,” or “ALEs.” In general, an employer is an ALE if it (along with any members in its controlled group) employed an average of at least 50 full-time employees, including full-time equivalent employees, on business days during the preceding calendar year.

For more details:

• Newfront ACA Employer Mandate & ACA Reporting Guide

• Becoming an ALE Subject to the ACA Employer Mandate

Determining Employees’ Full-Time Status: The Measurement Method

The ACA itself refers to full-time employees as those who are “employed on average at least 30 hours of service per week” in IRC §4980H. The IRS employer mandate regulations offer employers the option to choose between two alternative measurement methods to determine which employees are treated as full-time (i.e., averaging at least 30 hours of service per week) for §4980H (employer mandate) purposes:

1. The Monthly Measurement Method (MMM); or

2. The Look-Back Measurement Method (LBMM)

The IRS provides a useful short summary of these two options here: https://www.irs.gov/affordable-care-act/employers/identifying-full-time-employees

• Note: Employers cannot choose to use some other approach to determining employees’ full-time status for ACA employer mandate purposes. The MMM and LBMM are the exclusive means by which employers can determine which employees are full-time for avoiding potential §4980H penalty liability. Employers unfamiliar with these rules sometimes make the potentially costly error of designing a full-time status determination scheme that does not conform to this structure.

Employers Generally Must Apply the Same Measurement Method Approach to All Employees

Employers are permitted to choose separate measurement methods for the following limited classes of employees:

• Hourly vs. salaried employees

• Employees in different states

• Union vs. non-union employees

• Employees in different union groups

Outside of these four limited class distinctions, employers must apply the same measurement method across all employees. This limitation can be the cause of some consternation for ALEs that would prefer the simpler MMM approach for classes of employees where the LBMM’s measurement and stability periods would provide little or no utility, and the more robust LBMM approach for classes where the additional complexity trade-off is worth it to garner a level of predictability for the class’s full-time status. For example, employers cannot cherry pick a class of variable hour employees for application of the LBMM, while applying the MMM for those employees who are consistently working a routine full-time schedule.

How the Monthly Measurement Method Determines Employees’ Full-Time Status

The MMM is best thought of as the ACA’s default measurement method for determining employees’ full-time status. It is relatively simple and straightforward—albeit not without its drawbacks.

Under the MMM, an employee’s status as full-time or part-time is determined on a monthly basis by the hours of service completed in each calendar month. Employees are considered full-time for any given calendar month if they complete at least 130 hours of service.

The IRS treats 130 hours of service in a calendar month as the monthly equivalency of at least 30 hours of service per week to ensure consistency on a month-to-month basis throughout the year.

• Note: Unlike the LBMM, there is no measurement, administrative, or stability period under the MMM. The MMM is simply a month-to-month approach to determining full-time status.

Employees Whose Hours Fluctuate Above and Below 130 Hours of Service Per Month

The MMM is ill-suited as a tool to determine full-time status (and, assuming the health plan definition tracks the employee’s ACA full-time status, health plan eligibility) where the employees’ hours of service regularly fluctuate above and below 130 in a calendar month. Moving employees in and out of full-time status on a regular basis within each plan year causes several administrative headaches for employers.

The MMM rules permit a “limited non-assessment period” (a short period where the employer is not penalized for failure to offer coverage) during the period of three full calendar months beginning with the first full calendar month in which the employee is otherwise eligible to be offered coverage under the employer’s medical plan. An employee is “otherwise eligible to be offered coverage” for a calendar month if the employee meets all conditions to be offered coverage other than completion of the waiting period.

In other words, this three-month grace period for employers to offer coverage applies when an employee first works at least 130 hours of service in a calendar month. That may be the first month of employment or a subsequent month—but whenever it occurs, it will trigger this three-month limited non-assessment period. The IRS Form 1094-C and 1095-C Instructions simplify the more thorough regulatory provisions by referring to this timeframe as “the period beginning with the first full calendar month in which the employee is first otherwise (but for completion of the waiting period) eligible for an offer of health coverage and ending no later than 2 full calendar months after the end of that first calendar month.”

The most concise way to conceptualize this provision is that the MMM’s limited non-assessment period allows the employer to delay offering coverage without potential ACA employer mandate penalty liability during the plan’s waiting period for coverage after the employee triggers eligibility by working full-time for a month. This is often referred to as the ACA’s “first day of the fourth full calendar month rule.”

• For more details: The ACA First Day of the Fourth Full Calendar Month Rule

Employers may not use this limited non-assessment period more than once per period of employment (unless experiencing a break in service, which generally requires a period of 13 consecutive weeks with no hours of service, such as a termination and rehire situation).

Example:

• Reese is hired by Tech-Com, an ALE subject to the ACA employer mandate.

• Tech-Com uses the MMM to determine employees’ full-time status and health plan eligibility.

• Reese completes 125 hours of service in January-February, 135 hours of service in March-August, 125 hours of service in September-October, and 135 hours of service in November-December.

Result:

• Reese’s full-time (i.e., 130+ hours of service) work in March triggers eligibility for the health plan.

• This also triggers the ACA employer mandate three-month limited non-assessment period.

• Tech-Com will need to offer coverage to Reese within its waiting period, per the plan terms.

• The limited non-assessment period will accommodate a maximum potential waiting period (by not imposing ACA employer mandate penalties) for the months of March, April, and May.

• Tech-Com must offer Reese minimum essential coverage that is affordable and provides minimum value effective no later than June 1 to avoid potential penalties from March through August.

• In the months of September and October, Tech-Com can drop Reese from active coverage (a COBRA qualifying event of loss of coverage caused by reduction of hours) because he does not complete at least 130 hours of service.

• Tech-Com will then need to offer coverage again for November and December to avoid potential penalties because he reaches full-time status (i.e., 130+ hours of service) in those months.

• There is no three-month limited non-assessment period available when Reese increases hours back to full-time status in November because it is available only once per period of employment.

Important Lessons from Example:

• Reese’s situation highlights why the MMM would be a poor measurement method for Tech-Com.

• The monthly hours fluctuations will cause Reese to lose eligibility for active coverage, be offered COBRA, and regain active coverage all in the same plan year. Assuming other Tech-Com employees will have the same issue, this will cause significant administrative headaches.

• Even more troubling is the fact that Tech-Com likely would not know whether Reese would complete 130 hours of service in each calendar month until that month is complete. In a situation such as November, that could present potential ACA employer mandate penalty liability because Reese’s full-time status for that month may be discovered too late to offer coverage for the full month, and the limited non-assessment period would no longer be available at that point.

• The LBMM, on the other hand, would address these concerns by application of the measurement, administrative, and stability periods that provide predictability to an employee’s full-time status.

Why Full-Time Status Matters: Potential ACA Employer Mandate Penalties

The employer mandate creates two potential forms of tax penalty liability under §4980H for ALEs that do not offer coverage to full-time employees meeting certain requirements:

1. IRC §4980H(a)—The “A Penalty”
   The first is the §4980H(a) penalty—frequently referred to as the “A Penalty” or the “Sledge Hammer Penalty.” This penalty applies where the ALE fails to offer minimum essential coverage to at least 95% of its full-time employees in any given calendar month.
   The 2024 A Penalty is $247.50/month ($2,970 annualized) multiplied by all full-time employees (reduced by the first 30). It is triggered by at least one full-time employee who was not offered minimum essential coverage enrolling in subsidized coverage on the Exchange.

2. IRC §4980H(b)—The “B Penalty”
   The second is the §4980H(b) penalty—frequently referred to as the “B Penalty or the “Tack Hammer Penalty.” This penalty applies where the ALE is not subject to the A Penalty (i.e., the ALE offers coverage to at least 95% of full-time employees).
   The B Penalty applies for each full-time employee who was:

• not offered minimum essential coverage,

• offered unaffordable coverage, or

• offered coverage that did not provide minimum value.

Only those full-time employees who enroll in subsidized coverage on the Exchange will trigger the B Penalty. Unlike the A Penalty, the B Penalty is not multiplied by all full-time employees.

The 2024 B Penalty is $371.67/month ($4,460 annualized) per full-time employee receiving subsidized coverage on the Exchange.

• For more details: The Ultra Low 2024 ACA Affordability Percentage

Origin of the Monthly Measurement Method: The Default ACA Approach

The ACA originally did not contain an LBMM. Instead, it required ALEs to look at employees’ full-time status each month to determine whether the employee averaged at least 30 hours of service per week.

To put a finer point on it, IRC §4980H (the statutory basis for the ACA employer mandate) defines full-time status as follows: “The term ‘full-time employee’ means, with respect to any month, an employee who is employed on average at least 30 hours of service per week.” (emphasis added)

The IRS now refers to that default ACA full-time status determination as the MMM. The MMM did not even have a name prior to the final ACA employer mandate regulations—it was just the standard way of determining full-time status under the ACA. Only the LBMM needed a name in the initial ACA guidance because it was created as an alternative to the standard statutory approach (the MMM).

This MMM origin story as the default statutory approach is relevant because ACA reporting vendors sometimes will dismiss the MMM out of hand when employers broach the subject. In many cases, the industry either seems unaware of the MMM or views it as a fringe alternative inconsistent with mainstream best practices—despite it actually being the foundational measurement method.

Summary: Pros/Cons of the Monthly Measurement Method

As the famous quote from economics goes, there are no solutions; there are only trade-offs. Unfortunately, the ACA reporting industry (that largely drives employer direction in this area) rarely discusses the relevant trade-offs in this context. The decision-making process of carefully considering and adopting the appropriate employer mandate measurement method for an employer’s specific population and circumstances has become something of a lost art.

Furthermore, employers interested in the MMM often struggle with vendors to apply the MMM as their measurement method of choice. Many ACA reporting vendors treat the LBMM as the only viable measurement method, and they often dismiss the MMM as an unusual and obscure alternative—despite it actually being best thought of as the default approach to determine full-time status. In reality, both the MMM and LBMM are legitimate and reasonable, depending on the employer’s workforce characteristics.

Accordingly, the following is a high-level summary of the main considerations for employers when determining whether to utilize the MMM:

Advantages of the MMM

• Administrative simplicity for workforces with generally stable hours

• Avoids the significantly more complex (and typically vendor-driven) scheme associated with the measurement, administrative, and stability periods that are exclusive the LBMM

• Employees lose full-time status immediately upon reducing hours below 130 hours of service in a month (as opposed to remaining full-time for the duration of the stability period under the LBMM)

• Limited non-assessment period available for the first time an employee works full-time in a month

Disadvantages of the MMM

• No predictability as to full-time/part-time status for the plan year because it is determined monthly

• Not practical for workforces that often fluctuate around 130 hours of service per calendar month

• Employers will not know an employee’s hours of service completed until the month ends—and at that point it is too late to offer coverage for that month if the employee reached 130+ hours

• The three-month limited non-assessment period is available only once per period of employment

• Unlike the LBMM, no initial measurement/administrative period for new variable/seasonal/part-time hires to delay offering coverage for an extended 13+ month limited non-assessment period

Employers that Should Consider the MMM

• Employers with exclusively (or nearly exclusively) full-time workforce where employees’ status as full-time or part-time is always (or almost always) clearly known for each month

• Employers who set eligibility below 30 hours of service per week (e.g., 20 hours/week) because the ACA full-time status determination is not tied to plan eligibility

• Employers without a significant number of new variable/seasonal/part-time new hires (making the 13+ month extended limited non-assessment period available under the LBMM less relevant)

• Employers without a significant number of ongoing employees whose hours may fluctuate above and below 130 hours of service per month

Relevant Cites:

Treas. Reg. §54.4980H-1(a):

(21) Full-time employee.

(i) In general. The term full-time employee means, with respect to a calendar month, an employee who is employed an average of at least 30 hours of service per week with an employer. For rules on the determination of whether an employee is a full-time employee, including a description of the look-back measurement method and the monthly measurement method, see § 54.4980H-3…

(ii) Monthly equivalency. Except as otherwise provided in paragraph (a)(21)(iii) of this section, 130 hours of service in a calendar month is treated as the monthly equivalent of at least 30 hours of service per week, and this 130 hours of service monthly equivalency applies for both the look-back measurement method and the monthly measurement method for determining full-time employee status.

Treas. Reg. §54.4980H-3(c):

(c) Monthly measurement method.

(1) In general. Under the monthly measurement method, an applicable large employer member determines each employee's status as a full-time employee by counting the employee's hours of service for each calendar month. See §54.4980H-1(a)(21) for the definition of full-time employee…

(2) Employee first otherwise eligible for an offer of coverage. The rule in this paragraph (c)(2) applies with respect to an employee who, in a calendar month, first becomes otherwise eligible to be offered coverage under a group health plan of an employer using the monthly measurement method with respect to that employee. For purposes of this paragraph (c)(2), an employee is otherwise eligible to be offered coverage under a group health plan for a calendar month if, pursuant to the terms of the plan as in effect for that calendar month, the employee meets all conditions to be offered coverage under the plan for that calendar month, other than the completion of a waiting period, within the meaning of §54.9801-2, and an employee is first otherwise eligible if the employee has not previously been eligible or otherwise eligible for an offer of coverage under a group health plan of the employer during the employee's period of employment. An employer is not subject to an assessable payment under section 4980H(a) with respect to an employee for each calendar month during the period of three full calendar months beginning with the first full calendar month in which the employee is otherwise eligible for an offer of coverage under a group health plan of the employer, provided that the employee is offered coverage no later than the first day of the first calendar month immediately following the three-month period if the employee is still employed on that day. If the coverage for which the employee is otherwise eligible during the three-month period, and which the employee actually is offered on the day following that three-month period if still employed, provides minimum value, the employer also will not be subject to an assessable payment under section 4980H(b) with respect to that employee for the three-month period. This rule cannot apply more than once per period of employment of an employee. If an employee terminates employment and returns under circumstances that would constitute a rehire as set forth in paragraph (c)(4) of this section, the rule in this paragraph (c)(2) may apply again.

Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship. Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).