General Definition of Hours of Service
Section 4980H(c)(4)(B) provides that the Secretary of the Treasury, in consultation with the Secretary of Labor, will prescribe such regulations, rules and guidance as may be necessary to determine the hours of service of an employee, including rules for the application of section 4980H to employees who are not compensated on an hourly basis. In consultation with the Secretary of Labor, the Treasury Department and the IRS formulated rules set forth in the proposed regulations that generally were based on the definition of the term hour of service for purposes of the rules related to the crediting of hours of service under a qualified retirement plan (see 29 CFR 2530.200b-2(a)), with certain modifications.
Specifically, the proposed regulations define an hour of service to mean each hour for which an employee is paid, or entitled to payment, for the performance of duties for the employer, and each hour for which an employee is paid, or entitled to payment by the employer for a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence (as defined in 29 CFR 2530.200b-2(a)).
For employees paid on an hourly basis, an employer is required to calculate actual hours of service from records of hours worked and hours for which payment is made or due. For employees paid on a non-hourly basis (such as salaried employees), an employer may calculate the actual hours of service using the same method as for hourly employees, or use a days-worked equivalency crediting the employee with eight hours of service for each day for which the employee would be required to be credited with at least one hour of service, or a weeks-worked equivalency whereby an employee would be credited with 40 hours of service for each week for which the employee would be required to be credited with at least one hour of service. The proposed regulations prohibit use of these equivalencies, however, in circumstances in which their use would result in a substantial understatement of an employee’s hours of service in a manner that would cause that employee not to be treated as a full-time employee.
Comments were received on the days-worked and weeks-worked equivalency methods. Commenters requested that the number of hours of service credited under the equivalency methods be increased from eight hours per day or 40 hours per week to 10 hours per day or 45 hours per week, consistent with equivalency methods contained in regulations issued by DOL. See 29 CFR 2530.200b-3(e). The higher equivalency amounts under the DOL regulations are intended to provide an expansive standard for the number of hours an employee is credited with for purposes of eligibility, vesting and accrual of benefits in a pension plan. In the context of section 4980H, an equivalency of eight hours per day or 40 hours per week is more appropriate.
Commenters requested clarification of the circumstances under which an employee must be credited with service under the equivalency methods. Specifically, commenters asked whether an employee must have actually worked one hour of service in a day or week to be credited with eight or 40 hours of service respectively for that period. The equivalency methods contained in the proposed regulations provide that hours must be credited for any day or week in which the employee would otherwise be required to be credited with one hour of service if treated as an hourly employee. As described previously in this section VI.A, under the service crediting method applicable to hourly employees, an hourly employee must be credited with hours of service for certain hours in which no services are performed but with respect to which payment is made or owed by the employer (such as certain hours of paid leave). Accordingly, the equivalency methods do not require that an employee have actually worked an hour of service in a day or week to be credited with eight or 40 hours of service with respect to that day or week. This approach is the same as the equivalency rule for crediting hours of service under an employee pension benefit plan under DOL regulations at 29 CFR 2530.200b-3(e).
The preamble to the proposed regulations states that an employer may change the method of calculating non-hourly employees’ hours of service for each calendar year. At one commenter’s request, this rule has been added to the text of the final regulations. As set forth in the proposed and final regulations, an employer is not required to use the same method of calculating a non-hourly employee’s hours of service for all non-hourly employees, and may apply different methods of calculating a non-hourly employee’s hours of service for different categories of non-hourly employees, provided that the categories are reasonable and consistently applied. An employer may change the method of calculating a non-hourly employee’s hours of service for one or more categories of non-hourly employees for each calendar year as well.
One commenter asked whether an employer is required to calculate hours of service using all three hours of service calculation methods provided for non-hourly employees (actual hours and two equivalencies), and if an employer is required to classify the employee as a full-time employee if the employee would have such status under any of the methods. The regulations indicate that the equivalency methods are optional, and that an employer choosing to use equivalencies may determine hours of service using one of the equivalency methods. Accordingly, employers are not required to use more than one method of determining hours of service for any particular employee.
Commenters requested that the equivalency methods be expanded to include employees who are compensated on an hourly basis. Because employers are required to maintain records of hours worked in the case of employees who are compensated on an hourly basis, and because use of the equivalency methods could in some cases understate or overstate the number of hours actually worked by such employees, the final regulations do not adopt this suggestion.
One commenter requested that the anti-abuse rule prohibiting the use of an equivalency method if the result is to substantially understate an employee’s hours of service in a manner that would cause the employee not to be treated as Start Printed Page 8550a full-time employee be expanded to also prohibit the use of an equivalency method if the result is to understate hours of service for a substantial number of employees (even if no given employee’s hours of service are understated substantially and even if the understatement would not cause the employee to not be treated as a full-time employee). This expanded rule could affect the calculation of FTEs as part of the applicable large employer determination. For example, if an employer had 100 non-hourly employees who each worked two days per week for 10 hours each day, the employer could not use the days-worked equivalency because that would result in 400 fewer hours of service being included in the FTE calculation for each week, even though the understatement would not affect the employees’ treatment as full-time employees (because these employees are not full-time employees, regardless of the use of equivalencies). The final regulations adopt this suggestion.