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How to calculate full-time equivalent employees
To calculate full-time equivalent employees for a month, add the hours of service of every employee who is not full-time, counting no more than 120 hours for any one person, and divide the total by 120. Add that to your full-time count, repeat for all twelve months of the prior calendar year, average, and round down.
Full-time equivalents exist only to decide whether an employer is an applicable large employer. They are never people who must be offered coverage.
Key takeaways
- The divisor is 120. No single non-full-time employee contributes more than 120 hours in a month.
- Full-time is 130 hours a month. Or 30 hours a week — a separate test from the 120-hour conversion.
- Hours of service is broader than hours worked. It includes paid vacation, holiday, illness, incapacity, layoff, jury duty, military duty and leave of absence.
- Month by month, then average. Twelve monthly totals across the prior calendar year, divided by twelve.
- Round down. An employer averaging 49.9 is not an applicable large employer.
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When this calculation actually matters
- Identify every employee who was not full-time for the month — that is, under 30 hours per week and under 130 hours for the month.
- Total their hours of service for that month, counting a maximum of 120 hours for any individual.
- Divide the total by 120. That is the month’s full-time equivalent count.
- Add the month’s full-time employee count to its full-time equivalent count.
- Do this for each of the twelve months, sum the monthly totals, divide by 12, and round down.
Authoritative references
Authorities used for current calculations
- Determining if an Employer is an Applicable Large Employer — Internal Revenue ServiceSupports: The two-step FTE method, the 120-hour cap and divisor, and the rounding ruleVerified 26 July 2026
Statutes and regulations
- Definitions, including hour of service, 26 CFR § 54.4980H-1(a)(24) — Electronic Code of Federal RegulationsSupports: What counts as an hour of service, the paid non-working periods included, and the three exclusionsVerified 26 July 2026
Explanatory guidance
- Questions and Answers on Employer Shared Responsibility Provisions — Internal Revenue ServiceSupports: General employer shared responsibility guidanceVerified 26 July 2026
Published 26 July 2026. Last reviewed 26 July 2026. Next review on publication of revised IRS ALE guidance or an amendment to 26 CFR § 54.4980H-1. 4J Insurance is an independent commercial insurance brokerage, powered by PGI, based in Frisco, Texas. This page explains a counting method. It is not legal advice, tax advice, actuarial advice, or an individualized compliance determination.
The details that change the answer
What counts as an hour of service
This is where most in-house calculations go wrong. An hour of service is not the same as an hour worked. Under 26 CFR § 54.4980H-1(a)(24), an hour of service is each hour for which an employee is paid, or entitled to payment, for the performance of duties — plus each hour for which the employee is paid, or entitled to payment, for a period during which no duties are performed due to vacation, holiday, illness, incapacity including disability, layoff, jury duty, military duty or leave of absence.
An employer that exports only worked hours from payroll will undercount. Paid time off is included.
Hours that are specifically excluded
- Hours performed as a bona fide volunteer
- Hours performed under a Federal Work-Study Program or a substantially similar state program
- Hours for which the compensation is income from sources outside the United States
A worked example
A retailer has 38 full-time employees in March. It also employs 22 staff who are not full-time: twenty worked 90 hours each, and two worked 125 hours each.
All 22 are below the 130-hour monthly threshold, so none of them is full-time for March. The two at 125 hours are capped at 120 for the equivalent calculation.
Part-time hours counted: (20 × 90) + (2 × 120) = 1,800 + 240 = 2,040. Full-time equivalents: 2,040 ÷ 120 = 17. March total: 38 + 17 = 55.
Had those two employees worked 140 hours instead, they would have crossed 130 and been counted as full-time employees for March — one each, not converted into equivalents at all.
The interaction people miss
An employee at 130 or more hours in a month is full-time for that month and is counted at one, not converted into equivalents. The 120-hour cap applies only to employees who are genuinely not full-time. Running the cap across everyone, including employees who cleared 130 hours, understates the count and is the single most common source of a wrong answer.
Common mistakes
- Exporting worked hours only, omitting paid vacation, holiday and sick time
- Applying the 120-hour cap to employees who actually met the 130-hour full-time threshold
- Using 40 hours per week as the full-time standard instead of 30
- Averaging the full year in one step instead of computing each month and then averaging
- Rounding the final average up
- Excluding employees of commonly owned entities that must be aggregated
What to do with the result
- Below 50: keep the workpapers. The calculation is the evidence if the determination is ever questioned.
- At or near 50: test all commonly owned entities together before concluding, and re-run it every year.
- At or above 50: you are an ALE. Confirm the offer reaches 95% of full-time employees and dependents, that it is affordable and minimum value, and that Forms 1094-C and 1095-C are filed.
Related resources
Continue learning
- What is an applicable large employer?
- ACA affordability and the safe harbors
- ACA employer mandate penalties
- Monthly vs look-back measurement methods
Use a tool
Run the calculation — the free tool performs this count and aggregates commonly owned businesses
Discuss the issue
Request an ACA compliance review — we rebuild the count from payroll hours of service and check it against your offer
Full-time equivalent calculation FAQ
Why is the divisor 120 when full-time is 130 hours a month?
They are two different tests. 130 hours in a month is the threshold that makes an individual employee full-time in their own right. 120 is the conversion factor the regulation specifies for turning aggregate part-time hours into equivalents, and it is also the maximum number of hours any one non-full-time employee can contribute to that aggregate.
What counts as an hour of service?
Each hour for which an employee is paid or entitled to payment for performing duties, plus each hour for which they are paid or entitled to payment for a period when no duties were performed due to vacation, holiday, illness, incapacity including disability, layoff, jury duty, military duty or leave of absence. Paid time off counts.
Which hours are excluded?
Hours performed as a bona fide volunteer, hours under a Federal Work-Study Program or a substantially similar state program, and hours for which the compensation is income from sources outside the United States.
Do full-time equivalent employees have to be offered coverage?
No. Full-time equivalents are a counting construct used only to determine applicable large employer status. The offer obligation applies to actual full-time employees and their dependents, not to the equivalents produced by aggregating part-time hours.
Do employees of related companies count?
Generally yes. Companies with a common owner or otherwise related under Internal Revenue Code section 414 are combined for the determination. Running the calculation on one entity in isolation can produce a materially wrong answer.
The count is only useful if the inputs are right
Hours of service are broader than hours worked, and most payroll exports do not separate them for you.