What is an FTE and How Do You Calculate Full-Time Equivalency?
One of the most common yet often perplexing compliance concerns HR teams encounter is calculating FTE, or full-time equivalency. From what it is and why it's used to how to calculate the number, find out everything you need to know about how to calculate FTEs.
What Does FTE Stand for and Why Do Employers Use It?
Full-time equivalency (FTE) is a metric that quantifies the number of full-time employees at an organization based on hours worked, and quantifies how many part-time employees add up to a full-time employee. For example, if your organization’s work week is 40 hours, two part-time employees who each work 20 hours in a week would equal one FTE.
In short, full-time equivalency (FTE) represents an employee’s total hours worked divided by the number of compensable hours in a full-time schedule during a fiscal year.
Companies find FTE useful for a few main reasons, including:
- Determining Employee Workload: The FTE proves a reliable indicator for how over or underworked a team member is during a given period of time. For example, if an organization employs a worker who has been hired to work for approximately 60 hours and they work all of those 60 hours, they will be at 1.0 FTE. However, if that same employee is working 90-hour weeks, their FTE will be 1.5.
- Tracking Organization Costs: If a company bills clients, or pays out overtime, identifying teammates’ full-time equivalency helps identify and track organizational costs.
- Understanding Part-Time Contributions: If your team relies on part-time employees, understanding their contributions as a reflection of full-time equivalency helps you calculate valuable metrics, including the profits they generate.
- Determining ACA Obligations: Employers with more than 50 full-time employees or full-time equivalent workers—also known as applicable large employers (ALE)—must comply with the various rules and regulations established in the Affordable Care Act (ACA), including the employer shared responsibility provisions and special reporting provisions like Form 1095-C.
What Constitutes a Full-Time Employee under the Affordable Care Act (ACA)?
The Affordable Care Act (ACA) requires every employer with 50 or more full-time employees working at least 30 hours per week to offer health insurance to its employees.
These applicable large employers (ALE) can determine their status by calculating their number of full-time equivalent (FTE) employees per month, calculating the number of hours worked by non-FTEs per month, adding the subtotals together, and dividing that number by 12.
- If the total is less than 50, the employer isn’t an ALE.
- If the total is at least 50, the employer is an ALE and is required to offer health insurance to all qualifying employees.
Another key provision in the ACA states that all ALEs must offer a health insurance plan that qualifies as minimum essential coverage (MEC), otherwise known as the employer mandate.
One of the ACA’s regulations stipulates that the lowest-cost, employee-only health plan coverage option offered by an ALE—also known as minimum essential coverage (MEC)—doesn’t exceed a certain percentage of an employee’s household income. This rate is known as the affordability threshold and is typically adjusted every year to account for changes in market conditions, healthcare premium growth, and the American economy.
The affordability threshold for employer-sponsored health plans in 2021 is 9.83%, which is a small increase from the rate of 9.78% in 2020.
The government tracks this information with Form 1095-C, which is filled out for all eligible employees (even if they don’t participate in the health plan). Failure to file these forms could result in a fine.
Differences Between Full-Time Equivalent Employees and Full-Time Employees
FTE is often mistaken as an acronym for "full-time employee," but there are key differences between the two:
- The ACA establishes that full-time employees are the number of employees who, for a calendar month, averages at least 30 hours per week or 130 hours of work per month. For example, if Jane works 35 hours a week, or 140 hours in a month, she would be considered a full-time employee.
- On the other hand, a full-time equivalent is one or more employees whose work hours combine together to total at least 30 hours per week or 130 hours per month. This includes employees who may be part-time workers.
How Do Employers Calculate FTEs?
To calculate the full-time equivalents unit of measurement at an organization, employers should total the number of hours paid during a given period divided by the number of working hours in that period:
Hours paid in given period / working hours in that period = FTE.
For example, an organization may run on a typical 40-hour workweek and employs four people. Jane works 40 hours per week, Brian works 30 hours a week, and Travis and Katie each work 15 hours a week. To calculate the number of FTEs, the employer would:
Add the total number of hours worked/paid ...
40 + 30 + 15 + 15 = 100
Then divide by the number of hours in the work period ...
100 / 40 = 2.5
In this example, the organization would have 2.5 FTEs.
Additional FTE Frequently Asked Questions (FAQs)
Still have questions about FTE? Review a few of the most common topics related to full-time equivalency status and calculations:
What About Seasonal Workers and FTE Calculations?
Seasonal workers do not count toward an organization's FTE total. A seasonal worker is simply defined as employees who perform labor or service on a seasonal basis, such as retail workers during the holiday season.
Do Unpaid Interns Count Toward FTE Status?
No, unpaid interns do not count toward your FTE total. However, if you pay your interns, you will need to include them in your calculations.
Can Owners of Small Businesses Be Counted as an Employee?
No, people who own the organization or company cannot be counted in the FTE and average annual wage calculation.
How Do Employers Calculate Hours of Service?
According to the IRS, an employee's hours of service for a year include all the hours for which the employee is paid or entitled to payment for the performance of duties for the employer during the tax year in question. This includes paid vacation, holiday, and sick leave, in addition to other paid leaves.
To learn more about determining FTE, review the IRS's comprehensive FAQ.
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