Equivalencies Cannot Understate
For non-hourly employees the days-worked and weeks-worked shortcuts are not allowed if they substantially understate hours. Use actual hours for any group where they would.
The three things to know.
The Three Methods
Actual hours, a days-worked equivalency of eight hours for each day with any hour of service, or a weeks-worked equivalency of 40 hours for each week with any hour of service.
Where Understatement Happens
An employee who works three 10-hour days a week is credited with 24 hours under a days-worked count, which would wrongly drop that person below 30. Use actual hours for that group.
Applied by Classification
A method can differ between reasonable classifications of non-hourly employees, but it must be applied consistently within each and cannot be used to avoid full-time status.
Sources: 26 CFR § 54.4980H-3. General information, not legal advice.
A worked example.
Three 10-Hour Days
A clinic’s salaried technician works three 10-hour days every week, 30 hours in all. The clinic uses a days-worked equivalency of eight hours for each day with any hour of service.
What the Rule Produces
The equivalency credits 24 hours a week, so the technician would wrongly appear part-time. Because that substantially understates her hours, the clinic must use actual hours for this group, which show exactly 30 hours a week.
Four steps to apply it.
1. Inventory the groups
List non-hourly classifications.
2. Compare to actuals
Test each equivalency against actual hours.
3. Switch where needed
Use actual hours where the equivalency understates.
4. Document the choice
Record the method for each classification.
Where it goes wrong. Adopting one equivalency for everyone without testing it.
The questions that come up next.
Can we use weeks-worked for everyone?
Only where it does not substantially understate hours. A week with a single hour of service credits 40 hours, which can overstate. Test the method against actual hours before adopting it.
Who decides whether it understates?
The employer, and the IRS reviews it on audit. Keep the comparison you used to justify the method.
What about hourly staff?
Hourly employees are counted from actual hours worked and paid, with no equivalency.
Can we use different methods for different groups?
Yes, for reasonable classifications of non-hourly employees, applied consistently within each.
What if actual hours are not tracked?
Start tracking them for groups where equivalencies understate. Ask counsel about interim treatment.
Plan-specific questions belong with ERISA counsel, and we will bring them in.
Related pages on the look-back method.
The 13-Week Rehire Rule
An employee returning after at least 13 consecutive weeks without an hour of service can be treated as a new hire.
Special Unpaid Leave
For continuing employees, special unpaid leave such as FMLA, USERRA and jury duty leave is either excluded from the average or credited at the employee’s average weekly rate.
The Full Look-Back Guide
Every rule, example and source behind this page, in one place.
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