How are benefits impacted when an employee's hours are reduced?

​Whether  a reduction in hours impacts benefits eligibility is generally governed by plan documents and employer policy, though a few regulations come into play.

Most benefits plans will detail the eligibility requirements to participate in the plan, including employee classification (full-time, part-time, regular, temporary, etc.) and/or numbers of hours worked per week or month. Once these classifications change for a covered employee, the employee's benefit eligibility will need to be reassessed.

Short-term, temporary changes usually will not change an employee classification. For example, if a full-time employee goes on vacation for three weeks, most employers would not change the employee's full-time status. However, if an employee reduces his or her hours during the school year to accommodate a class schedule, employers may want to reclassify the employee to part time due to the length of the arrangement. It boils down to how the employer defines the classifications and how they are used in the eligibility requirements of each plan.

Where plan eligibility requirements are vague, consider adding clarification as to when eligibility would be lost. For example, in a policy where employees who work 20 or more hours per week are eligible for paid holidays, employers may want to make clear that working less than 20 hours per week for more than six consecutive weeks (or another specified period) will result in the loss of eligibility for holiday pay.

The rules are different for health insurance benefits, as some federal laws require an employer to maintain health insurance benefits for an employee even when their hours are reduced.

The Family and Medical Leave Act (FMLA) protects an employee's group health coverage during an FMLA covered absence or intermittent/reduced schedule leave. State family and medical leave laws include similar requirements.

The Patient Protection and Affordable Care Act requires large employers to offer employees who work 30 or more hours per week health insurance benefits to avoid employer penalties, and there are different options for employers to measure the 30-hours-per-week threshold when an employee's hours vary. Depending upon the length of the measurement period used and the corresponding stability period, eligibility may not be lost for some time. See How to Use the Look-Back Measurement Method to Determine Full-Time Status Under the Affordable Care Act for an example. Small employers have more discretion in defining coverage eligibility for employees working less than full time and should ensure that the health insurance plan documents are clear regarding benefit eligibility.

There are also retirement plan eligibility rules for employees working less than full time. For plan years beginning after Dec. 31, 2023, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 requires employers to allow long-term part-time workers to make elective deferrals to the employer-sponsored 401(k) plan, except in the case of collectively bargained plans. Eligible employees are those who have completed at least 500 hours of service each year for three consecutive years and are age 21 or older. Years of service prior to 2021 do not have to be counted; however, employers may choose to have more generous eligibility rules. The 2023 Consolidated Appropriations Act (also known as the Secure Act 2.0) reduces the three consecutive years of service to two years for plan years beginning after Dec. 31, 2024.

Benefits eligibility when employees' hours are reduced can be regulated by both internal policy and law, and employers are encouraged to consult with their benefits administrator or broker as well as legal counsel when defining benefits eligibility in their policies and insurance plan documents.