Whether you need to count employees who are out on disability leave will depend on your particular facts and circumstances. To determine who is a full-time employee, Treasury Department regulations look to the number of hours for which an employee is paid (or is entitled to payment) for services performed as well as the number of hours for which an employee is paid (or is entitled to payment) when no duties are performed due to certain qualifying absences, such as incapacity and disability.

Termination. IRS guidance makes clear that no hours of service are counted once a worker's employment is terminated. So, the first question is whether and when your employee on disability leave terminated employment. You do not need to count his or her hours, even if he or she continues to receive disability benefits once employment has ended.

Source of payments. If a worker’s employment has not been terminated, you need to determine the source of the payments that the employee is receiving while on disability leave and whether your company, as the employer, contributed to that arrangement either directly or indirectly. If the employee is receiving disability benefits under an arrangement for which he or she paid the premium entirely with after-tax dollars (such that the benefits are exempt from income taxes under Internal Revenue Code Sec. 104(a)(3)), then the employer is treated as not having contributed to the arrangement and the employee’s hours that are paid for under that arrangement do not need to be counted.

If your company did pay all or a portion of the disability premiums or allowed an employee to use pre-tax dollars to pay for his or her disability premiums, then unless another exception applies, you will need to count his or her hours that are paid for under that arrangement as hours of service, and he or she may be considered a full-time employee under the ACA.

Source: IRS Notice 2015-87, I.R.B. 2015-52, December 28, 2015.