A hybrid algorithm, which couples rigorous time-domain electromagnetic analysis with rate equations representing a multi-level atomic system, is presented in this paper. It is explicitly shown that the rate equations can be decoupled from Maxwell curl equations, provided that the evolution of both systems is ongoing on different time scales. Consequently, the proposed algorithm allows substantially speeding up electromagnetic analysis of absorbing and lasing materials with no deteriorating impact on accuracy. Several computational examples, pointing out major properties of the proposed hybrid FDTD algorithms, are presented in this paper.