Under the Affordable Care Act, applicable large employers (ALEs) must offer minimum affordable health coverage to their full-time employees, or pay a penalty. Find out if you qualify as an ALE and what you must do to comply.
The Affordable Care Act’s (ACA’s) employer mandate requires businesses with 50 or more full-time equivalent (FTE) employees to either:
- Offer minimum affordable health coverage to their full-time employees or
- Pay a penalty if any full-time employee receives a premium tax credit for purchasing individual coverage on the health insurance marketplace
The employer mandate is also known as the “pay-or-play” provision because it requires you to comply or pay a penalty. Whether you are subject to the pay-or-play provision depends on your status as an applicable large employer (ALE).
In this article, we’ll explain who qualifies as an ALE and what you must do to avoid ACA penalties.
Determining your ALE status
You are considered an ALE if you averaged 50 or more full-time (FT) and FTE employees during the prior calendar year.
- For each month in the prior calendar year, count the number of employees who had 120 hours of service or more for that month or who are classified as FT employees.
- Count the hours of service of all other employees for the month and divide by 120.
- Add up the FT and FTE employees.
- Do the same for all 12 months and divide by 12.
- Round down to determine ALE status.
(Sample numbers have been inserted into the table below for clarity; delete these before doing your own calculations.)
| Row # | FTE Formula | Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | TOTAL |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 1 | EEs ≥ 120 hrs | 38 | 34 | 39 | 37 | 43 | 43 | 44 | 46 | 45 | 48 | 53 | 54 | |
| 2 | EEs < 120 hrs | 700 | 878 | 788 | 976 | 685 | 814 | 860 | 640 | 812 | 710 | 574 | 671 | |
| 3 | Divide Row 2 by 120 | 5.833 | 7.317 | 6.567 | 8.133 | 5.708 | 6.783 | 7.1667 | 5.33 | 6.767 | 5.9167 | 4.782 | 5.592 | |
| 4 | Add Rows 1 & 3 together for FTE Count | 43.833 | 41.317 | 45.567 | 45.133 | 48.708 | 49.783 | 51.167 | 51.33 | 51.767 | 53.917 | 57.782 | 59.592 | 599.9 |
In the example above, 599.9 divided by 12 is 49.99, which rounds down to 49. The employer is not an ALE.
If you fall just below the 50 FTE threshold, you must watch your growth. A small increase in just one employee’s hours can tip you into ALE status. This can significantly increase your compliance burden under the pay-or-play mandate.
Special rules for ALE determinations
Controlled and affiliated groups. Employers under common ownership or control are combined when determining ALE status. Examples include controlled groups and affiliated service groups under IRC Sections 414(b), (c), (m) or (o).
- If one entity within the group qualifies as an ALE, all entities are treated as ALE members. Each is subject to the pay-or-play provision.
- Employers must aggregate employees across all group entities when performing the ALE calculation.
Seasonal workers. If your workforce exceeds 50 employees for 120 days or fewer in the prior calendar year, you may not be considered an ALE, as long as the employees exceeding the threshold were all seasonal workers.
A four-year preview for ALEs
Year 1: Determine ALE status. Calculate your prior year’s average of FT and FTE employees using the IRS’ ALE calculation above. If the average is 50 or more, you are an ALE (unless you qualify for an exemption). As an ALE, your compliance obligations under the pay-or-play mandate continue on a four-year cycle.
If you are not an ALE, then the pay-or-play provision does not apply. However, if you sponsor a self-insured plan, you should familiarize yourself with the ACA’s employer mandate reporting obligations for non-ALEs.
Year 2: Make an offer of coverage. You must offer minimum affordable coverage to all benefit-eligible FT and FTE employees by April 1 of year two to avoid offer-of-coverage penalties. This gives you three full months after determining you are an ALE to shop for coverage, perform a risk analysis and conduct your open enrollment.
Year 3: Report on your offer of coverage. Regardless of whether you offer coverage in year two, you must file Forms 1094-C and 1095-C with the IRS on time. You must also furnish copies to employees based on your offer of coverage in year two.
Year 4 (or later): Defend against penalties. You may need to respond to IRS-proposed penalty assessments if an employee triggers a penalty by going to the health insurance marketplace and getting subsidized coverage.
Seek help as needed
ALE calculations can quickly become complicated, and the penalties for getting it wrong can be steep. Reach out to our Employee Benefits team and we’ll be happy to help.
This content is for informational purposes only and not for the purpose of providing professional, financial, medical or legal advice. You should contact your licensed professional to obtain advice with respect to any particular issue or problem. Please refer to your policy contract for any specific information or questions on applicability of coverage.
Please note coverage can not be bound or a claim reported without written acknowledgment from a OneGroup Representative.
This content is for informational purposes only and not for the purpose of providing professional, financial, medical or legal advice. You should contact your licensed professional to obtain advice with respect to any particular issue or problem.
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