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How to Determine If An Employer Is An Applicable Large Employer

March 18, 2020


At the beginning of the decision tree for any Affordable Care Act (ACA) analysis is whether the employer is an Applicable Large Employer (ALE). Beginning in 2016 and each year after, an employer has one way to determine its ALE status. An ALE, which is defined in the text of the ACA, is an employer who averaged at least 50 full-time employees (including full-time equivalent employees (FTEs)) on business days during the preceding calendar year. If an employer is not an ALE, it is not subject to the employer mandate penalties (also known as the IRC section 4980H(a) and (b) penalties) and typically does not have reporting obligations. When calculating an employer’s ALE status, the controlled group rules apply.

Before discussing how an employer calculates whether it is an ALE, it is important to point out that an employer cannot use the monthly measurement method or the look-back measurement method when determining its ALE status. An employer must calculate its ALE status using the actual hours of service accumulated by its workforce in the preceding calendar year. However, an employer does not need to include the hours of service of leased employees, sole proprietors, partners, 2-percent S corporation shareholders, and workers described in IRC section 3508 (real estate agents and certain sales people) when determining its ALE status as those individuals do not count as employees for ACA purposes.

There are two variables an employer uses to determine its ALE status. First, an employer must determine its number of full-time employees. A full-time employee is an employee who accumulates 30 or more hours of service per week. The final regulations allow an employer to use 130 hours of service in a calendar month (a calendar month is defined by the final regulations as one of the 12 months in the calendar year) as the monthly equivalent to 30 hours of service per week. If an employee meets the definition of a full-time employee for a calendar month, that employee will count as one employee for that calendar month when determining an employer’s ALE status.

Next, an employer must determine its number of full-time equivalent employees (FTEs) for each calendar month. To determine the number of FTEs for a calendar month, all of the hours of service not accumulated by a full-time employee in that calendar month are aggregated together. However, when aggregating the employees’ hours of service no single employee can have more than 120 hours of service included for any calendar month. Using these two rules an employer sums up the hours of service and divides by 120 to give the employer its FTE number for the calendar month. An employer is allowed to round to the nearest hundredth when determining its FTE number for a calendar month. For example, if the FTE number is 12.457, an employer can round its FTE number to 12.46 for the calendar month.

The employer sums up its number of full-time employees and FTEs for each calendar month in the preceding year and divides by 12 to determine its ALE status for the current year. If the equation does not produce a whole number, an employer rounds down to the nearest whole number. For example, if an employer’s ALE status number equals 49.999, the employer can round down to 49.

The final regulations go into great detail about how an employer determines its ALE status. A simpler approach for employers involves two simple rules:

  1. sum up the hours of service accumulated by an employer’s workforce for the calendar month; and

  2. never include more than 120 hours of service in any calendar month for an employee.

Apply the two rules and divide the number by 120 to get an employer’s ALE number for a calendar month. After an employer does this for all 12 calendar months in a calendar year sum up the total and divide by 12. If an employer’s number is 50 or more, it is an ALE unless the seasonal worker exception applies.

A seasonal worker is an employee who performs services on a seasonal basis such as a retail worker during the holiday season or an agricultural worker used for the harvest. If an employer has seasonal workers, the employer may be able to avoid being classified as an ALE by using the seasonal worker exception. For the seasonal worker exception to apply an employer must satisfy two requirements:

  1. the employer must not be in excess of 50 full-time employees (including FTEs) for more than 120 days in the preceding calendar year; and

  2. the employees employed during the period that is no more than 120 days who cause the employer to exceed 50 full-time employees (including FTEs) must be seasonal workers.

If these conditions are satisfied, the employer will not be an ALE despite averaging 50 or more full-time employees (including FTEs) throughout the preceding calendar year. An employer’s ALE calculation is absolutely vital to an employer avoiding large unexpected fines.

The regulations provide an employer relief in the first year, and only the first year, an employer becomes an ALE. If an employer did not offer an employee coverage at any time during the preceding calendar year, the employer will not be subject to a section 4980H(a) penalty (or a section 4980H(b) penalty so long as the coverage offered provides minimum value) for the months of January, February, or March with respect to those employees so long as those employees are offered coverage by April 1. The provision is intended to allow an employer who learns it is an ALE for the first time late in the calendar year to have three months, January, February, and March, to select a plan to cover its full-time employees who were not offered coverage in the previous calendar year. If the employer does not offer coverage to these employees by April 1, the employees will count as not being offered coverage for the months of January, February, and March in addition to any other calendar month for which coverage is not offered.

An employer who is near the ALE threshold number of 50 should continue to monitor its ALE status each year. However, and critically, it is important for an employer to realize that an employer's ALE status is based on the prior year's hours of service. An employer will never have its ALE status change midyear. Instead, an employer will make its ALE determination at the very end of December or the first few days of January. Miscalculating an employer’s ALE status will likely lead to large, possibly business crippling, penalties and thus great care should be taken when making the calculation. If you would like to learn more about our efficient, user friendly platform and interface, please contact us. To date, we still do not have a client who has been assessed a penalty under IRC sections 4980H, 6721, or 6722. We take great pride in assisting our clients report accurately and timely on our interactive platform which allows users to update their ACA information throughout the year to see the Forms 1095-C progress. Keeping up with ACA reporting on a monthly basis makes the whole process more manageable when it is finally time to report to the IRS!


About the author – Ryan Moulder serves as General Counsel at Accord Systems, LLC and is a Partner at Health Care Attorneys P.C. Ryan received his LL.M. from Georgetown University Law Center and his J.D. from Saint Louis University School of Law. He has distinguished himself as a leader in the Affordable Care Act arena and has written and spoken on a variety of ACA topics as it relates to compliance for companies.


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