Applicable Large Employer (ALE): How to Calculate it?

Employers often offer various fringe benefits to their employees, apart from their annual wages, to make the compensation packages more attractive. Although many of these fringe benefits may depend on the employer, the Affordable Care Act (ACA) sets out federal regulations for certain employers to follow. One such regulation is the employer mandate, which requires Applicable Large Employers (ALEs) to offer their employees affordable health insurance.

Employers often find complying with this mandate challenging, from finding an affordable group health plan that is flexible to meet every employee’s healthcare needs to the ACA reporting requirements. However, failing to offer such group health insurance can attract hefty penalties from the IRS.

Let’s explore the different aspects of ALEs, including definitions, calculations, and tax reporting rules.

What is an Applicable Large Employer (ALE)?

An applicable large employer (ALE) is a business organization that employs 50 or more full-time or full-time equivalent employees. Even if you currently do not have 50 full-time employees, if you had an average of 50 FTEs over the previous calendar year, you still qualify as ALE in the current year.

Understanding your ALE status is crucial when it comes to compliance with the Affordable Care Act. One of the compliance requirements for the ACA is that every ALE must offer employer-sponsored health insurance to their employees. Failure to do so can result in hefty penalties and fines from the IRS. On the other hand, any organization with less than 50 FTEs has no such obligation. Therefore, understanding the definition of ALE and your ALE status is crucial when determining your obligations towards employees.

Meeting these requirements may be more complex if your company has operated for less than a year. The ACA recommendation is to estimate the number of employees you expect to employ over the year to determine your ALE status.

What Is a Full-Time Equivalent Employee (FTE)?

A full-time equivalent employee is a concept used in various employment-related contexts, particularly in relation to the ACA and employee benefits. An FTE is not a traditional full-time employee but rather a way to measure the combined work hours of part-time employees to determine their equivalence to full-time employees for certain calculations and compliance purposes.

Accurately counting your full-time and full-time equivalent employees is crucial when it comes to determining your ALE status. However many employers struggle when understanding the difference between a full-time employee and a full-time equivalent employee.

Employees who work an average of at least 30 hours per week (or 130 hours per calendar month) fall under the category of full-time employees. On the other hand, calculating the number of full-time equivalent employees requires you to combine the working hours of different employees within your company. As a result, combining two or more part-time employees can give you a full-time equivalent employee.

Adding the number of full-time and full-time equivalent employees gives you the final staff tally to determine your ALE status. However, you need to exclude the following employees when calculating your FTEs:

• A sole proprietor
• A partner in a partnership business
• A 2% S-corporation shareholder

When it comes to seasonal employees – for an annual employment term of 6 months or less, you will likely need to include them in your FTE calculations. However, you can exclude seasonal employees if:

• You employed more than 50 employees for less than 120 days during the calendar year, and
• During those 120 days, your business would have less than 50 employees if you excluded the seasonal workers.

It is important to note that these 120 days need not be consecutive.

Applicable Large Employer Calculation

You must determine whether you are an applicable large employer or not to comply with the employer mandate and avoid corresponding penalties. ALE calculations to assess your full-time equivalent employees can help you answer this question and ensure you adhere to the ACA regulations.

Determining your full-time employees is straightforward. It is the number of employees that have worked for at least 30 hours per week (or 130 hours per month). To calculate the number of full-time equivalent employees your business has, you need to consider the following steps:

Step 1:

Calculate how many FTEs and seasonal employees you had each month during the previous year:

• Multiply the number of your part-time employees and the hours they have worked per month.
• Divide these hours by 120 (30 hours for full-time employees × 4 weeks per month).
• Repeat the calculations for each month.

Step 2:

Add the number of full-time and FTE employees for each calendar month.

Step 3:

Calculate your average number of employees by adding full-time and FTE employees per month and dividing the total by 12.

For example, let’s consider your business has 20 full-time and 15 part-time employees in January. And your part-time employees work about 64 hours during the month. So, calculating the number of FTEs you have for January would follow below steps:

• Total hours of part-time employees = 15 × 64 = 960 hours
• Total part-time FTE = 960 ÷ 120 = 8 employees
• Total employees = 20 (full-time employees) + 8 (FTE part-time employees) = 28 FTEs

Repeating these steps for each month, you determine FTEs for each month as follows:

• January: 28 FTEs
• February: 33 FTEs
• March: 36 FTEs
• April: 46 FTEs
• May: 55 FTEs
• June: 60 FTEs
• July: 65 FTEs
• August: 48 FTEs
• September: 40 FTEs
• October: 35 FTEs
• November: 30 FTEs
• December: 28 FTEs

So, the average FTEs for the year would be:

And since you have fewer than 50 FTEs during the year, you do not qualify as an ALE under the ACA.

If you had 50 or more FTEs during the previous year, you are an ALE during the current year and must comply with the employer mandate. You may be a business where employee strength ebbs and flows from year to year, and you hover around the 50-employee mark. Therefore, you need to be on top of the FTE and ALE calculations each month and reevaluate your ALE status each year.

What Are the Tax Reporting Rules for ALEs?

ACA also has specific tax reporting requirements and rules for an ALE. The first step in ALE tax reporting is filling out Form 1095-C. This includes all the details about healthcare coverage you offer your employees, including the cost and coverage period. The IRS utilizes information in this form to determine whether you provide the qualifying coverage or are subject to penalties.

You need to fill out Form 1095-C for every employee, irrespective of the number of employees participating in the health plan. And every eligible employee – even the ones who declined to join the health coverage – must receive a copy of 1095-C.

ALE employers also need to complete the 1094-C transmittal form, which includes identifying company data and general information about the number of employees and 1095-C forms. Employees do not need this form.

Conclusion

Employers often offer various fringe benefits to their employees to attract and retain employees in the long term. Some fringe benefits – like health, life, and disability insurance or retirement contributions – may come from voluntary payroll deductions.

However, the ACA mandates that any business employing an average of 50 or more employees during a calendar year (an ALE) must offer employer-sponsored healthcare coverage to eligible employees. This includes both full-time and part-time FTE employees.

Therefore, staying on top of your ALE calculations and recalculating your FTEs each year is crucial to understanding your ALE status and ensuring compliance with ACA’s employer mandate. You must also follow ALE tax reporting requirements by filing Form 1094-C and 1095-C while making copies of Form 1095-C available to every eligible employee.

Frequently Asked Questions