If you are classified as an applicable large employer (ALE), you may wonder what your responsibilities are under the Affordable Care Act (ACA). Understanding guidelines such as minimum essential coverage (MEC), the employer mandate, minimum values, and affordability can be tricky, especially if you’re a new ALE.
ALEs that don’t meet the employer mandate can be subject to significant penalties. That’s why understanding the mandate is crucial for every employer with 50 or more full-time equivalent (FTE) employees.
This blog will answer common questions on how the ACA’s employer mandate affects ALEs.
Learn more about applicable large employers in our complete guide
What is an ALE?
The federal government considers a company or organization an ALE if it has at least 50 FTEs. Your FTE count is the sum of all full-time units worked by both your full-time and part-time employees.
According to the IRS, an FTE of 1.0 can be one full-time employee who works at least 30 hours per week, or 130 hours of service per calendar month. In another scenario, it can be two part-time employees whose combined hours equal that of a full-time employee. More on that later.
But you don’t need 50 FTEs at all times to be an ALE. Generally, if an employer has a monthly average of at least 50 FTEs during a current calendar year, the employer is an ALE for the following calendar year.
How does an employer calculate workforce size to determine if they’re an ALE?
To determine if the government considers your business an ALE, you must count all your full-time employees and the full-time equivalent of your part-time employees. Remember that for these calculations, you only count only U.S. employees.
To calculate your FTEs, add the actual hours worked by all your part-time workers in a calendar month and divide the total by 120. The total is the number of FTEs made up by your part-time employees.
Then, add that value to the number of full-time employees you have to get your total FTE count.
If you have any employees that work on a seasonal basis, you must include them in your workforce size by translating them into FTEs. But if your seasonal workers’ hours cause your FTE count to exceed 50 or more, you may be able to apply for the seasonal worker exemption1.
You qualify for the seasonal worker exemption if you meet both of the following criteria:
- Your workforce only exceeds 50 FTEs for 120 days or fewer during the calendar year, AND
- The workers that caused your FTE count to exceed 50 during the 120-day time period are seasonal employees.
How does common ownership impact ALE status?
Businesses that have shared ownership must aggregate, or combine, into a controlled group and determine whether the group is collectively considered an ALE. These employer aggregation rules apply even if the businesses are separate legal entities.
If the controlled group turns out to be an ALE, each component—or individual business—of that controlled group is also an ALE, regardless of their actual employee count. This means they’re also subject to the employer shared responsibility provisions (ESRP).
How does timing impact ALE status calculation?
Generally, ALE status calculations use information from the prior calendar year. If an employer existed only for part of the previous calendar year, they would prorate the calculations.
An employer that wasn’t in existence on any business day in the prior calendar year is an ALE if they are reasonably expected to and do hire an average of at least 50 FTEs on a business day during the current calendar year.
What is the employer mandate?
The ESRP of the Patient Protection and Affordable Care Act is commonly called “the employer mandate.” Only ALEs are subject to the special rules within the employer mandate.
The ACA employer mandate requires ALEs to offer their full-time workers and their dependents health insurance that’s affordable and meets MEC, or they may be subject to employer mandate penalties in the form of shared responsibility payments.
If you’re not an ALE, you aren’t required to provide health coverage for employees, nor are you subject to employer-shared responsibility penalties.
If you are an ALE and are assessed a penalty, that penalty will be multiplied by your number of full-time employees—not FTEs. Also, you don’t need to factor in the first 30 full-time employees in that calculation. So while you’re an ALE if you have more than 50 FTEs, you’re only subject to a financial penalty if you have more than 30 full-time employees—not FTEs.
What’s minimum essential coverage?
Minimum essential coverage is the minimum standard of medical coverage an ALE must provide to at least 95% of their FTEs to avoid paying penalties.
To avoid paying the penalty, ALEs must offer their employees the ability to enroll in MEC through an eligible health insurance plan, which is:
- Any plan or coverage offered in a state's small or large group market (including small business exchanges).
- Coverage under a grandfathered plan.
- Any qualified health plan certified by the Health Insurance Marketplace (including self-only coverage). However, employers must offer a health reimbursement arrangement (HRA) for this to be employer-sponsored.
How is affordability defined and calculated?
You calculate affordability using an employee’s salary and the share they must pay toward the cost of a monthly health insurance premium—whether that be for employer-sponsored group coverage or for the lowest-cost silver plan for that employee’s age and geographic rating area2.
In 2024, for a health plan to be “affordable,” employees can’t pay more than 8.39% of their annual household income for their healthcare coverage3. This is a decrease from the 2023 threshold of 9.12%.
Individual coverage HRA (ICHRA) affordability
If you’re offering an individual coverage HRA (ICHRA), you use the cost of the lowest-cost individual silver plan to determine how much of an allowance you need to provide to meet affordability requirements. You also use the non-tobacco user rate even though it may not reflect the employee’s situation.
Business owners that offer an ICHRA must offer an affordable allowance to at least 95% of their full-time employees. The amount given must be greater than or equal to the minimum affordable allowance to be “affordable.”
If the allowance is less than that, the ICHRA is unaffordable, and you may be subject to an employer shared responsibility penalty. If you need help calculating affordability, the federal government allows you to use affordability safe harbors.
In addition to affordability requirements, those with an ICHRA must also ensure their plans meet minimum value. Employees must purchase family coverage or self-only coverage from a public or private exchange. They can also buy a Medicare policy if they’re eligible for one.
The following plans don’t currently meet minimum value for an ICHRA plan:
- Short-term medical plans
- Ministry sharing plans
- Tricare
The federal government doesn’t consider these plans individual coverage, so an employee enrolled in these plans will not be eligible to participate in an ICHRA. In this case, these employees can purchase other qualified health insurance and accept your ICHRA benefit. Or they can decline the ICHRA if their allowance is unaffordable and buy whatever healthcare plan they choose.
However, if your ICHRA is unaffordable and an employee is therefore eligible for premium tax credits, you may be subject to the ESRP penalty.
Does the employer mandate require business owners to offer coverage to dependents?
Yes, the employer mandate requires that you offer qualified, affordable healthcare coverage to employees and their dependents. According to the employer mandate, a dependent is an employee’s child (including a child who has been legally adopted or placed for adoption) who hasn’t reached the age of 26.
Spouses, stepchildren, foster children, and non-U.S. citizen children not living in the U.S. or a contiguous country aren’t considered dependents.
When would an employer be subject to potential employer shared responsibility tax penalties?
The first type of financial penalty, the Section 4980H(a) penalty, is for an ALE that doesn’t offer MEC to at least 95% of their full-time employees and dependents. The second type of penalty, the Section 4980H(b) penalty, is for ALEs that don’t offer affordable coverage to their full-time employees and dependents.
In each case, these ALEs may be subject to a penalty if at least one full-time employee receives federal subsidies, like premium tax credits, for purchasing essential coverage through the Marketplace.
Now that we’ve gone over the details for each penalty and how they’re affected by tax subsidies, let’s go over how much it’ll cost if you fail to meet the requirements.
How much are the penalties for failing to meet the employer mandate?
The IRS adjusts both employer mandate penalties each year.
For 2024, the penalty amounts will be as follows4:
- Section 4980H(a) penalty: ALEs that fail to offer MEC to 95% of their full-time employees will be subject to a fine of $2,970 per full-time employee.
- Section 4980H(b) penalty: ALEs that fail to offer affordable or minimum value coverage will be subject to a fine of $4,460 per full-time employee.
The federal government adjusts these fines based on the number of employees that purchased subsidized coverage with premium tax credits and how many months during the previous year employees weren’t covered. The IRS will propose the greater penalty of the two, which means you can’t receive both penalties.
Does PeopleKeep help employers satisfy the employer mandate?
PeopleKeep’s software helps you design your ICHRA benefit so it complies with and meets the employer mandate. You can also use our affordability calculator to determine if your allowance is affordable for a specific employee.
While we do everything we can to help you comply with federal regulations, it is ultimately your responsibility to create a benefit that the IRS would consider compliant.
Do ALEs need to comply with COBRA?
ALEs employ more than 20 people for over half of a business year, which means they’re subject to COBRA. You must allow eligible employees to elect COBRA coverage when you terminate them from group health insurance or an ICHRA benefit.
What are the reporting requirements for ALEs who provide an ICHRA?
Reporting requirements dictate that ALEs who provide an ICHRA must complete Form 1095-C indicating the reasonable method they used to determine affordability for their ICHRA plan5. ALEs must give applicable employees the 1095-C form on or before January 31 of the following year6.
Starting in 2024, employers must combine all their tax forms. If they’re filing ten or more aggregate returns, they must file electronically7. This essentially ends paper filing for many employers.
The deadline for filing electronically is March 31 of the following year8. But if you need more time to file your reporting forms, you can get a 30-day extension9 by submitting Form 8809 if your reason for extension has good cause. Work with your tax advisor if you need help completing Forms 1095-C or 8809.
You must also provide employer notice to your applicable employees outlining the same information provided to the IRS.
Is an ALE status relevant to ICHRA minimum class size requirements?
Minimum class size requirements only apply to ALEs offering employer-sponsored group coverage to at least one class of employees while offering an ICHRA to another class of employees.
Conclusion
As overwhelming as the ACA regulations may seem, understanding them if you’re an ALE is essential to staying compliant. ALEs are subject to extra rules under the ACA. Those that fail to meet the employer requirements may have to pay costly penalties, including fines for failing to complete their reporting obligations.
If you’re an ALE looking for a quality health benefit that will meet ACA guidelines, an ICHRA may suit your needs. Schedule a call with a personalized benefits advisor at PeopleKeep to learn more.
This article was originally published on October 8, 2020. It was last updated on August 23, 2023.
- https://www.irs.gov/affordable-care-act/employers/determining-if-an-employer-is-an-applicable-large-employer#:~:text=or%20more%20information.-,Seasonal%20Workers,-When%20determining%20if
- https://www.cms.gov/CCIIO/Programs-and-Initiatives/Health-Insurance-Market-Reforms/state-gra
- https://www.healthcare.gov/glossary/affordable-coverage/
- https://global.lockton.com/us/en/news-insights/irs-increases-aca-employer-mandate-penalties-for-2024
- https://www.irs.gov/forms-pubs/about-form-1095-c
- https://www.federalregister.gov/documents/2022/12/15/2022-27212/information-reporting-of-health-insurance-coverage-and-other-issues-under-sections-5000a-6055-and#:~:text=Time%20and%20manner%20for%20furnishing%20statements%20%E2%80%94(i)%20Time%20for%20furnishing
- https://www.risk-strategies.com/blog/irs-final-rule-changes-e-filing-rules-for-aca-forms-in-2024
- https://www.federalregister.gov/documents/2022/12/15/2022-27212/information-reporting-of-health-insurance-coverage-and-other-issues-under-sections-5000a-6055-and#:~:text=Information%20Reporting%20Under%20Sections%206055%20and%206056%20and%20Penalties%20Under%20Sections%206721%20and%206722
- https://www.irs.gov/pub/irs-pdf/f8809.pdf
