If you qualify as an applicable large employer (ALE), you may wonder what regulations apply to you 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 employees. To help get you started, this blog will answer common questions on how the ACA’s employer mandate affects ALEs.
What is an ALE?
The federal government considers a company or organization an ALE if it has at least 50 full-time equivalent (FTE) employees. According to the IRS, a full-time employee is someone who works at least 30 hours a week, or 130 hours of service per calendar month.
However, you don’t have to have 50 full-time employees at all times to be considered an ALE. Generally, if an employer has a monthly average of at least 50 full-time equivalent employees during a current calendar year, the employer is regarded as an ALE for the following calendar year.
How does an employer calculate workforce size to determine if they’re an ALE?
To determine if you’re considered 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, only U.S. employees are counted.
To calculate your FTEs, add the hours worked by all your part-time workers in a given calendar month, and divide the total by 120. The total will give you the number of FTEs made up by your part-time employees.
Then, add up the number of full-time employees you have and add that number to the full-time equivalent of your part-time employees 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. However, if your seasonal workers’ hours cause your FTE count to exceed 50 or more, you may be able to apply for the seasonal worker exemption.
You qualify for the seasonal worker exemption if you meet both of the following criteria:
Your workforce only exceeds 50 full-time employees (including full-time equivalent employees) for 120 days or fewer during the calendar year, AND
The workers in excess of 50 employed during the 120-day time period are seasonal employees.
How does common ownership impact ALE status?
Businesses that have shared ownership must be aggregated into a controlled group before determining 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 is determined to be an ALE, each component—or each single individual business—of that controlled group is considered an ALE, regardless of the total number of employees, and is subject to the employer shared responsibility provisions (ESRP).
How does timing impact ALE status calculation?
Generally, ALE status calculations are based on the prior calendar year. If an employer was only in existence for part of the previous calendar year, the calculations are prorated.
An employer that wasn’t in existence on any business day in the prior calendar year is considered an ALE if they are reasonably expected to and do employ an average of at least 50 full-time employees, including 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 are generally 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 is affordable and meets MEC, or they may be subject to employer mandate penalties in the form of payments under the ESPR.
If you’re not an ALE, you aren’t required to provide health insurance coverage for employees, nor are you subject to employer shared responsibility penalties.
Only full-time employees—not full-time equivalents—are counted for calculating the penalty, and the first 30 full-time employees are not factored into the calculation. So while you’re considered an ALE if you have more than 50 full-time equivalent employees, you only are subject to a financial penalty if you have more than 30 full-time employees—not full-time equivalents.
What’s minimum essential coverage?
Minimum essential coverage is the minimum standard of health insurance coverage an ALE must provide to at least 95% of full-time equivalent employees 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 health plan.
How is affordability defined and calculated?
Affordability is calculated using an employee’s salary and the lowest cost silver plan for that employee’s age and geographic rating area1. In 2023, for a health plan to be considered “affordable,” employees can’t be expected to pay more than 9.12% of their annual household income for their health coverage.
Individual coverage HRA (ICHRA) affordability
If you’re offering an individual coverage HRA (ICHRA), the lowest cost silver plans are calculated for the individual only, not their dependents, and use the non-tobacco user rate even though it may not reflect the actual employee’s situation.
Business owners with an ICHRA must offer an affordable allowance to at least 95% of their full-time employees. The allowance must be greater than or equal to the minimum affordable allowance to be considered affordable.
If the allowance is less than that, the ICHRA is deemed unaffordable, and you may be subject to an employer shared responsibility penalty. If you need help, 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
These plans aren’t considered individual coverage, and an employee enrolled in these plans will not be eligible to participate in an ICHRA. With this knowledge, employees can make their healthcare purchases and accept or reject your ICHRA benefit.
Does the employer mandate require coverage be offered to dependents?
Yes, the employer mandate requires that you offer qualified, affordable health coverage to employees and their dependents. For the purposes of 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, or non-US 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 penalties?
The first type of financial penalty, Section 4980H(a), 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, Section 4980H(b), is for ALEs that don’t offer affordable coverage to their full-time employees and dependents.
In each case, these ALEs will be penalized 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 2023, the penalty amounts are as follows:
- Section 4980H(a) penalty: A penalty of $2,880 per full-time employee is accessed to ALEs that fail to offer MEC to 95% of their full-time employees.
- Section 4980H(b) penalty: A penalty of $4,320 per full-time employee is accessed to ALEs that fail to offer affordable or minimum value coverage.
These payments are adjusted based on the number of employees that purchased subsidized coverage with premium tax credits and how many months throughout the previous year that employees weren’t covered. The IRS will propose the greater penalty of the two, which means you can’t be hit with both penalties.
Does PeopleKeep help employers satisfy the employer mandate?
PeopleKeep’s software helps you design your ICHRA benefit to be compliant and meet the needs of the employer mandate. You can also use our affordability calculator to determine if your allowance is affordable for a specific employee.
However, while we do everything we can to help you be compliant, the software doesn’t prevent you from creating a benefit that could be considered non-compliant.
Do ALEs need to comply with COBRA?
ALEs employ more than 20 people for more than half of a business year, which means they’re subject to COBRA. You must give eligible employees a chance to elect COBRA coverage when they’re terminated from an ICHRA benefit.
What kind of reporting is required 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 plan. For 2023, or the 2022 tax season2, ALEs must provide the 1095-C form to applicable employees by March 2, 2023.
The deadline for filing a paper version of the 1095-C form is February 28, 2023, while the due date for filing electronically is March 31, 2023. You can obtain a 30-day extension by submitting Form 8809. Work with your tax advisor if you need help completing Forms 1095-C or 8809.
Lastly, you must also provide employer notice to your full-time 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 those offering affordable employer-sponsored coverage to at least one class of employees while offering an ICHRA to at least one class of employees. However, minimum class size requirements only apply to some of the 11 designated employee classes, or “applicable classes."
As overwhelming as the ACA regulations may seem, understanding them if you’re an ALE is essential to staying compliant. ALEs are subject to additional rules under the ACA, and those that fail to meet the employer requirements may be exposed to costly penalties, including fines for failing to comply with specific reporting requirements.
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 December 12, 2022.