Guide to applicable large employers (ALEs)
A one-stop guide to ALEs, the employer mandate, and how to provide compliant, personalized health benefits.
Are you an ALE in search of an ACA-compliant health benefit that doesn't break the bank? Schedule a call with a PeopleKeep personalized benefits advisor to learn about your options.
Looking to satisfy the employer mandate?
The Affordable Care Act (ACA) set federal regulations that specific organizations must follow. One such rule, known as the employer mandate, requires “applicable large employers,” or ALEs, to offer affordable health insurance to their employees or potentially pay a costly penalty to the IRS.
But for many ALEs, offering a traditional group health plan is challenging. It can be expensive, inflexible, and not valuable enough to meet each employee’s healthcare needs. In addition to offering health insurance, the ACA reporting requirements for ALEs can be difficult for employers to understand.
This guide will walk you through everything you need to know about ALEs, including employer mandate requirements, penalties, tax reporting rules, and which health benefits can keep you ACA-compliant.
What is an ALE?
An ALE is any organization with 50 or more full-time or full-time equivalent employees (FTEs). Even if an employer doesn’t have 50 full-time employees or FTEs at all times, if they had an average size of 50 during the previous calendar year, they qualify as an ALE for the current calendar year.
If an employer has fewer than 50 FTEs, they aren’t considered an ALE, so they aren’t required to offer health insurance coverage, nor are they subject to a penalty.
What is a full-time equivalent employee?
When determining if your organization is an ALE, accurately counting your FTEs is essential. But many employers don’t know the difference between a full-time employee and an FTE.
An employee is considered full-time if they average at least 30 hours of service per week or at least 130 hours of service during the calendar month. However, your number of FTEs is calulated using a combined total of full-time and part-time employee hours at your organization.
The employees you shouldn’t count when calculating your FTEs include:
- A sole proprietor
- A partner in a partnership
- A 2% S-corporation shareholder
Keep in mind that you’ll most likely need to count your seasonal workers in your FTE calculation. The ACA1 defines an employee working on a seasonal basis as someone who is “hired into a position for which the customary annual employment is six months or less.” However, seasonal workers do not need to be counted toward your FTE count under certain circumstances.
You can exclude a seasonal employee from your FTE count if:
- You had more than 50 employees for fewer than 120 days during the current calendar year AND
- During the 120 days, you would have had fewer than 50 employees if you excluded your seasonal workers.
- The 120-day period doesn’t have to be consecutive.
What is the calculation to determine if you’re an ALE?
To determine if an organization is considered an ALE, you must include all your full-time employees and FTEs. To calculate the number of FTEs made up by your part-time workforce, add the number of hours worked by all your part-time employees in a given calendar month and divide the total by 120. That will give you the number of FTEs your part-time employees make up.
Lastly, add the number of your full-time employees to your part-time FTEs to get your total FTEs for your organization.
Of course, the number of employees you have may change from one year to the next. Therefore, it’s essential to recalculate your FTEs each calendar year to determine your ALE status.
Get more detailed instructions on how to calculate your FTEs with our calculation worksheet
What is the employer mandate?
Under the ACA, ALEs are subject to the employer shared responsibility provisions, generally referred to as the employer mandate.
Under the mandate, ALEs must offer their full-time employees and their dependents a health insurance plan with minimum essential coverage (MEC) that is both affordable and provides minimum value. If they don't, they may be subject to a "shared responsibility payment," or tax penalty.
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 has not reached age 26. Spouses, stepchildren, foster children, or non-US citizen children that don’t live in the U.S. aren’t considered dependents.
According to the employer mandate, ALEs must cover enough of their full-time employees’ premiums to ensure that the coverage is considered affordable.
An employer’s healthcare coverage is considered affordable if the lowest-cost self-only coverage doesn’t exceed a set threshold of the employee’s household income. For 2022, that threshold is 9.61%. Anything over this threshold will make the employer subject to a tax penalty.
In addition to offering affordable coverage, ALEs have to offer healthcare coverage that provides comprehensive “minimum value” or be subject to the employer mandate’s penalty.
This means the plan has to cover at least 60% of average costs for a standard population. 60% is the actuarial value requirement for bronze plans sold on the individual health insurance market.
Qualified health plans must also provide “substantial” coverage for inpatient treatment and physician services. Major medical coverage plans typically meet these requirements.
What are the employer mandate penalties for ALEs?
Two potential penalties may be accessed to an ALE under the employer mandate. The first penalty is given to an ALE that doesn’t offer MEC to at least 95% of their full-time employees and their dependents. For the 2022 tax year, this penalty amount is $2,750 per employee, per year (or $229.17 a month).
The second type of penalty is for ALEs that don’t offer affordable coverage to their full-time employees and their dependents. If any employee receives a premium tax credit from the Health Insurance Marketplace because an employer doesn’t provide affordable healthcare coverage with minimum value, in 2022, the employer will be penalized $4,120 per employee, per year (or $343.33 a month).
These penalties are adjusted based on the number of employees receiving a premium tax credit and how many months they didn’t receive adequate coverage during the prior year. The IRS will propose the greater penalty of the two, so employers can’t be hit with both fines.
Even though FTEs are the metric used for calculating ALE status, penalties are only determined based on an employer’s full-time employees—not equivalents. So while you’re considered an ALE if you have more than 50 full-time equivalent employees, you only are subject to a penalty if you have more than 30 full-time employees—not full-time equivalents.
What are the tax reporting rules for ALEs?
If your business is considered an ALE, you have certain tax reporting obligations that you need to follow.
The first step in the reporting process is to complete Form 1095-C2. This form provides information about the healthcare coverage you made available to your employees, including the cost of coverage and the months that coverage was available, and helps the IRS determine whether or not you owe a penalty for not offering qualifying coverage.
Employers should fill out Form 1095-C whether they offer health insurance or not, and it must be filed for every person you employed that year, not just current employees. Moreover, every employee who is eligible for insurance should receive a 1095-C, including those who declined to participate in your qualified health plan.
Additionally, ALEs need to complete the 1094-C transmittal form3. The 1094-C is essentially a cover sheet for your 1095-C Forms. This form requires general information, such as identifying company information, the number of people employed by month, and how many 1095-C forms are being issued. Unlike the 1095-C, statements to employees aren’t required for the 1094-C.
As always, when filling out the applicable forms, it’s best to get legal guidance from your tax professional or financial advisor to avoid misfilings and penalties.
How can ALEs offer personalized health benefits?
Even for large employers that may have bigger benefits budgets, offering health insurance can be a difficult task. If you’re an employer looking for a way to satisfy the employer mandate while providing comprehensive healthcare coverage, PeopleKeep can help.
Our health reimbursement arrangement (HRA) and employee stipend benefit administration software allows ALEs to provide or enhance an ACA-compliant health benefit while also offering customization and flexibility. Below, we’ll highlight three solutions that will best meet the needs of our ALE customers.
Individual coverage HRA (ICHRA)
The individual coverage HRA (ICHRA) is one solution that ALEs use to satisfy the employer mandate. With an ICHRA, employers set a fixed, monthly allowance that each employee can use on the individual health insurance plan of their choosing, as well as other qualifying out-of-pocket expenses.
Once an eligible purchase is verified and approved, the employee is reimbursed up to their allowance amount.
An ICHRA can serve as an ACA-compliant, stand-alone benefit that's an alternative to group health insurance. Or, it can be offered to specific employees who don't qualify for your organization's group health plan.
However it’s offered, providing an affordable allowance is crucial to ensuring you satisfy the employer mandate. To be considered affordable, the allowance you set must be greater than or equal to the minimum affordable allowance. If the allowance is less than that amount, the ICHRA is considered unaffordable, and you may be subject to a penalty.
Affordability is calculated using an employee’s salary and the lowest-cost silver plan for that employee’s age and geographic rating area.
Determine an affordable ICHRA benefit for your team with help from a personalized benefits advisor.
If you want to rely on a group health plan to meet the employer mandate, you may consider adding an integrated HRA to it. The integrated HRA, also known as a group coverage HRA (GCHRA), supplements your group health insurance by covering out-of-pocket expenses that aren’t fully paid for by your qualified health plan.
Employees must be enrolled in the group health plan to participate in this type of HRA. In most cases, having a group health plan in place would make your organization ACA-compliant.
In these cases, an integrated HRA is best for employers who want to boost their existing group health insurance plan to better recruit and retain top talent by offering even more health coverage and eligible expenses for reimbursement.
Learn more about PeopleKeep's GCHRA by watching an on demand-demo.
The last option for ALEs is an employee stipend. While a stipend doesn’t satisfy the employer mandate on its own, you can supplement an ACA-compliant benefit like group health insurance plan or HRA with a stipend to provide an extra benefit to your employees.
Stipends, or employee perks, are a fixed amount of money offered to employees to help pay for various items, such as remote work, wellness, medical care, living expenses, and more.
The allowance you choose is a set amount of money for each employee to spend on whatever they choose. However, with our WorkPerks stipend administration software, you can decide which expenses are eligible for reimbursement.
Frequently asked questions about applicable large employers
How do I know if my company is an ALE?
To determine if your company is an ALE, you must calculate your total number of FTEs. Check out our FTE calculation worksheet for additional guidance.
What is the employer mandate?
The ACA employer mandate requires ALEs to offer their FTEs and their dependents health insurance that is affordable and meets minimum value, or they may be subject to employer mandate penalties in the form of shared responsibility payments.
How can I avoid the employer mandate’s ALE penalties?
You can avoid the employer mandate’s penalties if you’re an ALE that offers affordable healthcare coverage that meets minimum essential coverage (MEC) and minimum value to FTEs and their dependents at least annually.
How does common ownership impact ALE employer status?
Businesses with shared ownership must be aggregated into a controlled group before determining whether the group as a whole is considered an ALE. This aggregation occurs even if the businesses are separate legal entities.
If the controlled group is ALE, each subcomponent, or 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.
What is the reporting process for ALEs who provide an ICHRA?
Tax reporting rules dictate that ALEs who provide an ICHRA must complete Form 1095-C indicating the method they used to determine affordability for their ICHRA plan.
ALEs must also provide a statement to their full-time employees that includes the same information provided to the IRS. Contact your tax professional for legal advice and additional guidance when filing your taxes.
Do ALEs need to comply with COBRA?
By nature, ALEs employ more than 20 people for more than half of a business year, so they are subject to COBRA. The employer must give eligible employees a chance to elect COBRA coverage when terminated from an ICHRA benefit.
What expenses are eligible under an ICHRA, GCHRA, and WorkPerks?
ICHRAs can reimburse many healthcare products and services, including insurance premiums, provided they are not already paid with pre-tax dollars. Use our IRS expense tool to see which expenses can be eligible for reimbursement.
GCHRAs can also reimburse eligible expenses listed in our IRS expense tool. However, GCHRAs can’t be used to reimburse health insurance premiums.
With WorkPerks, employers can choose to reimburse various health, wellness, and remote work benefits options. They can select as many or as few eligible expenses as they choose.
Can business owners participate in an HRA?
Depending on how they file, some business owners can participate in an HRA.
C-corporation owners: C-corporations are legal entities separate from the owner. This means owners are considered common-law employees of the corporation and are eligible to participate in this benefit. As with all employees, this eligibility also extends to the C-corp owner’s family. All reimbursements paid to the C-corp owner and the owner’s family are tax-free to the company and the owner.
Sole proprietors: A sole proprietorship is an unincorporated business owned and run by a single employer. There’s no distinction between the business and the owner, so the owner isn't an employee. This means sole proprietors can’t participate.
But, if the owner is married to a W-2 employee of the business, the owner could gain access through their spouse’s allowance as a dependent. All reimbursements would be tax-free to both the sole proprietorship and the owner’s spouse.
Partners: A partnership is a pass-through entity, which means the company isn't subject to income tax. Instead, the partners are directly taxed individually. Partners in a partnership are considered self-employed, rather than company employees, so they’re not eligible to participate in a reimbursement benefit.
Similar to sole proprietors, partners can access the benefit if they are married to a W-2 employee of the business, as long as the partner’s spouse isn’t also a business partner.
S-corporation owners: An S-corporation is a pass-through entity, meaning the company isn’t subject to income tax. Instead, shareholders (i.e., owners who own 2 percent or more of the company’s shares) are directly taxed individually. This means shareholders aren’t considered employees and aren’t eligible to participate in a reimbursement benefit.
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