Applicable Large Employers: A Guide

The ACA introduced regulatory obligations that certain businesses must adhere to. One regulation, known as the employer mandate, requires “applicable large employers” (ALEs) to offer their staff affordable health insurance or face a considerable fine from the IRS.

However, for numerous ALEs, providing a standard group health insurance plan is burdensome. These plans can be costly, rigid, and might not cater adequately to the diverse healthcare needs of each employee. In addition to health insurance provision, understanding and managing ACA reporting requirements for ALEs can be complex for employers.

This guide will explain everything ALEs need to know about their responsibilities under the mandate, including requirements, penalties, tax reporting rules, and health benefits options that ensure ACA compliance.

What is an ALE?

An ALE is any entity with 50 or more full-time employees or full-time equivalent employees (FTEs). An employer might not have 50 full-time staff or FTEs continually but if their workforce averaged 50 during the previous year, they’re classified as an ALE for the current year. Entities with fewer than 50 FTEs are not considered ALEs and are thus not obligated to provide health insurance or subject to penalties.

This classification plays a significant role in how businesses plan and administer their health benefits programs. For organizations on the cusp of becoming an ALE, strategic workforce planning becomes crucial to managing potential healthcare-related costs and compliance requirements. Meanwhile, businesses that consistently operate below this threshold might explore different avenues for offering health benefits without the mandated obligations, possibly focusing on voluntary benefits, or exploring smaller scale health reimbursement arrangements to enhance their employee offerings. Regardless of size, understanding the nuances of ALE status can help companies navigate the complexities of healthcare provision within the legal framework set by the ACA.

Understanding Full-Time Equivalent Employees

Determining if your organization is an Applicable Large Employer (ALE) hinges on the precise calculation of your Full-Time Equivalent (FTE) employees, a task that often proves complex due to the nuanced differences between full-time employees and FTEs.

• Full-Time Employee: This individual works an average of 30 hours per week or accumulates at least 130 hours of service in a month. The ACA specifically defines this bracket to identify those employees whose work hours meet the threshold requiring employer health coverage. Essentially, full-time employees form the core workforce of any organization, with their consistent work schedules ensuring operational stability and productivity.
• FTE Figure: Unlike the straightforward tally of full-time employees, the total FTE figure represents a composite measure, blending the hours worked by both full-time and part-time staff. This calculation offers a broader perspective on labor resources by encapsulating all forms of employment within the organization into a unified metric. This holistic view is essential for regulatory compliance and strategic manpower planning, as it accurately represents the labor force’s impact on operational capacity and obligations under health care laws.

When computing your organization’s FTE tally, it’s crucial to omit certain categories of workers who are not considered in these calculations:

• Sole Proprietors: Individuals who own and operate their own business without forming a corporation are not counted towards the ALE status because they are self-employed and, by definition, do not fulfill the role of an employee within the context of their businesses.
• Partnership Partners: Like sole proprietors, partners in a partnership do not count as employees toward ALE status. This exemption arises because partners are not considered employees but rather co-owners who share in the profits, losses, and liabilities of the partnership.
• 2% Shareholders in S-corporations: Shareholders who own more than 2% of an S corporation’s stock are excluded from FTE calculations due to their dual role as both owners and employees, which aligns them more closely with business owners than traditional employees for purposes of ACA compliance.

Seasonal Workers introduce additional complexity to FTE calculations. While often included in workforce counts due to their contribution to labor needs during peak periods, they can be excluded from ALE determinations if:

• Seasonality Threshold: If your employee count peaks above 50 for fewer than 120 days (or four months) within a year due to seasonal employment demands, you may not need to count them toward ALE status. This provision accommodates businesses with fluctuating workforces while recognizing their temporary labor needs.
• Exclusion Criteria: Seasonal workers can also be excluded if their absence would reduce your workforce below the 50-employee threshold outside of their active employment period. This acknowledges that many employers rely on seasonal labor without maintaining a large permanent staff.

Furthermore, it’s essential to understand that the 120-day period for considering seasonal workers does not need to be continuous. Breaks between active seasons or fluctuating demand leading to periods of increased hiring can cumulate towards this threshold, allowing businesses greater flexibility in managing their workforce without automatically assuming full ALE responsibilities.

These nuanced aspects of FTE calculations underscore the importance of thorough workforce assessment in complying with ACA regulations and effectively managing healthcare obligations. They require a detailed understanding of both your immediate staffing needs and the broader implications of employment patterns on regulatory obligations.

Calculating ALE Status

To confirm if an entity is an ALE, tally all full-time employees and FTEs. For part-time workers’ FTE assessment, sum their monthly worked hours and divide by 120. This figure plus your full-time staff total equates to your organization’s FTE count.

Given workforce fluctuations, recalculating FTEs annually to determine ALE status is crucial.

Understanding the Employer Mandate

As per the ACA, ALEs face employer shared responsibility provisions or the employer mandate.

ALEs must offer their full-time staff and dependents health insurance that meets essential coverage criteria and is affordable and valuable. Failure results in a significant penalty.

For coverage to count as affordable under the mandate, it must not surpass a predetermined employee household income percentage. For 2024, this figure is capped at 8.39%.

Addressing Employer Mandate Penalties

ALEs can incur two types of penalties: one for not providing adequate coverage to over 95% of full-time employees and dependents, and another for not offering affordable coverage. Penalties for 2024 stand at $2,970 per employee per year for the former and $4,460 per employee per year for the latter.

FTE counts determine ALE status, but penalties are based solely on full-time staffing numbers.

Tax Reporting Obligations

ALE status tags along specific tax reporting duties:

• Complete Form 1095-C detailing offered healthcare coverage
• Complete 1094-C transmittal form as a cover sheet for your 1095-Cs
• Consult a tax professional or financial advisor when completing these forms to prevent inaccuracies and penalties.

Customizing Health Benefits for ALEs

For larger employers navigating healthcare provisioning complexities, Tesseon offers personalized solutions through its health reimbursement arrangement (HRA) and stipend administration software. These tools allow flexibility while ensuring ACA compliance through customizable plans tailored to each employee’s needs—such as Individual Coverage HRAs (ICHRAs) that provide set monthly allowances for health insurance and eligible expenses or Integrated HRAs augmenting existing group health plans by covering additional out-of-pocket costs.

Employee stipends serve as supplementary financial support for various personal expenses but must align with an ACA-compliant benefit strategy to contribute meaningfully towards meeting employer mandate obligations.