Is Your Organization an Applicable Large Employer? Understanding ACA Workforce Size Rules

One of the most important Affordable Care Act (ACA) compliance questions employers must answer each year is whether they are considered an Applicable Large Employer (ALE). Determining ALE status affects whether an employer must offer health coverage to certain employees and whether it must complete annual ACA reporting.

Because the determination is based on workforce size and hours worked during the prior calendar year, employers should review their employee data regularly to ensure they understand their status.

Why ALE Status Matters

Two major ACA provisions apply only to Applicable Large Employers:

• Employer Shared Responsibility rules, which require ALEs to offer affordable health coverage that meets minimum value to full-time employees and their dependents or potentially face penalties.
• Employer Information Reporting requirements, which require ALEs to file Forms 1095-C and 1094-C with the IRS and provide coverage information to employees.

Employers that are not ALEs are generally not subject to these requirements and may instead qualify for other provisions, such as the Small Business Health Care Tax Credit.

How ALE Status Is Determined

An employer’s ALE status is determined each calendar year based on the average number of full-time employees and full-time equivalent employees during the previous year.

In general:

• If an employer averages fewer than 50 full-time employees, including full-time equivalent employees, during the prior year, the employer is not an ALE for the current year.
• If the employer averages 50 or more full-time employees, including full-time equivalent employees, the employer is an ALE and must comply with the ACA employer requirements.

To determine the average workforce size, employers calculate the total number of full-time employees and full-time equivalent employees for each month of the prior year, add those totals together, and divide by 12.

Understanding Full-Time Employees

Under ACA rules, a full-time employee for any month is an employee who averages:

• 30 hours of service per week, or
• 130 hours of service during the month

These employees count directly toward the 50-employee threshold used to determine ALE status.

What Are Full-Time Equivalent Employees?

Part-time employees can also affect ALE status through the concept of full-time equivalent employees (FTEs). FTEs are calculated by combining the hours of employees who individually are not full-time.

To determine FTEs for a month:

1. Add together the hours of service for all non-full-time employees for the month (capped at 120 hours per employee).
2. Divide the total by 120.

The resulting number represents the employer’s full-time equivalent employees for that month.

Although FTEs are used when determining whether an employer meets the ALE threshold, employers are not required to offer health coverage to part-time employees to avoid potential employer shared responsibility penalties.

An Example

Consider an employer with:

• 40 full-time employees
• 20 part-time employees working about 60 hours per month

The combined hours of the part-time employees equal 1,200 hours per month. Dividing 1,200 by 120 equals 10 full-time equivalent employees.

In this case, the employer would have:

• 40 full-time employees
• 10 full-time equivalent employees

This results in a total workforce count of 50 employees for ALE determination, making the employer an Applicable Large Employer for the following year.

Aggregation Rules for Related Companies

Businesses that share common ownership or are otherwise related may need to combine their employee counts when determining ALE status. Under IRS aggregation rules, related entities may be treated as a single employer when calculating the 50-employee threshold.

If the combined group meets the ALE definition, each employer in the group is considered an ALE member and may be subject to ACA requirements individually.

Special Considerations

Several additional rules may affect ALE determinations:

• Employees receiving medical coverage through the military or Veterans Administration are not counted toward the ALE threshold for the months they have that coverage.
• A seasonal worker exception may apply if the employer exceeds the 50-employee threshold for 120 days or fewer during the year due to seasonal workers.
• New employers that were not operating in the prior year may be treated as ALEs if they reasonably expect to employ at least 50 full-time employees (including FTEs) during the current year.

Why Employers Should Review Workforce Data Annually

Because ALE status is determined using the prior year’s workforce size, employers should regularly review employee hours, staffing patterns, and payroll data. Organizations that are near the 50-employee threshold should pay particular attention to workforce changes that could affect their status.

Understanding whether your organization is an Applicable Large Employer helps ensure that the appropriate ACA compliance requirements—such as offering coverage and completing annual reporting—are properly addressed.

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This article is for informational purposes only and is not intended as legal, tax, or benefits advice. Readers should not rely on this information for taking (or not taking) any action relating to employment, compliance, or benefits. Always consult with a qualified professional before making decisions based on this content.