Are You an Applicable Large Employer (ALE)?
A critical factor that determines your obligations under the ACA is your status as an Applicable Large Employer (ALE). If you are unsure if your business qualifies as an ALE, you’re not alone.
In This Article
The line between a small business and a large one can be blurry since business sizes are often loosely defined. What one source might classify as small business another might label mid-sized. However, as far as the IRS is concerned, as you get closer to having 50 full-time employees on staff, you get closer to—and may already have reached —an important employee population threshold.
If you have anywhere from 25-45 full-time employees, you’re likely in a growth phase where understanding your ALE status is critical. Not sure where your company stands? You’re in the right place. This article will break down the ALE criteria, guide you through calculating your workforce size, and provide insight on your role as an ALE.
Key Takeaways
- You are an ALE if you had 50 or more full-time employees, including full-time equivalents, in the previous year.
- The ACA defines full-time as 30+ hours per week.
- Full-time equivalents (or FTEs) are determined by totaling part time hours and dividing by 120.
- To determine ALE status, combine your full-time employees and full-time equivalents.
- Certain employees may not count toward your workforce size, such as seasonal employees working less than 120 days a year.
- Businesses in controlled employer groups (parent-subsidiary, brother-sister) must combine workforces to determine ALE status.
What is an ALE?
The term ALE is a designation defined by the Affordable Care Act (ACA) and regulated by the IRS. The ACA defines an ALE as an employer that had 50 or more full-time employees, including full-time equivalents, during the preceding calendar year. Businesses who qualify as ALEs are subject to specific provisions of the ACA including the employer mandate, which requires large employers to provide healthcare coverage to full-time employees and their dependents.
What is an aggregate ALE?
Determining your ALE status can be complex if your business is connected to other businesses. If your company is part of an Aggregate ALE, your workforce is combined with those of related businesses to determine if the group meets the ALE threshold. If the total workforce across the group exceeds 50 full-time employees, your business must comply with ACA guidelines, even if you individually employ fewer than 50.
In some cases, not all businesses in a group may be part of the Aggregate ALE. For example, if one entity in a group of five businesses is owned more than 20% by a different entity, it might not be included under the Aggregate ALE rules. However, this does not exempt the entire group from ALE status.
Examples of Aggregate ALEs
The ACA includes safeguards like the Common Control Rule to prevent businesses from splitting into smaller entities to avoid ALE status. The Common Control Rule governs when businesses are treated as a single employer under three main types of groups:
Parent-Subsidiary Group – A parent company directly or indirectly owns 80% or more of the related subsidiaries.
Brother-Sister Group – Five or fewer individuals, estates, or trusts collectively own at least 80% of the related companies, and have more than 50% control over them.
Combined Group – Related businesses are connected through both parent-subsidiary and brother-sister relationships.
If you think you might be part of an employer group, click here to learn more about Aggregate ALEs.
Am I an ALE?
So, are you an ALE? There is really only one way to be sure: doing the math. To arrive at the correct answer, you’ll need to follow these 4 steps.
1. Count Full-Time Employees
First you will count up your employees who work an average of at least 30 hours per week or 130 hours per month. Count them for each month of last year.
2. Calculate Full-Time Equivalents
Next, you will combine all hours worked by part-time employees for each month (basically anyone not counted in the first step—with some exceptions considered later). Divide that total by 120. Repeat that for every month of last year. This will determine the number of full-time equivalents you have for each month.
3. Total Monthly Workforce Size
Now, you’ll use the totals from step one and two to find your total workforce for each month. Add the number of full-time employees and equivalents for each month to arrive at your monthly totals.
4. Average Annual Workforce Size
Finally, add up the monthly workforce totals for the year, and divide by 12 to find your annual average workforce size.
Though some exceptions or special cases may apply for your business, this is the basic equation to determine your ALE status.
If you are having difficulty with step one, counting your full-time employees, there are two methods to determine how many full-time employees you have: the monthly measurement method and the lookback method. For more information about these methods and how to properly calculate hours of service visit irs.gov.
Employee types and the role they play in your ALE status
As you can see, your different types of employees will play different roles in calculating your workforce size. The ACA may define these types of employees differently than you’d expect, so understanding the distinctions between them can help you make sure you get an accurate workforce count.
Full-Time Employees
The ACA’s definition of a full-time employee may be quite different from what you are used to, or what your business considers to be a full-time employee. It is common for businesses to consider full-time a 40-hour work week, but the ACA dictates that a full-time employee averages 30 hours or more per week, or 130 hours per month. By that definition you may have more “full-time” employees than you assumed.
Part-Time Employes
Once you understand how the ACA defines full-time employees, it’s easier to understand who your part-time employees are. The ACA considers anyone who averages fewer than 30 hours per week a part-time employee. Though you won’t count this group in your full-time workforce, they play a crucial role in calculating your full-time equivalents.
Full-Time Equivalents
Understanding what full-time equivalents are is one of the trickier parts of determining your ALE status. Though we’ve listed equivalents under employee types, a full-time equivalent is not really an employee, it is a unit of measurement used to quantify the workload of your employee population. The basic FTE calculation is total monthly part time hours worked / 120hours = FTE total.
It is unlikely that the number of part-time employees you have will divide evenly into FTEs. For example, if you have nine employees who work a collective 520 hours per month, that breaks down to 4.33 FTEs (520hours /120hours). As long as your annual average workforce total is under 50, you are not an ALE. That means, even if your total comes out to 49.95, you are still not considered an ALE.
Seasonal Workers
There is an exception for seasonal workers that is crucial for businesses with fluctuating employee numbers due to seasonal demands, such as those in the retail, agriculture, and tourism industries.
If you have more than 50 full-time employees for only a short period of time in any given year (120 days or less) because of seasonal hiring, you will not be considered an ALE.
Leased Employees (Staffing Agencies)
Another possible exception to your workforce count could be any employees you’ve hired through staffing agencies. If your business uses a staffing agency, those workers are likely considered employees of that agency rather than your business. If that’s the case, you would not count them when calculating your workforce size. Of course, this depends on the contractual arrangement between your business and the agency, so if you are unsure, check your contract or contact the agency directly.
Variable-Hour Employees
Any employees whose hours vary or who do not have a predictable schedule may require the most careful tracking. To determine whether or not your variable-hour employees should be counted among your full-time employees, you may need to use the lookback measurement method. When you use this method, you will be tracking the hours worked during a specific period that can be anywhere from 3-12 months.
To learn more about the look-back measurement method, click here.
Employees With Military-Sponsored Healthcare
Lastly, if you have any employees who receive medical care or healthcare coverage through the military, they do not count toward your employee population for the purposes of determining your ALE status.
For more details see this page.
Additional Exceptions
Your situation may have layers of complexity beyond “full-time” and “part-time.” You may have a number of special employee types on your payroll, for example if you run a winter resort, you may have mostly seasonal employees.
Other employees that are excepted or given special consideration by ACA and IRS guidelines are:
- Volunteers
- Interns
- Student employees participating in a work study
- Independent contractors
- Sole proprietors
- Partners
- 2% shareholders in an S corp
- Employees of a religious order
- Hours for work not taxed as US income
If you have a number of different types of employees, you may want to consult with a professional for assistance properly calculating your workforce size.
*Note: More exceptions or special cases may apply. For assistance with your particular situation, reach out to a Benefit Guide at 888-920-7526 or schedule a meeting.
Example workforce calculations
Company A: Employer is an ALE
Company A: Business Supply Merchant
Employee Information
40 full-time employees each month.
20 part-time employees each working 60 hours per month.
1. Calculate full-time equivalents (FTEs)
20 part-time employees * 60 hours/month = 1,200 hours
1,200 hours / 120 = 10 FTEs
2. Total for each month
40 full-time employees + 10 FTEs = 50 employees
3. Average number of employees for the year
If we follow the same calculations above for each month of the year, this employer may have an average annual workforce size close to 50.
Company B: Employer is not an ALE
Company B: Tech Startup
Employee Information
30 full-time employees each month.
20 part-time employees each working 90 hours per month.
1. Calculate full-time equivalents (FTEs)
20 part-time employees * 90 hours/month = 1,800 hours
1,800 hours / 120 = 15 FTEs
2. Total for each month
30 full-time employees + 15 FTEs = 45 employees
3. Average number of employees for the year
If we follow the same calculations above for each month of the year, this employer may have an average annual workforce size close to 45.
Company C: Employer is not an ALE
Company C: Small Business Retail
Employee Information
35 full-time employees each month
2 full-time employees with TRICARE
10 part-time employees each working 80 hours per month
5 seasonal workers averaging 28 hours/week for 2 months
1. Calculate full-time equivalents (FTEs)
10 part-time employees * 80 hours/month = 800 hours
800 hours / 120 = 6.67 FTEs
2. Total for each month
35 full-time employees + 6.67 FTEs = 41.67 employees
*Seasonal worker hours not counted since they worked fewer than 3 months
*Full-time employees with military-sponsored TRICARE coverage not counted
3. Average number of employees for the year
If we follow the same calculations above for each month of the year, this employer may have an average annual workforce size close to 40
Company D: Employer is an ALE
Company D: Manufacturing
Employee Information
45 full-time employees each month
5 full-time employees with TRICARE
10 full-time temporary employees hired through staffing agencies
15 part-time employees each working 100 hours per month
3 variable-hour employees working an average of 120, 90, and 84 hours per month
1. Calculate full-time equivalents for part-time employees
15 part-time employees * 100 hours/month = 1,500 hours
1,500 hours / 120 = 12.5 FTEs
2. Calculate full-time equivalents for variable-hour employees
Using the lookback measurement method, we determined the average hours for 3 variable-hour employees over the past 9 months (our chosen measurement period for this example). The results were:
Employee A: 120 hours/month
Employee B: 90 hours/month
Employee C: 84 hours/month
Now we calculate how many FTEs the variable-hour employees' workload represents
294 hours / 120 = 2.45 FTEs
3. Total workforce count for each month
45 full-time employees + 12.5 part-time FTEs + 2.45 variable-hour FTEs = 59.95 employees
*Full-time temporary employees not counted
*Full-time employees with military-sponsored TRICARE coverage not counted
4. Average number of employees for the year
If we follow the same calculations above for each month of the year, this employer may have an average annual workforce size close to 60.
Free Workforce Calculation Worksheets
Are you ready to find out your ALE status? Use one of our free ALE worksheets to get started. If you feel like you have a good handle on your employee types and how many full-time employees you have, we recommend starting with the simplified worksheet. If you want to have a list of excepted types handy, we recommend starting with the detailed worksheet.
Understanding your ALE status
By accurately calculating your full-time employees and full-time equivalents, you can determine your ALE status and prepare for the responsibilities that come with it. Knowing your status can help you plan strategically for your company’s future. It puts you in a better position to comply with ACA requirements—and avoid hefty tax penalties.
In a later article we will explore what those ACA requirements are, how being an ALE will impact your business operations, and the steps you need to take to remain ACA compliant.
Glossary
ACA: The Patient Protection and Affordable Care Act, commonly known as the ACA, is a healthcare reform law enacted in 2010 designed to expand health insurance coverage and reduce healthcare costs in the US.
Aggregate ALE: A group of related employers that are considered a single entity for the purpose of determining Affordable Care Act (ACA) compliance.
ALE: A business that employs 50 or more full-time employees, including full-time equivalents (FTEs), on average per month during the previous calendar year.
Employer Mandate: An ACA requirement that applicable large employers (ALEs) offer 95% of their full-time workforce affordable MEC health plans that meet ACA minimum value standards.
FT Employee: An individual who averages 130 work hours, or more, per month (or 30+ hours per week)
FT Equivalent: A unit resulting from combining all part-time employee work hours for a month and dividing by 120.
PT Employee: An individual who averages fewer than 30 work hours per week.
Seasonal Worker: An employee hired into a position for which the customary annual employment is six months or less. These positions typically occur at the same time each year, such as agricultural and or holiday jobs.
Variable-Hour Employee: those whose weekly work hours are not predictable at the start of employment. Do not consistently meet the full-time threshold of 30 hours per week or 130 hours per month.
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