21: Are You A Large Employer Under the Affordable Care Act?

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Learn the steps to calculating ALE status under the ACA.

The ACA requires applicable large employers (or ALEs) to offer health insurance that has certain “minimum essential benefits” (also referred to as minimum essential coverage) to at least 95% of their full-time employees.

The insurance must provide “minimum value” and the premium must be “affordable”.

If you do not offer a health insurance plan that has these minimum essential benefits, then you could be penalized by the IRS.

You are an ALE if you have 50 or more full-time employees including full-time equivalent employees.

Employee Count Calculation:

In order to know if you’re an ALE, you have to identify your full-time employees and calculate how many full-time equivalent employees you have, which is based on how many part-time employees you have.

A full-time employee is someone who works an average of 30 hours or more per week in a calendar month, or an average of 130 hours per month in a year.

To calculate the number of full-time equivalents simply add up all your part-time employees hours worked in a month (up to 120 each) and divided that total by 120.

Next, add the number of full-time employees to the number of full-time equivalents and you have your magical total.

The 8 Steps:

Step 1: Calculate the aggregate number of hours of service for all employees who were not full-time employees for each calendar month. Do not include hours of service for any employee in excess of 120 hours. In other words, if Employee A works 122 hours, you only count the first 120 hours.

Step 2: Divide the total hours of service by 120. The result equals the number of FTE’s for that calendar month.

Step 3: Calculate the number of full-time employees for each calendar month.

Step 4: Add the number of full-time employees to the number of FTE’s.

Step 5: Add up the 12 monthly numbers and divide the sum by 12.

Step 6: If the number of FT employees in step 5 is less than 50, you are not a ALE.

Step 7: If the number of FT employees in step 5 is 50 or more, determine if the seasonal employee exception applies (see next step).

Step 8: If your workforce exceeds 50 full-time employees for no more than 4 months during a calendar year, AND the employees in excess of 50 for those months were seasonal employees, then you are not a ALE

The determination is made annually. If you didn’t qualify as an ALE in 2015, but you will in 2016, then you have to comply with the ACA next year. You’ll take your measurement in 2016 to know if you qualify as a large employer for 2017, and then you’ll maintain that stats until the next year when you can make the determination again.

That’s why it’s important to understand how to perform the calculation and to track where you’re at each month. Knowing exactly where you are in the calculation will help you plan going forward.

Did You Just Start A New Business?

If you just started your business in the current calendar year, then you are considered a ALE if you “REASONABLY EXPECT” to employ an average of 50 or more full-time employees, or a combination of full-time employees and full-time equivalents.

HOWEVER, if your count will be 50 or more for 120 days or less, and the employees in excess of 49 who will be employed during that period are seasonal workers, then you are not an ALE. These four calendar months or 120 days don’t have to be consecutive.  So if you only went over 49 in a total of 120 days or less and the employees that put you over the threshold were seasonal employees then you’re not an ALE.

In year 2 you’ll base the decision on the number of employees that you actually employed in year 1 rather than relying on your “reasonable expectation”. Let’s say you start business on July 1, 2016. For the period July 1st to December 31st your status will be based on your “reasonable exception”. For calendar year 2017, the decision will be based on your actual employee count for the six month period that you were in business in 2016.

If you think you will be an ALE and you offer a compliant plan but you don’t end up actually being an ALE then you don’t have to worry about complying with the reporting requirements. Not much of a consolation though if you did provide coverage when you didn’t have to.  At least it was a good test run and you’ll know what to do if you ever do become a ALE.

If you “reasonably expected” not to be a ALE but you actually ended up being one and you didn’t offer compliant group health insurance then you might be subject to penalties. It depends on weather or not one of your qualified full-time employees obtained coverage from an exchange and received a subsidy in the form of a tax credit. That’s the penalty trigger.

It doesn’t matter what your situation is or the circumstances surrounding your non compliance. If you didn’t provide the right coverage and one or more employees obtains coverage from an exchange and gets a tax credit then you’re subject to penalties.

 Penalties:

There are two penalties referred to as the A and B penalties.

The A penalty, after section 4980H(a) of the Act, is $2,000 a year or $166.66 for each month or partial month of non-compliance. This penalty is for not offering minimum essential benefits. There’s really no reason you shouldn’t be able to provide this insurance. It is readily available and in most cases 100% of the premium can be paid for by the employee. If you don’t provide a minimum essential benefit plan you’ll pay the A penalty on all full-time employees. The consolation is that you get a 30 employee exemption from the A penalty.

Going back to the example, let’s say that you don’t reach the threshold until November and even though you’re an ALE you only have 40 full-time employees that you should have offered coverage to. After subtracting the 30 employee exemption, you are penalized on the remaining 10 for the last two months of the year.

The second penalty is the B penalty, after, you guessed it, 4980H(b) of the Act. This penalty is $3,000 per year or $250 for each month or partial month of non compliance. This penalty is only assessed on those employees who receive a premium tax credit, and it will never be more than the maximum A penalty – so it’s capped

You’ll never pay both in the same year.

If you do provided minimum essential coverage but it doesn’t pass the minimum value test or it is unaffordable to your employees, then you’ll pay the B penalty, but only on those employees that obtain coverage from the exchange and receive a premium tax credit.

Summary:

Applicable large employers have to comply with the ACA by offering a group health insurance plan comprised of minimum essential benefits which also provides minimum value and is affordable.

To determine weather or not you are an ALE  you have to count your full-time and full-time equivalent employees.

And if you don’t comply and one of your employees obtains coverage from an exchange and receives a premium tax credit, you will be penalized by the IRS.

About the author, Thomas

I have 20 of years insurance industry experience in C-level management, focusing on all aspects of workers compensation, risk management, loss control, employee benefits, HR, payroll and professional employer organization (“PEO”) operations. Currently, I am the owner and CEO of Humanly HR, and founder and host of SmallBiz Brainiac; a podcast providing employer intelligence to small business owners.

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