What is an Applicable Large Employer (ALE)?

An Applicable Large Employer, or ALE, refers to companies or organizations that have an average of 50 or more full-time (or full-time equivalent) employees over the course of a calendar year. An ALE might refer to a single entity or to a group of related ones. 

For business owners, understanding ALE status is crucial. It allows you to determine your obligations for providing healthcare coverage under the Affordable Care Act and also informs your tax reporting requirements. In this guide, we’ll explain the key aspects of ALEs, including calculating your ALE status, defining full-time equivalent (FTE) employees, and the implications of the employer mandate. We’ll also go over practical examples and offer best practices for complying with the regulations related to ALEs. Let’s take a look.

Key Takeaways

• An Applicable Large Employer (ALE) is any business that employs an average of 50 or more full-time employees over the course of a calendar year.
• ALEs are subject to additional regulations under the Affordable Care Act (ACA) concerning their obligation to provide employer-sponsored health insurance.
• A company may also have ALE status if they employ full-time equivalent (FTE) employees, which is a consolidation of 2 or more part-time employees.
• To determine your ALE status as a company, you must add your full-time and FTE employees for each month of the year, then divide the sum by 12 to get an annual average.
• ALEs also have different tax requirements—they must fill out IRS Form 1095-C to provide details on the coverage you offer your employees.

Table of Contents

• Importance of ALE Status in the ACA
• What Is a Full-Time Equivalent (FTE) Employee?
• Applicable Large Employer Calculation
• What Is the Employer Mandate?
• What Are the Tax Reporting Rules for ALEs?
• Optimize Payroll Management with FreshBooks Payroll
• Frequently Asked Questions

Importance of ALE Status in the ACA

The Affordable Care Act (ACA) uses the definition of an ALE for certain compliance purposes. ALEs must provide employer-sponsored health insurance to all full-time employees. If they fail to do this, they face the prospect of stiff penalties.

ALE requirements for companies that haven’t been in business for a year are less clear. The ACA suggests businesses calculate how many employees they expect to work on business days over the first year.

What Is a Full-Time Equivalent (FTE) Employee?

An FTE employee is a combination of 2 or more part-time employees. So, when you combine together multiple part-time employees, you would make FTE employees. 

Businesses, therefore, need to know the number of their FTEs to determine if they’re an ALE.

What Constitutes a Full-Time Employee?

You should consider an employee to be full-time under certain circumstances. That’s if they average at least 30 hours of service per week or at least 130 hours of service during a calendar month. You would add together your full-time employees to your FTEs to get the final staff tally.

You should not include some types of contract workers or organizations, such as:

• A sole proprietor
• A partner in a partnership
• A 2 percent S-corporation shareholder

What About Seasonal Workers?

It’s likely that you would have to count any seasonal workers in your calculations. A worker employed on a seasonal basis is typically someone hired into a position for which the customary annual employment is 6 months or less.

You can leave out seasonal employees from your count if:

• You employed less than 50 workers for fewer than 120 days in the current calendar year
• During the 120 days, you would have had fewer than 50 employees if you left out your seasonal workers

The 120-day period doesn’t need to be consecutive.

Applicable Large Employer Calculation

To work out whether an organization is an ALE, you should consider all your FTEs and full-time employees. There is a simple calculation to determine the number of FTEs created by the part-time members of your workforce.

You would do this by adding up the number of hours worked by all your part-time employees in a given calendar month. After that, you should then divide the total by 120 (30 hours per week x 4 weeks per month). This will give you your total number of FTEs made up by your part-time employees. 

Finally, add together the number of your full-time employees to your part-time FTEs. This will give you the final number of full-time employees within your organization.

The Need to Recalculate Each Year

Most companies that hover around the 50-employee mark need to keep on top of this calculation and perform it each month.

The number of employees tends to ebb and flow from one year to the next. It’s therefore vital to recalculate your full-time employee total each calendar year to determine your ALE status. 

Example of an ALE Company

In your business, you have 26 full-time employees in January. You also have 16 part-time employees who each work around 52.5 hours in the same month.

Here’s how to work out the number of FTEs you have. Multiply the sum of your part-time employees (16) by the hours they work each month (52.5 hours).

16 part-time employees X 52.5 hours = 840 hours

Divide the overall hours worked by part-time employees (840 hours) by 120 hours (30 hours for full-time X 4 weeks). This will determine how many full-time equivalent employees you have for the month. 

840 hours / 120 hours = 7 employees

Combine your full-time employees (26) and FTE part-time employees (7). That figure gives you your grand total of full-time employees for January.

26 full-time employees + 7 FTE part-time employees = 33 FTEs

Working Out the Annual Total of FTEs

You have 33 full-time equivalent employees for the month of January. Perform the process for all other months in the previous year. After you do this, you find the following:

• January: 33 FTEs
• February: 36 FTEs
• March: 46 FTEs
• April: 54 FTEs
• May: 55 FTEs
• June: 61 FTEs
• July: 62 FTEs
• August: 60 FTEs
• September: 54 FTEs
• October: 54 FTEs
• November: 47 FTEs
• December: 42 FTEs

To work out your FTEs for the year, combine all the totals for each month and divide the figure by 12 to get the average.

33 + 36 + 46 + 54 + 55 + 61 + 62 + 60 + 54 + 54 + 47 + 42 = 604

604 / 12 = 50.33

You have 50.33 FTEs for the previous year. Since you have at least 50 FTEs, the ACA considers you an ALE.

What Is the Employer Mandate?

ALEs are liable for employer-shared responsibility provisions, typically known as the employer mandate. 

Under the mandate, ALEs have to provide their full-time employees and their dependents with a health insurance plan. It must have the minimum essential coverage (MEC). It also has to be affordable and offer value for money.

If they fail to offer this, they might be liable for a tax penalty or shared responsibility payment. For employer mandate purposes, a dependent means the child of an employee. 

This also includes a legally adopted child who has not yet turned 26 years of age. Spouses, stepchildren, and foster children do not count as dependents for these purposes.

Affordable Coverage

To comply with the employer mandate, ALEs have to cover a certain amount of their full-time employees’ premiums. This is to make sure that the health coverage is affordable.

You would consider an employer’s healthcare coverage affordable in certain instances. These would be if the lowest-cost self-only coverage doesn’t go over a set threshold of the employee’s household income.

For 2024, that threshold is set at 8.39% of the employee’s household income. Anything over this threshold could make the employer liable for a tax penalty.

Minimum Value

There are other requirements as well as the offer of affordable coverage. ALEs must provide healthcare coverage that offers comprehensive “minimum value.” Failure to do so would make them liable to the employer mandate’s penalty.

This means the plan has to cover at least 60 percent of the mean costs for a standard population. 60 percent is the actuarial value essential for bronze plans. These are plans that would be available on the open health insurance market for individuals. 

Qualified health plans also have to offer “substantial” coverage for certain health benefits. These include physician services and inpatient treatment. Major medical coverage plans normally comply with these requirements.

What Are the Tax Reporting Rules for ALEs?

An ALE comes with tax reporting requirements. The initial stage of the reporting procedure is to fill in Form 1095-C.

This form will contain details of the healthcare coverage you provided to your employees. This includes the cost of coverage and the period that coverage was available.

The form assists the IRS in determining if you owe a penalty for not providing qualifying coverage.  

How to Fill Out the Required Forms

Employers should fill out Form 1095-C regardless of the number of employees who decided to participate in the health plan. It needs filing for every person employed during the tax year. All eligible employees should receive a 1095-C. This includes those who declined to join the health plan.

ALEs also have to complete the 1094-C transmittal form. This acts as a cover sheet for the 1095-C Forms. This form requires general information. This includes identifying company data, the number of people employed each month, and how many 1095-C forms the company issued.

You would not need to issue the 1094-C form to employees.

Optimize Payroll Management with FreshBooks Payroll

With an understanding of what an applicable large employer (ALE) is, companies can better manage their responsibilities, ensuring compliance with the ACA and all relevant tax filing rules. By taking the time to determine your ALE status, you’ll stay informed on your obligations and provide the coverage your employees deserve.

If you’re looking for a comprehensive solution to manage payroll, ensure compliance, and reduce errors from the process, FreshBooks Payroll powered by Gusto is here to help. Our payroll software is a great way to reduce the time spent on the administrative work of paying employees, ensuring accurate reporting and total compliance at every step of the way. Try FreshBooks for free today!

FAQs on Applicable Large Employers

Still curious about calculating ALE status or the requirements for ALE companies? Learn more with these frequently asked questions.

What Size Employer Does ACA Apply to?

The ACA applies to employers with 50 or more full-time employees and/or FTEs. 2 provisions of the Affordable Care Act (ACA) only apply to Applicable Large Employers (ALEs). These include the offering of minimum essential coverage for healthcare and reporting details of their healthcare coverage provisions to the IRS.

Does the Affordable Care Act Apply to All Employers?

The ACA only concerns employers with 50 or more full-time employees. These could include full-time equivalents (FTEs). Those who work 30 or more hours a week are considered full-time employees for ACA and ALE purposes.

Who Is Exempt From ACA Reporting?

Organizations that employ fewer than 50 people in a given year would be exempt from ACA reporting. However, if they choose to offer health coverage it must meet certain ACA standards.

What is the 98% offer method?

The 98% Offer Method is a way for companies to have the option to report without separate certification of full-time employees. It means that an employer is not required to identify which employees are full-time if they offer affordable, minimum-value coverage to 98% of their employees (and their dependents).

What is the 6-month rule for ACA?

The 6-month rule is a stability period for employees who have been subject to a measurement period to determine their full- or part-time status. The ACA states that the stability period must be at least as long as the measurement period and must be a minimum of 6 months.

What is the 95 rule for ACA?

If 95% or more of your full-time employees receive affordable, minimum-value health coverage, the ACA refers to this as ‘substantially all’ employees being covered. This is known as the 95% rule and is the minimum coverage for businesses to avoid penalties.

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