An applicable large employer (ALE) is required to comply with the employer mandate and required to distribute and file ACA reporting with the IRS (Forms 1095/1094-C). To know whether or not an employer is an ALE, a specific calculation must be run each calendar year.
An ALE is an employer who employed (along with entities in the same controlled group) an average of 50 or more full-time employees plus full-time-equivalent employees on business days during the previous calendar year. Full-time equivalents are basically hours worked by part-time employees.
Full-time employees are those who work at least 30 hours per week, or 130 hours of service per month. However, for purposes of determining whether an employer is an ALE, the employer must use 120 hours per month as the basis to identify full-time employees. Thus, anyone working 120 hours or more per month must be counted as a full-time employee.
A leased employee, sole proprietor, partner in a partnership, or 2% S-corporation shareholder is not considered an employee for purposes of the ALE determination.
The IRS gives the following method for calculating the number of full-time employees plus full-time equivalents during the prior calendar year during each calendar month divided by 12, to get the yearly average:
Step 1: Add the number of full-time employees (including seasonal workers) for each calendar month during the previous calendar year.
Step 2: Add the number of full-time equivalents (including seasonal workers) for each calendar month in the preceding calendar year. Calculate the total hours of service in a month for employees who are not full-time employees for that month. (don’t include more than 120 hours of service for any employee.) Then divide the total number of part-time hours by 120.
Step 3: Add the number of full-time employees and full-time equivalents from Steps 1 and 2 for each month of the preceding calendar year.
Step 4: Add up the 12 monthly numbers from Step 3 and divide the sum by 12. This is the average number of full-time employees for the preceding calendar year.
Step 5: If the number in Step 4 is less than 50, then the employer is not an ALE for the current calendar year. If the number in Step 4 is 50 or more, the employer is an ALE and subject to the employer mandate for the current calendar year. In some cases, “seasonal workers” can be disregarded.
As an example, during each calendar month of 2019, a company has 20 full-time employees, each of whom averages 35 hours of service per week; 40 employees, each of whom averaged 90 hours of service per month; and no seasonal workers.
Each of the 20 employees who average 35 hours of service per week count as one full-time employee for each calendar month. To determine the number of full-time equivalent employees for each calendar month, the total hours of service of the employees who are not full-time employees (but not more than 120 hours of service per employee) are added up and divided by 120. The result is that the employer has 30 full-time-equivalent employees for each calendar month (40 × 90 = 3,600, and 3,600/120 = 30). Because this employer had 50 full-time employees (20 full-time employees plus 30 full-time equivalent employees) during each calendar month in 2019, and because the seasonal worker exception is not applicable, this organization is an ALE for the 2020 calendar year. This means they are subject to the employer mandate, and will have to file Forms 1095-C and 1094-C for the 2020 tax year in early 2021.
Remember, employers need to look at 2019 numbers if they are unsure about whether or not they’re an ALE for 2020.
IRS ALE webpage: https://www.irs.gov/affordable-care-act/employers/determining-if-an-employer-is-an-applicable-large-employer