Applicable Large Employer (ALE): Definition, Calculation & Tax Rules

An Applicable Large Employer (ALE) has a clear definition with obligations attached. ALEs have to offer their employees a certain level of health insurance coverage. There are tax penalties if they fail to do so.

Find out what constitutes an ALE. Keep compliant as we explain the calculation tools and tax rules you need to know about.

Table of Contents

What is an Applicable Large Employer (ALE)?

Why It’s Important to Know About ALE Status

What is a Full-Time Equivalent Employee?

Applicable Large Employer Calculation

What Is the Employer Mandate?

What Are the Tax Reporting Rules for ALEs?

Key Takeaways

Frequently Asked Questions

What Is an Applicable Large Employer (ALE)?

An ALE is any organization with 50 or more full-time or full-time equivalent employees (FTEs). 

Some employers may not have 50 full-time employees or FTEs every day. If they had an average of 50 over the previous calendar year, they would qualify as an ALE for the current calendar year. 

Those organizations with fewer than 50 FTEs do not fall into the ALE category.

Why It’s Important to Know About ALE Status

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 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 workers 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. 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. 

An 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 52,50 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 (52,50 hours).

16 part-time employees X 52,50 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 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 2023, that threshold was set at 9.12 percent. 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 employees with the 1094-C form.

Key Takeaways

An Applicable Large Employer (ALE) is an organization made up of 50 full-time employees over a given year. Full-time Equivalent Employees (FTEs) are a combination of part-time employees. That combination forms part of an organization’s full-time employee total.

ALEs have certain obligations to their employees that they must comply with. If they do not, they risk facing tax penalties. The most critical duty is to offer minimum essential coverage for healthcare. It needs to be affordable and offer value. There are rules on how this gets defined.

The IRS makes checks that ALEs are compliant through the filling in of certain forms. These include the 1094-C and 1095-C forms.

FAQs on Applicable Large Employers

What Size Employer Does ACA Apply to?

The ACA applies to employers with 50 or more full-time employees. 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. ALEs also have to report 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 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.

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