Will Your Business Be an Applicable Large Employer in 2023?

Group health insurance requirements apply differently to applicable large employers (ALEs) than other businesses. Some businesses erroneously believe they are not an ALE only to be surprised when ALE status is levied upon them. Specifically, the Affordable Care Act imposes two requirements upon applicable large employers:

• shared responsibility provisions, otherwise know as Pay or Play (reference ACA Increasing Pay or Play Mandate and Penalties in 2023), and
• information reporting requirements for offers of minimum essential coverage.

Thus, knowing if your business either is an ALE for 2023, or may grow to become an ALE, will allow you to plan for the event, ensure compliance, and transition smoothly into the requirements of that status.

What Determines Applicable Large Employer Status?

The short answer is that if a business has less than 50 full-time employees and full-time equivalents (FTEs), they are not an ALE. But a complete answer considers several other factors. Thus, if your business is anywhere near that magic number of 50, or if you have multiple businesses with similar ownership that when combined may approach that figure, read on.

For a business to calculate the size of its staff to determine Applicable Large Employer status, it must add the number of full-time employees for each month to the number of FTEs for each month and divide by 12. Once that result is greater than 50, the employer enters ALE status the following year. A calendar year, not fiscal year, must be used, and calculation examples are provided below.

What is a Full-Time Employee?

A full-time employee for any month averages at least 30 hours of service per week, or at least 130 hours during the month. Note that either condition will qualify them for a full-time employee, and that an employee may be full-time one month and part-time another.

What is an FTE?

Great question. The answer is straightforward, but not necessarily intuitive. Take a deep breath and: an FTE is a combination of employees (none of whom are full-time employees by themselves) who are equivalent to a full-time employee when lumped together. A business calculates its number of FTEs for any given month by:

1. combining the hours of all non-full-time employees for the month, but do not include more than 120 hours of service per employee, and then
2. dividing that total by 120.

Note that in the above two calculations, 120 is not a typo. You’d think it should be 130 since that is the qualification for a full-time employee, but we are following IRS guidelines, so 120 it is. And a business’s number of FTEs only matters in determining whether they are an Applicable Large Employer. ALEs do not need to offer minimum essential coverage to part-time employees to avoid a shared responsibility payment (Pay or Play). If a part-time employee applies for coverage through the Marketplace and receives a premium tax credit, it will not trigger a shared responsibility payment.

ALE Calculation Examples

Let’s apply this information to calculate Applicable Large Employer status for two example businesses.

Other Considerations

Combining Entities

But how does the IRS handle businesses that have common ownership? Companies that are related under opens in a new windowsection 414 of the Internal Revenue Codeopens PDF file are usually combined when determining ALE status. If the combined number of full-time employees and FTEs is 50 or more, then each business is considered an ALE member and is subject to the shared responsibility provisions (Pay or Play), and any Pay or Play penalty is calculated separately for each ALE member.

Seasonal Workers

Seasonal workers are an exception when calculating whether a business is an Applicable Large Employer. A business is not considered to have more than 50 full-time employees and FTEs if:

1. staffing exceeds 50 full-time employees and FTEs for 120 days or less during the year, and
2. staffing over that 50 are seasonal workers.

A seasonal worker is an employee who performs labor or services on a seasonal basis. The IRS has much more to say on this subject and their  opens in a new windowQuestions and Answers page is a great resource. Specifically, to learn about the difference between a seasonal worker and a seasonal employee see opens in a new windowquestion number 27. For the full definition of seasonal worker, see opens in a new windowsection 54.4980H-1(a)(39) of the ESRP regulations.

Our View

Each year growing businesses should carefully consider whether they triggered ALE status. If so, they should begin planning for the additional considerations this brings in the following calendar year. In particular, they should speak to their accountant and insurance broker to review their employee benefits plan and determine what, if any, changes are needed.

Most information in this article is taken directly from IRS guidelines. For source information, reference the links below. Questions on employee benefits insurance? Contact your Bankers Insurance agent. Not a client of ours? Let us earn your business! Each client is assigned a personal agent in our office, given their email address, and provided a phone number that rings right on their desk.

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References

• opens in a new windowQuestions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act
• opens in a new windowDetermining if an Employer is an Applicable Large Employer