Many provisions of the Affordable Care Act (ACA), such as cost-sharing limits, mandatory no-cost preventive care, and waiting period limitations, apply to all employer-sponsored health plans. However, employers who qualify as an Applicable Large Employer (ALE) have additional obligations that can result in significant penalties if they are not met.
The determination of an employer’s ALE status is made by calculating the average number of full-time employees (including full-time equivalents – or FTEs) in the preceding calendar year. If the employer averaged 50 or more full-time employees in the prior calendar year, it is considered an ALE the next year and is subject to the ACA’s employer mandate effective January 1, regardless of the group’s plan year. For example, if the employer had at least 50 full-time employees (including FTEs) for 2023, it will be considered an ALE beginning January 1, 2024 even if the plan renewal date is July 1, 2024.
Employers whose headcount approaches the 50 full-time and full-time equivalent average are well-advised to review their FTE count in November/December to ensure they understand whether they are subject to the employer mandate on January 1.
ALE Responsibilities
The ACA requires ALEs to offer qualified, affordable health coverage to full-time employees under the Employer Shared Responsibility provision. ALEs that don’t offer coverage, or whose coverage is unaffordable may be subject to a penalty if a single employee purchases subsidized coverage in the exchange.
In addition, ALEs must furnish annual informational reporting to the IRS and to its employees via Forms 1094-C and 1095-C (or 1094-B and 1095-B for small, self-funded plans). Failure to provide this reporting can result in sizable penalties for each year the reporting is not filed. As a result, it is important that
employers understand whether they are an ALE and when they become an ALE as their company grows.
Timing is Critical
A special rule under the ACA gives first year ALEs a brief grace period, to allow employers who become ALEs time to respond to their new responsibilities. The rule allows that if an employee was not offered coverage at any point in the prior calendar year, the employer will not be subject to a penalty for failure to offer coverage during the months of January through March of that year, as long as coverage is offered on or before April 1.
This provision applies only during the first year for which an employer is an ALE – even if the employer falls below the 50 full-time employee (plus full-time equivalent employee) threshold in a subsequent year and then expands and becomes an ALE again. Employers who are close to the 50 full-time employee threshold should calculate their FTE count for the prior calendar year in November or December to determine their ALE status, confirm they understand the ACA’s definition of full-time employees and are offering coverage to those employees, review the affordability requirements to determine if their coverage is affordable and adjust their employee contributions if needed.
New ALEs should also create a plan for completing their ACA reporting that will be due in the following calendar year. Many employers work with their payroll company for ACA reporting since the payroll system houses much of the data needed to produce the reporting forms. However, some payroll systems cannot produce these forms or the cost for adding this functionality to the payroll system is prohibitive, so some employers engage an outside vendor to assist them with this process. Either way, it is beneficial to begin the planning process as early as possible to ensure a smooth reporting cycle for the 2024 calendar year.
Determining ALE Status
The ACA rules for calculating an employer’s ALE status are complex and include detailed methods for determining how an employee’s hours of service are to be counted, which employees should be included, individuals whose hours should be excluded, and how to count employees who average less than 30 hours of service per week. For more information, please contact your Benefit Advisor to request a copy of our Compliance Check titled “Determining Applicable Large Employer Status” and the “ALE Status Determination Worksheet.”
