What constitutes a full-time employee under the ACA? The answer is not as simple as it seems.
And getting your full-time employee count right matters because it determines Applicable Large Employer (ALE) status, a necessary step for understanding the requirements of the ACA’s Employer Mandate. If your organization is classified as an ALE, you will need to comply with the healthcare law’s responsibilities.
Under the ACA’s Employer Mandate, ALEs must offer affordable Minimum Essential Coverage (MEC) to at least 95% of their full-time workforce (and their dependents) whereby such coverage meets Minimum Value (MV).
Failing to offer this coverage to the appropriate members of your workforce could subject your organization to Internal Revenue Code (IRC) Section 4980H penalties via Letter 226J, which the tax agency is currently issuing for the 2019 tax year.
What is an ALE?
Before diving into the specifics of ACA full-time, it’s important to understand first what an ALE is. The ACA-denoted term is an organization that employs at least 50 full-time employees, including full-time equivalent employees, for more than 120 days during the preceding calendar year, according to the IRS.
In other words, for an organization to be in ALE in 2022, it would need to have employed at least 50 full-time and full-time equivalent employees for more than 120 days in 2021.
What are ACA full-time employees?
Now, to determine ALE status you must calculate your full-time employees. An ACA full-time employee is someone who works 30 hours a week or 130 hours a month. If Tommy Joe’s Restaurant, for example, employs 60 workers and 40 of them are employees that work at least 30 hours a week or 130 hours a month, those 40 workers are considered full-time employees under the ACA.
The ACA’s Employer Mandate requires organizations to extend offers of health insurance to these employees. Failing to offer coverage that meets MEC, MV, and affordability can result in a penalty Letter 226J.
Identifying which employees work 30 hours a week or 130 a month can be difficult for organizations that employ large variable-hour employees – that is, employees who work different shifts and hours each week.
If you don’t classify your designated full-time employees as such, you will need to implement the Look-Back Measurement Method to determine their average hours worked over time.
What are ACA full-time equivalent employees?
The other portion of the ALE calculation requires capturing full-time equivalent employees. These employees are not physical employees, but rather the culmination of all non-full-time designated employees. To calculate full-time equivalent employees, part-time employees’ hours, including seasonal workers, must be added together on a monthly basis.
Start by taking the total number of part-time employees and add their total hours of service for a particular month together. Next, divide the total by 120. The result is your full-time equivalent count for the month. Add these to your full-time employee count to determine ALE status for the month.
Note: This process will need to be conducted on a monthly basis and averaged over the preceding year in order to determine ALE status for the current year.
Below is an example of how to calculate ALE status.
Real-world ALE calculation example
Tommy Joe’s Restaurant has 20 full-time designated employees under the ACA. In addition, the restaurant has 40 variable hour, part-time employees who cumulatively worked a total of 4,000 hours for the month of August.
To calculate the ACA full-time equivalent employees for the month of August, divide the total number of hours (4,000) by 120 to get the result of 33.33. While not a nice round number, 33.33 represents the ACA full-time equivalent employee count for the month of August.
Next, take the 20 ACA full-time designated employees and combine them with the 33.33 full-time equivalent employees. The 53.33 employee total is Tommy Joe’s ALE count for the month of August.
While it’s true that Tommy Joe’s has more than 50 full-time and full-time equivalent employees for the month of August, to be considered an ALE the count needs to exceed 50 over the previous 12-month time frame. Once the calculation is performed for each month, take the average to determine ALE status for the current reporting year.
Determining employee classifications
Calculating ALE status can be challenging, but when employee classifications are accurately logged across your payroll, HCM, and benefits platforms, it can be manageable.
To ensure accurate employee classifications, consider outsourcing your ACA compliance process to a full-service solution provider, like Trusaic. Our ACA Complete solution pulls your employee data monthly, measures workers’ hours of service, identifies full-time employees, and calculates full-time equivalents and ALE status for you. We’ve helped thousands of clients establish sound ACA compliance practices.
Bottom line, determining ACA full-time status is critical and organizations need to do it right if they want to minimize their potential penalty exposure from the IRS.
To learn more about calculating ALE status, the Look-Back Measurement Method, affordability calculations, and more ACA Employer Mandate requirements, download the 2022 ACA Essential Guide for Employers below.
For information on ACA penalty amounts, affordability percentages, important filing deadlines, steps for responding to penalty notices, and best practices for minimizing IRS penalty risk, download the ACA 101 Toolkit.