Classify Workers Correctly to Determine ALE Status and Avoid ACA Penalties
Classifying workers is an important step for employers determining if the requirements of the ACA’s Employer Mandate apply to them. That’s because worker classifications directly impact an employer’s applicable large employer (ALE) status.
Determining ALE status
Organizations should begin their ACA compliance process by first determining if their business is an ALE. ALEs, or Applicable Large Employers, are employers with 50 or more full-time and full-time equivalent employees that are required to offer Minimum Essential Coverage (MEC) to at least 95% of their full-time workforce (and their dependents) whereby such coverage meets Minimum Value (MV) and is affordable for the employee or be subject internal Revenue Code (IRC) Section 4980H penalties.
To accurately calculate ALE status, employers must first determine if they make up an aggregate employer group of two or more commonly owned, related, or affiliated employers.
Start by combining the group members’ full-time and full-time equivalent employees to accurately determine the workforce size. Because this process requires a working knowledge of the IRS’ controlled group rules, organizations should consider partnering with an expert in ACA compliance in order to avoid penalties resulting from the failure to account for aggregated ALE group members.
One of the challenges with determining ALE status is that employers don’t always have full-time or part-time employees. Some have seasonal workers, independent contractors, and variable-hour workers, which add layers of complexity to calculating ALE status. Below we have defined the different types of workers and whether they should be included for determining ALE status.
Full-time employees
Under the ACA, a full-time employee is defined as someone who works 30 hours a week or 130 hours a month. Here’s an example:
Red Parrot restaurant employs 80 workers and 45 of them are employees that work at least 30 hours a week or 130 hours a month. The 45 workers who average 30 hours a week or 130 hours a month are considered full-time employees. For ALE calculation purposes, full-time employees must be included.
Full-time equivalent employees
Full-time equivalent employees include workers that aren’t designated as full-time. To account for your businesses’ full-time equivalent employees, part-time, variable-hour, and seasonal worker employees’ hours must be added together every month. This is done by taking the total number of non-full-time-designated employees and adding their total hours of service for the 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 your ALE status for the month. This process will need to be conducted every month and averaged over the preceding year to determine ALE status for the current year.
Part-time employees
One thing is consistent with part-time employees, also known as variable hour employees: work schedule irregularities. As far as the ACA is concerned, a part-time employee must work less than 130 hours a month. Employers can use their discretion for extending benefits to this employee, but the ACA does not mandate that part-time employees receive an offer of health coverage. As mentioned above, part-time employees’ hours are in fact used to determine full-time equivalent employees for purposes of calculating ALE status.
Seasonal workers
A “seasonal worker” is a worker who performs labor or services on a seasonal basis as defined in certain U.S. Department of Labor regulations. This worker category includes agricultural laborers and retail workers employed exclusively during holiday seasons. The IRS does consider seasonal workers when determining if an organization is an Applicable Large Employer.
Seasonal employees
The IRS uses the classification “seasonal employee” only when determining if a worker is a full-time employee under the Look-Back Measurement Method. In this particular situation, a seasonal employee is someone who is hired into a position for which the customary annual employment is six months or less and for which the period of employment begins each calendar year in approximately the same part of the year, such as summer or winter. The IRS provides a ski instructor as an example of a seasonal employee.
Seasonal employees are included in the ALE status. However, an employer will not be considered an ALE if the workforce exceeds 50 full-time employees, including full-time equivalent employees, for 120 days or fewer during the preceding calendar year, and all of the employees above 50 who were employed during that period of no more than 120 days were seasonal.
Independent contractors
Often referred to as 1099 workers, independent contractors are not technically employees. Rather, their agreements with an employer are on a per-service basis. Since independent contractors aren’t employees, they should not be included for purposes of calculating ALE status.
The IRS provides additional information regarding the rules for determining who is a full-time employee on the Employer Shared Responsibility Final Regulations.
To add to the layer of complexity, new regulations on worker classifications are being enacted across the country. States like California and New Jersey have introduced laws that distinguish employees and independent contractors through ABC tests. These methods differ from the IRS guidelines and can create additional challenges for employers as they classify their workers.
Employers: the bottom line is that classifying your workers correctly is imperative for ACA compliance and failing to do so could result in significant IRS penalty assessments. The responsibility falls on your shoulders and best practices suggest assessing your workforce makeup regularly to ensure there are no surprises come filing season.
The IRS is currently issuing ACA Letter 226J penalty assessments to employers identified as having failed to comply with the ACA for the 2018 tax year. If your business needs assistance classifying workers correctly, calculating ALE status, and complying with the ACA, download the 2021 ACA Essential Guide for Employers to learn best practices for minimizing IRS penalty risk.
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.
