Classifying workers correctly is critical for determining if the requirements of the ACA’s Employer Mandate apply to an organization. The reason? Worker classifications directly impact an employer’s Applicable Large Employer (ALE) status.
Determining ALE status
Organizations should begin their ACA compliance process by determining if their business is an ALE. ALEs are employers with 50 or more full-time and full-time equivalent employees that must 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, organizations 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 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 when calculating ALE status.
Below we define the different types of worker classifications and explain whether to include them for purposes of determining ALE status.
Under the ACA, a full-time employee works 30 hours a week or 130 hours a month. Here’s an example:
Red Pizza Parlor 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 ACA full-time employees. When calculating ALE status, be sure to include full-time employees.
Full-time equivalent employees
Full-time equivalent employees include workers that aren’t designated as full-time. To understand your business’s full-time equivalent employees, add together your part-time, variable-hour, and seasonal worker employees’ hours of service for each month. To do this, take the total number of non-full-time-designated employees and add their 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. To determine ALE status for the current year, conduct this process for each month of the previous year. Once you’ve calculated the counts for each month, identify the average. If that number is 50 or greater, then your organization is an ALE for the following reporting year.
One thing is consistent when it comes to part-time/variable-hour employees: irregularity. No work week is the same for this group of workers. Under ACA regulations, a part-time employee works less than 130 hours a month.
Employers can use their discretion for extending benefits to part-time employees, 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 in the full-time equivalent employee calculation for purposes of determining ALE status.
A seasonal worker is an individual 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, for example. The IRS requires employers to include seasonal workers when determining ALE status.
The IRS uses the classification of seasonal employees 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 also included when determining 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.
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, don’t include them in your ALE calculations.
The IRS provides additional information regarding the rules for determining who is a full-time employee on the Employer Shared Responsibility Final Regulations. If you’re unsure if an employee is full-time or part-time, use one of the two IRS-approved measurement methods to calculate their hours.
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.
Furthermore, worker classifications pose serious issues relating to pay equity, as incorrectly classifying a worker can result in less pay, including salary, benefits, and bonus compensation.
The bottom line? Classifying your workers correctly is imperative to the integrity of your workforce. Failing to get it right could impede compliance with ACA requirements as well as lead to legal action from state and federal governments for violations of equal pay laws.
The responsibility falls on your shoulders and best practices suggest assessing your workforce composition regularly to ensure there are no surprises come filing season.
If your business needs assistance classifying workers correctly, calculating ALE status, and complying with the ACA, download the What is The ACA’s Employer Mandate to learn best practices for minimizing IRS penalty risk.
To gain invaluable insights on penalty amounts, affordability percentages, filing deadlines, expert tips for responding to penalty notices, and proven strategies for minimizing IRS penalty risk, download the ACA 101 Toolkit.