Employee classifications are important for many reasons, including managing compliance with the ACA’s Employer Mandate.
Under the ACA’s Employer Mandate, Applicable Large Employers (ALEs), or organizations with 50 or more full-time and full-time equivalent employees must offer at least 95% of their full-time employees and their dependents Minimum Essential Coverage that is affordable and meets Minimum Value.
And employee classifications are the key to determining ALE status since it relies on full-time and full-time equivalent counts. Thus, understanding how to calculate ALE status in the context of ACA is critical to ensuring compliance.
How to Calculate ALE Status
Calculating ALE status plays a key role in managing ACA compliance requirements. To see if your organization is an ALE, you must first determine if you’re 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 determine your workforce’s size.
This process requires a deep understanding of the IRS’ controlled group rules, which is not common knowledge for the majority of organizations. Best practices encourage partnering with an expert in ACA compliance to avoid penalties resulting from failing to account for aggregated ALE group members.
Another reason calculating ALE status can be challenging is that employers don’t always have clearly defined full-time and part-time employee classifications. Some have complex workforces, made up of seasonal workers, independent contractors, and variable-hour workers.
Moreover, job titles don’t always correlate to predetermined working hours throughout the organization. Needless to say, calculating ALE status can be tricky.
In the event your organization is moving forward with determining ALE status on its own, however, we’re here to help. Below we’ve defined the types of worker classifications and explained whether to include them when calculating ALE status.
What Are Full-Time Employees?
The IRS defines a full-time employee as someone who works 30 hours per week or 130 hours per month. Here’s a quick example:
Johnny Rad’s Pizza employs 80 workers. Of those 80, 45 are considered full-time employees since they work at least 30 hours per week or 130 hours per month. These 45 workers, who meet the criteria of averaging 30 hours a week or 130 hours a month, are considered ACA full-time employees.
When determining the ALE status, it’s important to include full-time employees in the calculation.
What Are Full-time Equivalent Employees?
Full-time equivalent employees encompass workers who aren’t classified as full-time. That is, they aren’t physical employees. To calculate your business’s full-time equivalent employees, sum up the hours worked by your part-time, variable-hour, and seasonal employees each month.
To do this, add together the hours worked by all non-full-time-designated employees for a given month. Then, divide the total by 120.
This result represents your full-time equivalent count for the month. Combine this count with your full-time employee tally to determine your ALE status for that month.
To calculate ALE status for the current year, perform this calculation using counts for every month of the previous year.
Once you’ve identified the counts for each month, calculate the average. If the average is 50 or more, your organization is an ALE for the subsequent reporting year.
What Are Part-Time Employees?
Part-time and variable-hour employees often have irregular work schedules, making each workweek unpredictable. According to ACA regulations, a part-time employee works fewer than 130 hours per month.
While employers have the discretion to offer benefits to part-time employees, the ACA doesn’t require them to extend health coverage.
However, as mentioned above, it’s important to note that part-time employees’ hours are still factored into the calculation of full-time equivalent employees for determining ALE status.
Seasonal Workers vs Seasonal Employees
A seasonal worker is an individual who performs labor or services on a seasonal basis as defined by 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.
Similarly, 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 at approximately the same time of year, such as summer or winter. The IRS provides a ski instructor or a lifeguard as an example of a seasonal employee.
Seasonal employees are also included when determining ALE status, with one caveat. 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.
This essentially means that an organization will not be considered an ALE if it is made up predominantly of seasonal employees.
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 do not need to be included in your ALE calculations. These workers also do not require benefits, so your business does not need to extend them offers of health coverage either.
Get Help with Employee Classifications
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.
Ensuring accurate classification of your workers is crucial for maintaining the integrity of your workforce. Incorrect classification can not only hinder compliance with ACA requirements but also expose your business to potential legal action from state and federal authorities for violating equal pay laws, which are increasing at a rapid rate.
The burden for proper employee classifications falls on your organization, and it’s advisable to regularly review your workforce composition to avoid any unexpected issues during filing season.
If your business requires assistance in correctly classifying workers, determining ALE status, and adhering to ACA regulations, turn to Trusaic to ensure you’re 100% compliant with the requirements of the ACA’s Employer Mandate.
