Understanding the details of the employer-shared responsibility provisions under the ACA can be challenging, especially as the IRS continues to issue penalties for non-compliance.
One of the first steps is determining whether or not your organization is an Applicable Large Employer (ALE). To find out whether or not your organization is an ALE, you must perform an aggregated employer analysis.
What is an aggregated employer analysis?
The aggregated employer analysis identifies which organizations must be grouped together for purposes of determining ALE status. Under the ACA’s Employer Mandate, an ALE is an “employer” with 50 or more full-time and full-time equivalent employees. However, the term “employer” includes all related entities under the employer aggregation rules.
If the grouping of organizations forms an ALE, then the “employer” must offer Minimum Essential Coverage to at least 95% of their full-time workforce and their dependents, whereby such coverage meets Minimum Value and is affordable for the employee.
Failing to adhere to these requirements can result in 4980H penalties, which the IRS is currently issuing via Letter 226J for the 2020 tax year.
Common ALE grouping situations
Oftentimes, small organizations with fewer than 50 full-time and full-time equivalent employees are not ALEs.
However, if they have common ownership, for example, these smaller organizations may be aggregated under the ACA, which can make the total employee count 50 or more full-time and full-time equivalent and therefore make them an ALE. See below for a real-world example of smaller organizations forming an ALE.
ALE grouping example
A husband and wife own a fast-food restaurant. Ownership is an even 50/50 split between the two of them. The husband and wife also have ownership in a different fast-food restaurant. The split there also is 50/50. The first restaurant had a total of 43 full-time and full-time equivalent employees for the 2021 reporting year. The second restaurant had a total of 15 full-time and full-time equivalent employees for the 2021 reporting year.
Now, viewed independently, neither one of these restaurants is an ALE. However, because of common ownership between the two restaurants, under the ACA these two restaurants form part of an aggregated employer group. That group is considered to be an ALE with a total full-time and full-time equivalent count of 58 employees for the 2022 reporting year.
That means that the Employer Mandate requirements apply to them and thus the employer must report their ACA information to the IRS and any state governments that mandate additional reporting for the 2022 tax year.
Had the analysis not been performed, the owners would not know they’re an ALE and thus subject to the ACA’s Employer Mandate, potentially exposing them to significant IRS penalties.
Conducting an aggregated employer analysis
Generally speaking, to perform an aggregate employer analysis you need the following information:
- All of the legal entities that could potentially relate through ownership or working relationship
- The business structure and date the business started
- The ownership for each respective entity
Before performing the analysis, make sure to have the IRS regulations close by. The tax agency provides strict guidelines on how to group entities for purposes of determining ALE status.
The reality here is that each ownership situation is unique. There are many nuances and details to take into account. When performing an aggregate employer analysis, it may be in your interest to perform the aggregate employer analysis by working with outside help who is familiar with dealing with the IRS on ACA issues, specializes in ACA compliance, and has expertise in data consolidation.
Bottom line, ALEs that fail to abide by the employer shared responsibility provisions of the ACA can receive significant penalties from the IRS.
If your organization needs assistance conducting an aggregated employer analysis, contact Trusaic for assistance.
Our comprehensive full-service software solution, ACA Complete handles everything for you, including data consolidation, employee eligibility for offers of coverage, annual and state reporting, measurement method implementation, affordability calculations, and IRS audit defense. Failing to accurately determine ALE status could land your organization a Letter 226J from the IRS.
To better understand the requirements of the ACA’s Employer Mandate, download the 2022 ACA Essential Guide for Employers below.
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.