Determining If an Employer Is an ALE
Generally, an employer is a “large employer” if it employs 50 or more EFTEs during the preceding calendar year. Seems simple, right? Well, it is not all that simple, because several issues come into play in determining what constitutes an FTE. What else would you expect? Consider this to be an overview of the issues that does not necessarily cover all the intricacies that apply.
Taxpayer Advocate Service Online Estimator
The IRS’ Taxpayer Advocate Service has developed an Employer Shared Responsibility Payment (ESRP) Estimator to help employers determine the number of their full-time and full-time equivalent employees and make an estimate of the maximum amount of the potential liability for the employer shared responsibility payment that could apply if they fail to offer coverage to their full-time employees. The estimator can be accessed at: https://taxpayeradvocate.irs.gov/estimator/esrp/
Employee Categories Not Considered FTEs
The final regulations provide clarifications regarding whether employees of certain types or in certain occupations are considered full-time, including:
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Volunteers: Hours contributed by bona fide volunteers for a government or tax-exempt entity, such as volunteer firefighters and emergency responders, will not cause them to be considered FTEs.
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Educational Employees: Teachers and other educational employees will not be treated as part-time for the year simply because their school is closed or operating on a limited schedule during the summer.
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Seasonal Employees: Those in positions for which the customary annual employment is six months or less generally will not be considered FTEs.
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Student Work-study Programs: Service performed by students under federal or state-sponsored workstudy programs will not be counted in determining whether they are FTEs.
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Adjunct Faculty: In general, employers of adjunct faculty are instructed to use a method of crediting hours of service for those employees that is reasonable in the circumstances and consistent with the employer responsibility provisions. For this purpose, the regulations specify that crediting an adjunct faculty member with 2.25 hours of service per week for each hour of teaching or classroom time is reasonable.
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Work Performed Outside the U.S.: In determining whether an employer is an ALE, an employer generally takes into account only work performed in the United States. Thus, employees working only abroad, whether or not U.S. citizens, generally will not be taken into account for purposes of determining whether an employer is an ALE.
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Veterans: Shall not be taken into account as a FTE for any month the individual has medical coverage under Tricare or the Veterans Administration (Transportation Act of 2015).
Methods of Determining FTE Status
An employer’s number of FTE matters for purposes of whether the Employer Shared Responsibility provisions apply to the employer. An employer identifies its FTEs based on each employee’s hours of service. An employee is a FTE for a calendar month if he or she averages at least 30 hours of service per week. Under the final regulations, for purposes of determining FTE status, 130 hours of service in a calendar month is treated as the monthly equivalent of at least 30 hours of service per week.
The final regulations provide two measurement methods for determining whether an employee has sufficient hours of service to be a FTE.
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Monthly Measurement Method: Under this method, an employer determines each employee's status as a FTE by counting the employee's hours of service for each month. For employees paid on an hourly basis, an employer is required to calculate actual hours of service from records of hours worked and hours for which payment is made or due. For employees paid on a non-hourly basis (e.g., salaried employees), an employer may calculate the actual hours of service using the same method as for hourly employees, or use a days worked equivalency crediting the employee with eight hours of service for each day for which the employee would be required to be credited with at least one hour of service, or a weeks-worked equivalency under which an employee would be credited with 40 hours of service for each week for which the employee would be required to be credited with at least one hour of service, (Reg. § 54.4980H-3(c))
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Look-Back Measurement Method: Under this method, employers may determine the status of an employee as a FTE during a future period (referred to as the stability period), based upon the hours of service of the employee in a prior period (referred to as the measurement period). The stability period is a period selected by an ALE, that immediately follows, and is associated with, a standard measurement period or an initial measurement period (and, if elected by the employer, an administrative period of no longer than 90 days). The standard measurement period is a period of at least three months but not more than 12 months, as determined by the employer. The employer determines the months in which the standard measurement period starts and ends, provided that the determination is made on a uniform and consistent basis for all employees in the same category.
CAUTION –The look-back measurement period of some employees may change because of situations in which an employee transfers from one position to another within the same ALE, and the employer uses a different measurement period for each position. Also, there are special rules when an employer changes between the monthly and the look-back measurement methods. Refer to Notice 2014-49 for guidance in both situations.
Hours of Service
Generally, an hour of service means each hour for which an employee is paid, or entitled to payment, for the performance of duties for the employer, and each hour for which an employee is paid, or entitled to payment, for a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence.
Under the final regulations, an hour of service does not include any hour of service performed as a bona fide volunteer, as part of a Federal Work-Study Program (or a substantially similar program of a State or political subdivision thereof) or to the extent the compensation for services performed constitutes income from sources without the United States.
In addition, until further guidance is issued, a religious order is permitted, for purposes of determining if an employee is a full-time employee for the Employer Shared Responsibility provisions, to not count as an hour of service any work performed by an individual who is subject to a vow of poverty as a member of that order when the work is in the performance of tasks usually required (and to the extent usually required) of an active member of the order.
Treasury and the IRS continue to consider additional rules for the determination of hours of service for certain categories of employees whose hours of service are particularly challenging to identify or track or for whom the general rules for determining hours of service may present special difficulties (including adjunct faculty, commissioned salespeople and airline employees) and certain categories of work hours associated with some positions of employment, including layover hours (for example for airline employees) and on-call hours. For this purpose, until further guidance is issued, employers are required to use a reasonable method of crediting hours of service that is consistent with section 4980H. The preamble to the final regulations includes examples of methods of crediting these hours that are reasonable and that are not reasonable, including a method that is considered reasonable for crediting hours of service for adjunct faculty members.
New Employer Issues
If the employer was not in existence during the preceding calendar year, the final regs include special rules for new employers establishing a group health plan in the first months of operation. (Reg. § 54.4980H-2(b)(3))
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First Calendar Year of Operation - The determination of whether a new employer is a large employer in its first calendar year of operation is based upon the employer's reasonable expectations at the time the business came into existence. This is true, even if the actual number of full-time employees exceeds that reasonable expectation.
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Multiple Related Entities & The 30 Rule - For purposes of Code Sec. 4980H(a) liability calculation, with respect to a calendar month, the number of FTE of an applicable large employer member (i.e., one of multiple related entities that, due to the application of the aggregation rules, make up an ALE) is reduced by that member's allocable share of 30. (Reg. § 54.4980H-4(e))
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New Employee Waiting Period - Under the look-back measurement method, if a new employee is reasonably expected to be a full-time employee and is otherwise eligible for coverage, and the employer offers coverage to the employee by the first day of the calendar month following the conclusion of the employee's initial three full calendar months of employment, the employer will not be subject to a penalty for those three months if the coverage offered provides minimum value. (Reg. § 54.4980H-3(d)(2)(iii))
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Employee Start Date - An employer is also not subject to a penalty with respect to an employee for the first calendar month of the employee's employment if the employee's start date is other than the first day of the calendar month. (Reg. § 54.4980H-4(c), Reg. § 54.4980H-5(c))
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Employer Not in Existence in Prior Year - In a case where an employer was not in existence during the preceding calendar year, the seasonal worker exception applies so that the employer will not be treated as an ALE if it reasonably expects: (1) its workforce to exceed 50 EFTE for 120 days or fewer during the current calendar year, and (2) the employees in excess of 50 employed during such 120-day period to be seasonal workers. (Reg. § 54.4980H-2(b)(2))
An employer that was not in existence on any business day in the prior calendar year is considered an ALE in the current year if the employer is reasonably expected to employ an average of at least 50 EFTE on business days during the current calendar year and it actually employs an average of at least 50 EFTE on business days during the calendar year. In contrast, for the next year (the year after the first year the employer was in existence), the employer will determine its status as an ALE using the rules that generally apply (that is, based on the number of EFTEs that the employer employed in the preceding year).
Other Issues
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Commonly Owned or Related Businesses - If two or more companies have a common owner or are otherwise related, they are combined for purposes of determining whether they employ enough employees to be subject to the employer mandate. However, these rules for combining related employers do not apply for purposes of determining whether a particular company owes an employer shared responsibility payment or the amount of any payment. Rather, these determinations are made separately for each related company. (Q&A 6)
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Types of Employers Subject to the Mandate - In addition to for-profit businesses, non-profit and government entity (including federal, state, local, and Indian tribe) employers are subject to the employer mandate if they are ALEs. (Q&As 7 - 8)
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Eligible for Health Care Coverage from Another Source - For purposes of determining whether an employer is an ALE, all employees are counted (subject to a limited exception for certain seasonal workers), regardless of whether the employees are eligible for health coverage from another source, such as Medicare, Medicaid, or a spouse’s employer. Thus, an ALE with full-time employees who are eligible for health coverage through another source, will be subject to the Employer Shared Responsibility provisions regardless of whether those employees are eligible for coverage from another source. But employees who are eligible for Medicare or Medicaid are not eligible for a premium tax credit. If no full-time employee receives a premium tax credit (for example, because all of an employer’s full-time employees are eligible for Medicare or Medicaid), the employer will not be subject to an Employer Shared Responsibility payment. The IRS has issued final regulations adopting an intentional or reckless disregard for the facts exception to the Code Sec. 36B eligibility safe harbors for household income below 100 percent of the Federal Poverty Level (FPL), government programs such as Medicaid, and employer-sponsored coverage. The final regulations generally apply for tax years beginning after December 31, 2016. However, if an ALE does not offer coverage to its FTEs (and their dependents) or offers coverage to fewer than 95% (beginning in 2016) of its FTE (and their dependents) and a FTE receives a premium tax credit, the employer will be liable for a penalty, which will be calculated based on the employer’s number of FTEs. For this purpose, the number of FTEs includes FTEs who are eligible for coverage from another source.
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Employees Receiving PTC – For purposes of determining whether an employer is an ALE, all employees are counted (subject to a limited exception for certain seasonal workers). Thus, an ALE with FTEs who are exempt from the individual insurance provision will be subject to the Employer Shared Responsibility provision. However, if no FTE receives a premium tax credit, the employer will not be subject to a penalty. If an ALE does not offer coverage to its FTEs (and their dependents) and a FTE receives a premium tax credit, the employer will be liable for a penalty which will be calculated based on the employer’s number of FTEs.
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Waiting Period - A group health plan or group health insurance issuer cannot impose, as a condition of eligibility for coverage under the plan, a waiting period that exceeds 90 days. In addition, a one-month orientation period can begin any day of a month (Reg. Sec. 54.9815-2708(c)(3)(iii)).
Example - An employee begins working full time for an employer on Oct. 16. The employer sponsors a group health plan, under which full-time employees are eligible for coverage after they have successfully completed a bona fide one-month orientation period. If the employee completes the orientation period on Nov. 15, health plan coverage for the employee must begin no later than Feb. 14, which is the 91st day after the end of the orientation period.
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Mandatory Electronic Filing – All employers filing 250 or more Forms 1095-C have had to file Forms 1094-C (transmittal form) and 1095-C electronically.
The IRS has adopted final regulations that lower the number of information reporting forms, such as the 1095-C, for the electronic filing threshold to 10, for returns required to be filed during calendar years on or after January 1, 2024. (TD 9972, Feb. 22, 2023) Proposed regulations that would have reduced the filing threshold from 250 to 100 for forms required to be filed in 2022 and 2023 were not adopted.
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1095-C Reporting Requirements - All ALEs, regardless of whether the employer is a tax-exempt or government entity (including federal, state, local, and Indian tribal governments), are subject to the 1095-C reporting requirements. (Q&A 6) The due date for filing the 2023 1095-Cs is February 28, 2022 (April 1 if filed electronically). (Reg Sec 301.6056-1(e)) In past years the IRS has provided an automatic 30-day extension for furnishing the employee’s copy, so watch for announcements for filings due in 2024, as their due date may also be extended. An ALE must report information with respect to all FTEs, even ones who are not offered coverage during the year. If an ALE does not offer coverage to any of its FTEs, the employer must file returns with IRS and furnish statements to each of its full-time employees to report information specifying that coverage was not offered. (Q&A 21)
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Spouses – Employer plans are not required to cover spouses.
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Dependents – Coverage must be included for an employee’s child who is under the age of 26. Coverage must include the full month in which the child turned 26., The definition of a child for these purposes excludes step and foster children., Excluded from the definition are children who are not U.S. Citizens or nationals, except for those residing in Canada or Mexico or a child who is an adopted child that has the same principal place of abode as the taxpayer and is a member of the taxpayer's household.
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Employees Outside the U.S. - An employer generally considers only work performed in the U.S. in determining whether it is an ALE – so, a foreign employer with fewer than 50 EFTE in the U.S. generally won't be subject to the employer mandate. Similarly, a company that employs U.S. citizens working abroad would only be subject to the employer mandate if the company had at least 50 EFTE, determined by taking into account only work performed in the U.S. (Q&As 13 -14)
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Seasonal Employees - Under an exemption, an employer will not be considered to employ more than 50 EFTE if: (a) the employer's workforce exceeds 50 FTEs for 120 days, or fewer, during the calendar year; and (b) the employees more than 50 employed during that 120-day (or fewer) period were seasonal workers. Seasonal workers are workers who perform labor or services on a seasonal basis as defined by the Secretary of Labor, and retail workers employed exclusively during holiday seasons. For this purpose, employers may apply a reasonable, good faith interpretation of the term "seasonal worker." (IRS Q&A #4) Special rules apply to construction industry employers.
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Full-time Employee - A FTE is an employee who, for a calendar month, is employed an average of at least 30 hours of service per week with the employer. For this purpose, 130 (30x52 = 1,560/12 = 30)service hours in a calendar month is treated as the monthly equivalent of at least 30 hours per week. (Regulations sections 54.4980H-1(a)(21) and 54.4980H-3 and Notice 2014-49, 2014-41 I.R.B. 66)
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Part-Time Employees - Solely for purposes of determining whether an employer is an ALE, an employer will also have to include for that month the number of FTEs determined by dividing (a) the aggregate number of hours of service of employees who are not FTEs for the month by (b) 120.
Example – Equivalent Full-Time Employees - For his business, John has 45 full-time employees plus he has 20 part-time employees. His part-time employees for the month of January worked 960 hours. That is the equivalent of 8 (960/120) full-time employees. Thus, the number of John’s full-time employees for the month of January is 53 (45 + 8).
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Prior Employee – A rehired prior employee cannot be treated as a new hire if the employee had one hour of work in the prior 13 weeks., Note: There is a “parity” rule that shortens the period to be classified as a new hire. That applies when the no work period plus 4 weeks exceeds the duration of the previous period of work.
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Continuing Employee – A continuing employee, one that does not meet the 13-week rule, is considered a full-time employee upon resumption of services (no waiting period).
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Penalty Deductibility – This excise tax penalty is nondeductible under the general rules for excise taxes. (Code Sec. 275(a)(6)),
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Rounding of Full-Time Employee Count – The sum of the FTEs and EFTEs is determined, and then that number rounded down to the nearest whole number before determining if the employer meets the 50- employee threshold.
Example: The employer has 35 FTEs and his part time employees worked 1,750 hours. Thus, his EFTEs are 14.58 (1,750/120). Adding the FTEs and the EFTEs together results in a total of 39.58 (35 + 14.58). That result is then rounded down to 39 before making the determination if the employer is an ALE.
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Benefit Hours – The hours used to determine full-time status include both hours worked and benefit hours for which the employee was paid. Benefit hours include holiday, vacation, sick time, jury duty or any period of paid leave.