Having recently helped a client determine if it employed on average more than 50 employees per month in a calendar year and therefore was an applicable large employer (“ALE”) subject to the Affordable Care Act (“ACA”) in the following calendar year, I had many opportunities to see the complexities of the ACA’s rules in operation.
There are numerous steps that an employer should proactively take to determine if it is an ALE (or will be one) so that it is prepared for the reporting and coverage requirements imposed by the ACA.
ALE Determination Formula
ALE status depends on both the actual number of full-time employees and the number of “full-time equivalent employees” (“FTEs”). FTEs are counted based on a combination of part-time hours.
Subject to some specific exceptions, an employer’s status as an ALE for a particular calendar year is determined by adding the following together and dividing the total by 12:
- The total number of full-time employees for each calendar month in the preceding year. A full-time employee is any employee who is employed for 130 hours or more per month.
- The total number of FTEs for each calendar month in the preceding year. FTEs are a combination of employees, each of whom individually lacks the hours to count as full-time, but who in combination are counted as the equivalent of a full-time employee solely for determining ALE status. The number of FTEs is determined by adding the number of hours of service of employees who are not full-time (but not more than 120 hours per employee) for the month, and then dividing by 120. Fractions are taken into account. An employer may round the number of FTEs for each calendar month to the nearest one-hundredth.
If the result is not a whole number, it is rounded to the next lowest whole number. If the result is 50 or more, the employer is an ALE for the current calendar year.
Consequences of Being an ALE
Generally, for any year that a company is an ALE, it must furnish each ACA full-time employee with a report (IRS Form 1095-C) showing whether the company offered the employee minimum value coverage and whether the coverage was affordable. The Form 1095-Cs are then transmitted to the IRS with a Form 1094-C. Although described as a transmittal form, the Form 1094-C includes important disclosures about the company’s offers of coverage and could trigger significant penalties if not prepared completely and properly. Penalties for failure to furnish the Form 1095-C to employees and file them with the IRS could run as high as $540 per full-time employee.
Given the significant penalties for failure to furnish and file Forms 1094-C and 1095-C, companies that were under the 50 full-time and FTE threshold in 2018, and have added employees in 2019, should consider performing an interim calculation of the company’s ALE status for 2020.
If the company will be an ALE in 2020, the following steps should be taken:
- Confirm that the company’s payroll system gathers the data necessary to prepare Form 1095-C for each full-time employee.
- Review the company’s health plan eligibility rules and determine if coverage needs to be extended to variable hour employees who previously were not offered coverage. While best practice is to extend the offer of coverage as of January 1, 2020, there is a limited transition rule that may allow the company to avoid the ACA’s failure to offer coverage penalty for the months of January – March, if the offer is made by April 1st.
- Confirm that the employee’s cost for employee-only coverage as of January 1, 2020, meets one of the ACA’s affordability safe harbors. Unlike the offer of coverage penalty, there is currently no transition rule for the affordability penalties. A company that maintains its health plan on a fiscal year basis, and had set the employee cost sharing amount before the company knew it would be an ALE for 2020, may want to change its employee cost sharing amount so to avoid exposure to the penalty for failure to offer affordable coverage.
If the company is not an ALE for 2020, best practice is to retain in a safe place for future reference the data used in reaching that conclusion. The IRS has been sending letters to companies that the IRS believes were ALEs requesting the company file IRS Form 1095-C for the relevant year or provide information to demonstrate that the company was not an ALE.
Finally, in any year that a company files Forms 1094-C and 1095-C, I recommend that the Forms be reviewed by someone who understands the ACA rules. We have seen numerous situations where the company’s service provider failed to check the box on Form 1094-C, indicating that the employees were offered ACA compliant coverage when, in fact, the company did offer that coverage, and no one noticed the error. Catching the error before the forms are submitted will avoid unnecessary correspondence from the IRS.
Companies that have questions about ALE status or complying with the ACA’s rules should reach out to an experienced employee benefits attorney for guidance.