How Is Applicable Large Employer (ALE) Status Computed?

Understanding Applicable Large Employer (ALE) status is important for businesses navigating the Affordable Care Act (ACA). An employer is an ALE if they had an average of at least 50 full-time employees, including full-time equivalents, during the preceding calendar year. This classification triggers specific obligations under the ACA’s employer shared responsibility provisions. Employers must accurately determine their ALE status annually to ensure compliance and avoid potential penalties.

Identifying Full-Time Employees

Determining the number of full-time employees is the initial step in computing ALE status. For ACA purposes, a full-time employee is an individual who averages at least 30 hours of service per week, or 130 hours of service per month.

“Hours of service” include hours actually worked and hours for which an employee is paid but does not perform duties. This includes paid leave such as vacation, holiday, illness, disability, jury duty, military duty, or other similar leaves of absence. Employers must track these hours to ensure an accurate assessment of each employee’s status.

Determining Full-Time Equivalent Employees

Beyond full-time employees, businesses must also account for full-time equivalent (FTE) employees when determining ALE status. FTEs represent the aggregate hours worked by employees who do not meet the full-time definition. To calculate FTEs, employers sum the hours of service for all non-full-time employees in a month and then divide that total by 120.

For instance, if part-time employees collectively work 4,000 hours in a month, dividing by 120 yields approximately 33.3 FTEs. The total count of full-time employees and FTEs combined determines whether an employer meets the 50-employee threshold for ALE classification.

Combining Employees for Related Entities

For accurate ALE determination, employers must consider aggregation rules, particularly if they are part of a controlled group or affiliated service group. These rules, established under Internal Revenue Code Section 414, mandate that all employees across related entities be combined for calculating ALE status. This means that even if individual entities within a group fall below the 50-employee threshold, their combined workforce might classify the entire group as an ALE.

Common ownership or control triggers these aggregation rules. For example, a parent company and its subsidiaries, or businesses under common control, are treated as a single employer. This prevents employers from segmenting their workforce into smaller entities to circumvent ACA requirements.

Applying the Look-Back Measurement Method

The most common approach for employers to determine ALE status for ongoing employees is the “look-back measurement method.” This method involves three distinct periods: the measurement period, the administrative period, and the stability period. The measurement period, chosen by the employer, ranges from 3 to 12 months, during which employees’ hours of service are tracked.

Following the measurement period is a short administrative period, up to 90 days, which allows employers to calculate employee hours, prepare offers of coverage, and facilitate enrollment. Finally, the stability period commences, during which coverage must be offered to employees determined to be full-time during the preceding measurement period. This stability period must be at least six months long and cannot be shorter than the measurement period. This approach provides a consistent framework for managing coverage obligations based on past employee activity.