While the Affordable Care Act (ACA) has been in effect for several years, new small business owners may wonder if the ACA laws apply to their business. The ACA was written with an employer mandate that requires businesses of a certain size to offer affordable health insurance with minimum essential coverage to their full-time employees and their children up to the end of the month that they turn 26. If a business does not meet this legal requirement, they may be subject to penalties. The very first step to understanding if a small business is required to offer health insurance to their staff is to determine whether the employer is an Applicable Large Employer (ALE).
What is an Applicable Large Employer?
An employer is considered an Applicable Large Employer for the current calendar year if they had at least 50 full-time employees (including full-time equivalent (FTE) employees), during the previous full calendar year. On the other hand, if an employer did not have at least 50 full-time employees (including FTEs), on average during the previous full calendar year, the employer would not be considered an ALE for the current calendar year.
How to Determine if You are an Applicable Large Employer under the ACA
Simply put, an employer must add up all its full-time employees* and full-time equivalent employees for each calendar month of the previous year and then divide the total number by 12 to get the average.
*Full-time employees are those who work an average of 30 hours or more per week. For purposes of counting employees for ALE status, an employer is not obligated to count employees who have medical care through the military.
1. To calculate full-time equivalents for each month, add up the hours worked by part-time employees over the course of a month, assigning no more than 120 hours per employee, then dividing the total number by 120.
2. Take the FTE number and add it to the number of full-time employees for that month to equal the total month count.
3. Calculate the total month count for each month then add all 12 numbers together.
4. Finally, divide the sum by 12 to get the average for the prior year. If the number isn’t a whole number, it is rounded down, regardless of how close it is to the next number. For example, if the average number is 51.9, it would be rounded down to 51. This rounding is very important if the number comes out to say 49.7 because it gets rounded down to 49 instead of rounded up to 50, which is the threshold for ALE status.
Businesses with fewer than 50 employees are exempt from the employer mandate and are not required to offer health insurance. However, if they choose to offer health coverage that coverage must meet certain ACA requirements.
It isn’t always as simple as you would think to determine whether a business is an ALE in a given calendar year. A qualified HR or tax expert can help you determine your status. One thing to consider is whether affiliated or related companies need to be included in the calculation of full-time and FTE employees. An ownership test is commonly used to determine whether common ownership exists. If it does then all employees would need to be counted as though they were part of a single employer, called an “Aggregated ALE Group.”
An ALE may be required to fulfill certain tasks under the Affordable Care Act, including requirements to submit certain year-end documents, such as Form 1095-C, to the IRS. Working with a Professional Employer Organization (PEO) is the best way to ensure that your business is meeting all employer requirements.
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With the cost of doing business in Hawaii at record highs, we know how important it is to keep labor costs in line with revenue. Our plans are priced competitively and include value-added services like time-in/time-out systems. Our three tiers of PEO service plans are tailored to the size of your business and specific needs. We offer a 100% paperless solution which means that your employees can manage their needs through a computer, tablet, or phone. We can truly improve your employees’ work benefits while freeing you up to run your business.
What are you waiting for? Companies that partner with a PEO benefit from 7-9% faster growth, 10-14% lower employee turnover; and they are 50% less likely to go out of business. Contact us today to get started!