FAQs: ALEs and the ACA employer mandate

If you have 50 or more full-time equivalent (FTE) employees, you may wonder what your responsibilities are under the Affordable Care Act (ACA). Understanding the rules regarding minimum essential coverage (MEC), affordability, and minimum value can be challenging. But these regulations, outlined in the ACA’s employer mandate, are critical to your business’s success.

Applicable large employers (ALEs) that don’t comply with the employer mandate can be subject to significant penalties. That’s why it's crucial to have a good grasp of the requirements.

In this blog post, you’ll learn:

• How to determine if your business qualifies as an ALE under the ACA.
• What the ACA employer mandate entails and how to avoid penalties.
• Insights into the tax reporting responsibilities for ALEs, including those for employers offering an individual coverage health reimbursement arrangement (ICHRA).

What is an ALE?

The federal government considers a company an ALE if it has at least 50 FTEs. Under the ACA, an employee is a full-time worker if they average at least 30 hours of service per week or at least 130 hours of service during the calendar month.

However, your FTE count is the sum of your organization's full-time employees and the equivalent full-time hours worked by part-time employees.

You don’t need 50 FTEs at all times to be an ALE. Generally, if an employer has a monthly average of at least 50 FTEs during a current calendar year, the IRS considers them an ALE for the following calendar year.

How does an employer calculate workforce size to determine if they’re an ALE?

To determine if your business is an ALE, you must count all your full-time employees and the full-time equivalent of your part-time workers. For these calculations, you count only U.S. employees. You also don’t count sole proprietors, partners in a partnership, independent contractors, or S-corporation shareholders who own 2% or more of the company as employees.

Here’s a quick step-by-step overview of the FTE calculation:

1. Calculate the average monthly hours worked by all part-time workers over the previous year. If you have any seasonal or temporary employees, you must also include their hours.
2. Divide the above total by 120. This will give you the number of FTEs in your part-time workforce.
3. Add the number of full-time employees who work 30 or more hours each week to the number of part-time FTEs. You’ll round this number to the lowest whole number. For example, 37.17 becomes 37. The result is your organization's total FTE count.

If your seasonal workers’ hours cause your FTE count to exceed 50 or more, you may be able to apply for the seasonal worker exemption¹.

You qualify for the seasonal worker exemption if you meet both of the following criteria:

1. Your staff exceeds 50 FTEs for 120 days or fewer during the calendar year, AND
2. The employees causing your workforce to exceed 50 FTEs during the 120-day period are seasonal workers.

Your number of employees will likely change annually. So, recalculate your FTEs each calendar year to keep your ALE status updated.

How does common ownership impact ALE status?

Businesses with shared ownership are considered a controlled group and must determine whether the entire group is an ALE. These employer aggregation rules apply even if the companies are separate legal entities.

If the controlled group is an ALE, each component—or individual business—of that group is also an ALE, regardless of its individual FTE count. This means the company is also subject to the employer shared responsibility provisions.

How does timing impact ALE status calculation?

Generally, you use information from the prior calendar year to determine your ALE status. If an employer existed only for part of the previous calendar year, they can prorate the calculations.

Suppose a company wasn’t in existence on any business day in the prior calendar year. In this case, the employer is an ALE if they are reasonably expected to hire an average of at least 50 FTEs on a business day during the current calendar year.

What is the employer mandate?

The employer shared responsibility provisions of the ACA are commonly called “the employer mandate.” The additional rules within the employer mandate apply only to ALEs.

The ACA employer mandate requires ALEs to offer at least 95% of their full-time workers and their dependents affordable health insurance that meets MEC and provides minimum value. If they don’t, they may be subject to employer mandate penalties in the form of shared responsibility payments.

If you have fewer than 50 FTEs, the federal government doesn’t consider you an ALE. Therefore, you don’t have to offer your employees health coverage. You also won’t face any penalties.

What’s minimum essential coverage?

Minimum essential coverage (MEC) is the minimum level of health coverage an ALE must provide to at least 95% of their full-time employees to avoid paying a penalty.

ALEs must offer their employees employer-sponsored health insurance that provides MEC, which could be in the form of:

• An employer-sponsored small or large group health insurance plan
• A grandfathered health plan
• A stand-alone health reimbursement arrangement (HRA) paired with an ACA-compliant qualified health plan such as those purchased on a public exchange, like the federal Health Insurance Marketplace. This will allow your employees to shop for and enroll in an individual health plan.
  • The only stand-alone HRA available to ALEs is the individual coverage HRA (ICHRA)

What is minimum value?

ALEs must offer their employees coverage that provides minimum value. This means the policy must cover at least 60% of the average costs for a standard population, which is the actuarial value for bronze plans sold on the individual market. Employers who don’t comply will be subject to a penalty.

In addition to minimum value, qualified health plans must provide employees with substantial coverage for inpatient medical care and physician services.

How does the federal government define and calculate affordability?

You calculate affordability using an employee’s household income and the share they must pay toward their monthly health insurance premium.

In 2025, the IRS considers an employer-sponsored health plan affordable as long as the premium for the lowest-cost self-only coverage doesn’t exceed 9.02% of an employee’s annual household income. Total household incomes include income from everybody in the household who files a tax return².

You can use the ACA’s safe harbors since you likely don’t know your employees’ household incomes. The most popular safe harbor uses the annual federal poverty level (FPL).

Individual coverage HRA (ICHRA) affordability

Employers offering an individual coverage HRA (ICHRA) to satisfy the ACA must provide an affordable allowance to at least 95% of their full-time employees. You’ll use the lowest-cost individual silver plan to calculate the minimum HRA allowance you must offer. You’ll also use the non-tobacco user rate even though it may not reflect the employee’s situation.

Your allowance must be greater than or equal to the minimum to be “affordable.” If it’s less than that, the ICHRA is unaffordable, and you may face a penalty.

The federal government allows you to use affordability safe harbors if you need help calculating affordability to avoid penalties. In addition to affordability requirements, those with an ICHRA must ensure their plans meet minimum value. Employees participating in the benefit must purchase family coverage or self-only coverage from a public or private exchange. They can also buy a catastrophic plan, Medicare policy, or student health plan (except for self-insured student coverage) if eligible.

The following plans don’t currently meet the minimum value requirement for an ICHRA plan:

• Short-term health plans
• Healthcare sharing plans
• TRICARE medical coverage

The federal government also doesn’t consider these plans individual coverage. Therefore, employees with these policies aren’t eligible to participate in an ICHRA. However, these individuals can buy other qualified health insurance and accept your ICHRA benefit. Or they can decline the ICHRA if their allowance is unaffordable and buy another policy type.

However, if your ICHRA is unaffordable and an employee is eligible for federal subsidies, like premium tax credits, you may be subject to an employer shared responsibility provisions penalty.

Does the employer mandate require business owners to offer coverage to dependents?

Yes, the employer mandate requires you to offer compliant, affordable health coverage to 95% of full-time employees and their dependents. Under the employer mandate, a dependent is an employee’s child who hasn’t reached the age of 26. This includes a child who has been legally adopted or placed for adoption.

The ACA doesn’t consider the following individuals to be eligible for dependent coverage:

• Spouses
• Stepchildren
• Foster children
• Non-U.S. citizen children not living in the U.S. or a contiguous country

When would an employer be subject to potential employer shared responsibility tax penalties?

There are two types of employer shared responsibility tax penalties:

1. The Section 4980H(a) penalty is for an ALE that doesn’t offer MEC to at least 95% of their full-time employees and dependents in any given calendar month.
2. The Section 4980H(b) penalty applies to ALEs that don’t offer affordable or minimum value employee coverage to their full-time workers and dependents.

In each case, these ALEs are only subject to these potential penalties if at least one full-time employee receives premium tax credits to help them purchase coverage on the ACA Marketplace.

Now that we’ve reviewed the details of each penalty and how they’re affected by tax subsidies let’s examine the cost of failing to meet the requirements.

How much are the penalties for failing to meet the employer mandate?

The IRS adjusts both employer mandate penalties annually. The IRS will impose the greater of the two fines, meaning you can’t receive both penalties.

For 2025, the penalty amounts are as follows³:

1. Section 4980H(a) penalty: If at least one full-time employee receives a premium tax credit to help pay for coverage through an ACA marketplace exchange, the ALE will receive a monthly penalty of $241.67 (or an annual penalty of $2,900) per employee.
   1. The IRS multiplies the penalty by your number of full-time employees—not FTEs. Also, you don’t need to factor in the first 30 full-time employees in that calculation. So, while you’re an ALE, if you have more than 50 FTEs, you’re only subject to a financial penalty if you have more than 30 full-time employees—not FTEs.
2. Section 4980H(b) penalty: If at least one full-time employee doesn’t receive a health plan option that’s affordable, meets MEC, or provides minimum value, the ALE will be subject to a monthly penalty of $362.50 (or an annual penalty of $4,350) per employee with tax credits.

Get our employer mandates penalties flowchart to learn more about how you can avoid costly fines.

Do ALEs need to comply with COBRA?

ALEs employ more than 20 people for over half of a business year, which means they’re subject to federal COBRA coverage rules. You must allow eligible employees to elect COBRA when terminating them from group health insurance or an ICHRA benefit. You may also be subject to additional state COBRA laws.

What are the reporting requirements for ALEs who provide an ICHRA?

Reporting requirements dictate that ALEs who provide an ICHRA must complete certain tax forms to determine affordability for their ICHRA plan.

You must complete the following tasks to comply with federal regulations:

• Submit Form 1094-C to the IRS, which provides information about the coverage you offer your employees.
  • Include every full-time and part-time employee from the tax year who participated in your ICHRA.
• Send Form 1095-C to your employees, which tells them how you calculated affordability.
  • All full-time employees who worked for at least one month must receive a 1095-C form on or before January 31 of the following year⁴.

You must combine all your tax forms. Additionally, if you’re filing ten or more aggregate returns, you must file electronically⁵. The deadline for filing electronically is March 31 of the following year⁶.

If you need more time to file your reporting forms, you can get a 30-day extension by submitting Form 8809 if your reason for extension has good cause⁷. Work with your tax advisor if you need help completing Forms 1094-C, 1095-C, or 8809.

Is an ALE status relevant to ICHRA minimum class size requirements?

Minimum class size requirements only apply to ALEs offering employer-sponsored group coverage to at least one class of employees while offering an ICHRA to another class. While there are 11 potential ICHRA employee classes, only some have class size requirements.

Minimum class size rules apply to the following employee classes:

1. Salaried employees
2. Hourly employees
3. Full-time workers
4. Part-time workers
5. Geographic location
   1. This only applies if the rating area is smaller than the state level, such as a county area.

If the ICHRA is your only health benefit, minimum class size rules don’t apply. However, there are class size requirements based on organization size.

The class size minimums are as follows:

• If you have fewer than 100 eligible employees, your class must include at least 10 employees
• If you have between 100-200 employees, your class must consist of at least 10% of your employees
• If you have more than 200 employees, your class must have at least 20 employees

Does PeopleKeep help employers satisfy the employer mandate?

PeopleKeep’s HRA software helps you design your ICHRA benefit to comply with the employer mandate requirements. Through our platform, you can set a custom allowance that fits your budget and is affordable for all your employees.

While we do everything we can to help you comply with federal regulations, it’s ultimately your responsibility to create an IRS-compliant employee benefit.

Conclusion

As overwhelming as the ACA regulations seem, ALEs must understand them to stay compliant. Those who fail to meet the employer requirements may have to pay costly penalties, including fines for failing to complete their reporting obligations.

Employers subject to ACA requirements may find searching for a quality health benefit challenging. But, a customizable and flexible ICHRA can suit every organization’s needs. At PeopleKeep, we help small and medium-sized businesses offer health benefits through our ICHRA administration platform. If your organization is a larger ALE or looking for more robust support, our parent company, Remodel Health’s ICHRA+, is a great option.

Schedule a call with an HRA specialist at PeopleKeep to learn more about how we can improve your benefits package.

This article was originally published on October 8, 2020. It was last updated on January 10, 2025.

1. ALEs and seasonal employees

2. Affordable health insurance coverage

3. 26 CFR 601.601

4. Information reporting of health insurance coverage

5. E-filing rules for ACA tax form filings

6. Information reporting under Sections 6055 and 6056

7. IRS Form 8809