How To Calculate FTEs To Determine ALE Status

As a business owner, you must understand if the Affordable Care Act’s (ACA) employer mandate applies to you. Knowing the number of full-time equivalent employees (FTEs) your company has allows you to determine if the federal government considers your business an applicable large employer (ALE). If you’re an ALE, you must comply with the employer mandate or pay a penalty.

You can avoid penalties by offering affordable health coverage that meets minimum essential coverage (MEC) and provides minimum value to at least 95% of full-time employees and their dependents. But first, you’ll need to calculate the number of FTEs at your organization to see if the mandate applies to your business.

In this blog post, you’ll learn:

• The simple steps for determining your organization’s FTE count to see if you qualify as an ALE under the ACA.
• The health insurance criteria ALEs must meet and the tax penalties for noncompliance.
• The coverage options for ALEs that can satisfy the employer mandate.

What is an ALE?

An ALE is an organization that has 50 or more FTEs. According to the ACA, ALEs must offer health insurance policies to at least 95% of their full-time employees and their dependents or potentially be subject to a tax penalty.

Under this mandate, a dependent is an employee’s child or individual in the employee’s care who hasn’t turned 26.

Your health plan must meet the following requirements to satisfy the employer mandate:

• It must provide MEC.
• The IRS must consider the coverage affordable.
  • The employee should not have to pay more than 9.02% of their household income for a self-only plan in 2025¹.
• The plan must provide minimum value.
  • The plan must cover at least 60% of the cost of covered healthcare services for a standard population. This is the actuarial value of bronze-tier plans on the individual market.

ALEs must also complete IRS forms 1094-C and 1095-C. These forms describe the type of healthcare you provided to meet the employer shared responsibility provisions (ESPR). It’s best to get help from your financial advisor to prevent tax filing errors.

You can determine your ALE status by calculating your total average FTEs during the prior year. If your business had fewer than 50 FTEs in the previous calendar year, the IRS doesn’t consider you an ALE. So, you don’t have to offer health insurance to your employees or pay a penalty.

However, employers of all sizes should provide health benefits to their employees to support their well-being and increase retention.

What are the tax penalties?

All organizations with 50 or more FTEs are ALEs. But, the IRS only penalizes companies with more than 30 full-time employees—not FTEs—for noncompliance with the mandate. The penalties are only triggered when at least one of those workers finds health coverage on the Health Insurance Marketplace and uses premium tax credits to help pay for it.

The two penalties for ALEs, also known as employer shared-responsibility payments (ESRP), are as follows:

1. The Section 4980H(a) penalty
   1. This applies when an ALE doesn't offer MEC to at least 95% of its full-time employees in any given calendar month. To trigger it, a single full-time employee must receive a premium tax credit to help pay for coverage through an ACA marketplace.
   2. This penalty is $241.67 per month (or $2,900 annualized) in 2025. You must multiply it by the number of full-time employees (minus the first 30).
2. The Section 4980H(b) penalty
   1. Suppose an ALE offers coverage to at least 95% of full-time employees. But, each full-time employee didn’t receive an affordable coverage option that met MEC and provided minimum value. In this case, the Section 4980H(b) penalty is applicable. To trigger it, a full-time employee must decline coverage from their employer and enroll in subsidized coverage on an ACA marketplace.
   2. In 2025, this penalty is $362.50 per month (or $4,350 annualized) for each full-time employee who receives subsidized coverage on an ACA marketplace (minus the first 30). The penalty can’t exceed the amount the employer would owe under the 4980H(a) penalty.

What is an FTE employee?

Employers who offer employee benefits often wonder what the difference is between a full-time employee and a full-time equivalent employee.

Here’s how full-time employees and full-time equivalent employees compare:

• The ACA considers an individual employee full-time if they average at least 30 hours per week or at least 130 hours per month.
  • Thirty hours per week is the minimum number of hours the IRS needs an individual to work to classify that employee as full-time under the ACA. However, many business owners’ company policies consider an employee with a 40-hour workweek a full-timer. When considering health insurance, you must count those working 30 or more hours as full-time.
• A full-time equivalent is a unit of measurement. It’s the total number of full-time hours worked by both full- and part-time employees at an organization.
  • When calculating FTEs, you must count the hours of employees who are considered part-time and work fewer than 30 weekly hours.

A business owner can calculate how many full-time employees they have and the number of part-time hours that count as full-time equivalent employees to make up their total FTE count.

What is the difference between FTE and headcount?

An FTE count and headcount are different methods of measuring business size, but they serve different purposes.

A headcount counts the total number of people employed at your organization or within a particular department. Depending on how many part-time workers you have, you’ll likely have a higher overall headcount than FTEs.

Your headcount is essential for various reasons, including:

• Tracking your employee turnover
• Calculating the productivity of your workforce
• Budgeting for labor costs
• Comparing the size of your entire workforce to your industry competitors

Unlike FTEs, you determine your headcount regardless of how many full-time or part-time employees you have or the number of hours per day per week they work.

How do you calculate monthly FTEs?

To determine if your company is an ALE, you must include all FTEs in your total number.

Let’s start with part-time workers:

• Add the average number of hours worked each month by all part-time workers in the previous year. This number should also include hours worked by your seasonal or temporary workers.
• Divide the total by 120. This gives you the number of FTEs in your part-time workforce.
  • The ACA defines one FTE as a block of 120 hours worked by part-time employees each month. This differs from what the ACA defines as a full-time employee, which is a person who works an average of 130 hours per month.

Add the number of full-time employees (anyone who works 30 or more hours each week) to your FTE count of part-time employees to get your total number of FTEs at your organization.

To look at it another way, check out the formula below:

(Total part-time hours in a month / 120) + the number of full-time employees = Number of FTEs for the month

According to the IRS, you should round the result down to a whole number.

Here’s an example calculation for an organization with 30 full-time employees and 10 part-time employees:

Let’s assume that each part-time employee works 20 hours per week. There are 4.3 weeks per month on average. This is 86 hours per month for the part-time employees.

You don’t need to include the following employees in your FTE calculations:

• A sole proprietor
• A partner in a partnership
• A 2% or more S corporation shareholder
• Independent contractors

Remember, your business isn’t an ALE if you employed fewer than 50 FTEs on average during the previous calendar year.

The number of employees you have may change from one year to the next. So, it's crucial to calculate your FTEs each calendar year to determine your ALE status and avoid penalties.

What is the seasonal worker exemption?

As mentioned above, you must count seasonal or temporary employees in your FTE calculations. The IRS defines these individuals as employees working on a seasonal basis who you hire into a position for an annual employment of less than six months.

If you have seasonal workers whose hours cause your total number of employees to exceed 50 or more, you may qualify for the seasonal worker exemption².

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

1. Your workforce exceeds 50 full-time workers (including FTEs) for 120 days or fewer during the calendar year, AND
2. The employees in excess of 50 employed during the 120-day period of time are seasonal workers.

Why are FTE calculations necessary for employers?

Besides ALEs needing to know if their FTE count means they have to comply with the employer mandate, knowing how many FTEs you have is vital for your company’s metrics. Tracking your employees’ workloads and output between your full-time employees and FTEs can help you evaluate real performance and make improvements.

Some state and federal employment laws will only apply to your organization if you have a certain number of FTEs. This is like how specific labor laws only apply to those with full-time employment but not part-time employees.

Calculate your employees' average hours per week and your FTEs yearly to maintain an accurate picture of your business.

What are the health insurance options for ALEs?

If you qualify as an ALE, you must offer comprehensive health coverage that satisfies the employer mandate. Luckily, there are a few options available to you. Let’s briefly go over them in the sections below.

Traditional group health insurance

Traditional group health insurance is a common way to offer your employees health coverage. A type of employer-sponsored health plan, business owners choose and offer a group health plan to their employees and eligible dependents and split the cost of this coverage with their employees.

You can buy a group health policy through an insurance carrier, licensed agent, or broker. Because you’re an ALE, you’ll likely be able to access lower premiums and meet the minimum participation requirements. Insurers often require at least 70% of your employees to participate in the coverage.

While it’s a familiar option for most employees, group health insurance can have downsides, including:

• Depending on your workforce demographics and location, the coverage may not meet every employee’s unique needs
• You may have limited plan options. This is especially true if you’re a remote company with your entire staff across the U.S.
• Group plans can come with high premiums and steep annual rate hikes

Health reimbursement arrangements (HRAs)

One of the most flexible options for ALEs is a health reimbursement arrangement (HRA). An HRA is a tax-free health benefit employers use to reimburse employees for individual health insurance premiums and qualified out-of-pocket medical expenses. Employers often leverage an HRA as an alternative to group health insurance policies.

With an HRA, you set a monthly allowance that your employees can spend on healthcare costs. Once employees make an approved purchase, you reimburse them tax-free up to their allowance amount.

HRAs are an excellent option for business owners because they have no annual rate hikes, participation requirements, or minimum contribution limits. This flexibility makes them ideal for every organization’s budget, size, and location. Better yet, reimbursements are free of payroll taxes for employers and income-tax-free for employees.

The following two HRAs can work for ALEs:

1. Individual coverage HRA (ICHRA): The ICHRA is for organizations of all sizes. This type of HRA has no maximum contribution limits. You can also set different eligibility requirements and vary allowance amounts based on 11 employee classes to customize the benefit. For example, you could offer the benefit to only full-time employees or offer a smaller allowance to part-time employees. If you offer an affordable ICHRA allowance, the benefit can satisfy the ACA’s employer mandate.
   1. Only employees with a qualifying form of individual health insurance can participate. They can buy a qualified health plan on a public health exchange, such as the federal Health Insurance Marketplace, or a private exchange.
2. Group coverage HRA (GCHRA): Also known as an integrated HRA, this benefit is specifically for employers who offer a group health plan. It allows you to reimburse your employees tax-free for out-of-pocket medical expenses like deductibles and coinsurance. Like the ICHRA, there are no minimum or maximum employer contribution limits. A GCHRA can’t reimburse employees for premiums.
   1. Only employees enrolled in your company’s group health plan can participate in the benefit.

Conclusion

The ACA helps to ensure that as many people as possible have affordable health insurance. While the law doesn’t require all businesses to offer health insurance to their workers, employers with 50 or more FTEs are ALEs and must follow the employer mandate. Thankfully, business owners can easily confirm their ALE status.

Knowing the difference between full-time employees, part-time employees, and a full-time-equivalent count is a good place to start. Proper calculations can help you meet employer mandate regulations, submit proper reporting, and avoid penalties.

If you are a new ALE and are new to offering a health benefit, PeopleKeep can help. We specialize in helping 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, is a great option. Remodel Health’s ICHRA+ solution is designed to meet the needs of larger organizations.

If you believe an HRA is the best way to satisfy the employer mandate, contact us at PeopleKeep, and we’ll help you get started!

This article was originally published on January 21, 2022. It was last updated on January 6, 2025.

1. Affordability threshold for 2025

2. ALEs and seasonal workers