FAQs: ACA and ALEs – What You Need to Know
As an ALE, understanding the regulations set forth by the Affordable Care Act (ACA) can feel complex, but mastering the basics is essential to staying compliant and avoiding costly penalties. The employer mandate, minimum essential coverage (MEC), minimum value standards, and affordability requirements all play a crucial role.
In this blog, we answer frequently asked questions about ACA and ALEs to help you stay informed and compliant. Topics include how to calculate workforce size, common ownership rules, how timing affects ALE status, the employer mandate, and more.
What Is an ALE?
An ALE, or Applicable Large Employer, is any company or organization that employs at least 50 full-time equivalent (FTE) employees on average during the prior calendar year. The IRS defines a full-time employee as someone who works 30 or more hours per week or 130 hours per calendar month. This includes all paid hours such as PTO and certain types of leave.
Even if a company doesn’t have 50 full-time employees at all times, it only needs to average that number over the year to qualify as an ALE for the following year.
How Does an Employer Calculate Workforce Size?
To determine ALE status, employers must add the number of full-time employees to the full-time equivalent of all part-time employees. Only U.S.-based employees are included.
To calculate FTEs:
- Add the total monthly hours worked by all part-time employees
- Divide that number by 120
- Add that result to the number of full-time employees
Seasonal workers must be included in the count, but you may qualify for the seasonal worker exemption if:
- Your full-time employee count (including FTEs) exceeds 50 for no more than 120 days in a calendar year, and
- The employees causing the count to exceed 50 are seasonal workers
How Does Common Ownership Impact ALE Status?
If a business is part of a controlled group, such as through common ownership or shared management, all entities in the group must be evaluated together. If the combined employee count meets ALE thresholds, then each company within the group is considered an ALE. Each one must comply with the employer mandate, even if they individually employ fewer than 50 people.
How Does Timing Affect ALE Determination?
ALE status is based on the prior calendar year’s average FTE count.
For businesses established partway through a year, calculations are based on the months of operation. New businesses that did not exist at all in the prior year are considered ALEs if they reasonably expect, and do in fact, average 50 or more FTEs during the current year.
What Is the Employer Mandate?
The Employer Mandate, also known as the Employer Shared Responsibility Provisions (ESRP), applies only to ALEs. Under this rule, ALEs must:
- Offer Minimum Essential Coverage (MEC) to at least 95 percent of their full-time employees and dependents
- Ensure that coverage is affordable and meets Minimum Value standards
These requirements apply only to full-time employees for penalty purposes, not FTEs. Additionally, the first 30 full-time employees are excluded when calculating the penalty under Section 4980H(a).
What Is Minimum Essential Coverage (MEC)?
MEC is the baseline level of coverage defined under the ACA. Plans that meet MEC include:
- Group health plans in the small or large group market
- Grandfathered plans
- Coverage certified by the Health Insurance Marketplace
To avoid penalties under Section 4980H(a), ALEs must offer MEC to at least 95 percent of their full-time employees and dependents.
What Is Minimum Value (MV)?
To meet Minimum Value, a plan must cover at least 60 percent of total allowed benefits costs and include substantial inpatient and physician services. This standard is what protects ALEs from the Section 4980H(b) penalty.
How Is Affordability Defined in 2025?
For 2025, the IRS defines a plan as affordable if the employee’s share of the self-only premium does not exceed 8.39 percent of their household income. Employers may use any of the IRS’s three affordability safe harbors: W-2, rate of pay, or federal poverty line.
This affordability test is based on employee-only coverage, not family or dependent tiers.
Does the Employer Mandate Require Coverage for Dependents?
Yes. ALEs must offer coverage to eligible dependents, defined as:
- Biological and adopted children, or those placed for adoption, under age 26
Spouses, stepchildren, foster children, and non-U.S. citizen children living outside the U.S. or its territories are not considered dependents for ACA purposes.
Note: Starting in 2023, the “family glitch” fix allows family members to qualify for Marketplace subsidies even if the employee’s coverage is affordable, provided dependent coverage is unaffordable. This does not affect ALE compliance directly, but it may impact your employees’ household decisions.
When Would an ALE Be Subject to ESRP Penalties?
There are two types of penalties under Internal Revenue Code Section 4980H:
- Section 4980H(a): Applies if MEC is not offered to at least 95 percent of full-time employees and their dependents
- Section 4980H(b): Applies if the coverage offered is either unaffordable or does not meet Minimum Value standards
If at least one employee receives a federal subsidy, such as a premium tax credit on the Marketplace, and the employer failed one of the tests above, the IRS will assess the higher of the two penalties. Both penalties cannot be applied at the same time.
How Much Are the ACA Penalties in 2025?
The IRS adjusts penalties each year. For 2025, the estimated amounts are:
- Section 4980H(a): $2,900 per full-time employee, excluding the first 30
- Section 4980H(b): $4,360 per full-time employee receiving a subsidy
Penalties apply monthly and are based on the number of months the employer was not in compliance.
Still Have Questions?
Navigating ACA compliance is a year-round responsibility, but you don’t have to do it alone. Our team of ACA experts is here to help you interpret requirements, avoid penalties, and streamline benefits administration. Contact us to stay compliant, efficient, and focused on your business.
