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Classify Employees To Avoid ACA Penalties And Determine ALE Status

Accounting Support • Apr 22, 2021
The first step in ACA compliance is to determine ALE status. Employers must classify their employees accurately to minimize ACA penalty risk and get a reliable

Classifying employees is a crucial step for employers to determine if ACA Employer Mandate requirements apply to them. So, employers must classify their employees accurately to determine ALE status and  avoid ACA penalties.

How To Accurately Determine ALE Status?

The first place that employers should start with ACA compliance is to determine if they are Applicable Large Employers. Applicable Large Employers (ALEs) are employers with 50 or more Full-Time (FT) and FT equivalent employees who must offer Minimum Essential Coverage (MEC) to at least 95% of their FT workforce and their dependents. Whereby this coverage meets the Minimum Value (MV) and is affordable for the employees.

Otherwise, be subject to the Internal Revenue Code (IRC) Section 4980H penalties. Employers should determine whether they make up an aggregate employer group of two or more commonly owned, affiliated, or related employers to determine ALE status accurately. Members of the groups should combine the hours of their FT employees and FT equivalent employees to determine their workforce size correctly.

5 Different Types Of Employees

Here are five different types of employees and whether they should be included to determine ALE status:

    1. FT Employees
      Under the 
      Affordable Care Act (ACA), an FT employee is defined as someone that works 30 hours/week or 130 hours/month. For example, if a restaurant employs 80 employees and 45 employees work at least 30 hours/week or 130 hours/month, those 45 employees are considered FT employees. FT employees are included in the ALE calculation.
    2. Seasonal Workers
      A seasonal worker is a worker that performs services or labor on a seasonal basis as defined in specific U.S. Department of Labor regulations. It includes retail workers and agricultural laborers employed during holiday seasons. The IRS considers seasonal workers when determining if an organization is an ALE.
  • Seasonal Employees
    According to the Look-Back Measurement Method, the term "seasonal employee" applies when determining if someone is an FT employee. A seasonal employee is someone that is hired into a position for which the usual annual employment is six months or less. The period of employment starts each calendar year in approximately the same part of the year. Seasonal employees are included when determining ALE status.
  • FT Equivalent Employees
    FT equivalent employees include employees who are not designated as FT employees. To account for your businesses' FT equivalent employees, variable-hour, part-time, and seasonal worker employees' hours should be added together each month. It is done by taking the total number of non-full-time-designated employees and adding their total service time for the month together. Then, divide the total by 120, and the result is your FT equivalent count for the month. Add these to your FT employee count to determine ALE status for the month.
  • 1099/Independent Contractors
    1099/independent contractors are not employed and their agreements with an employer are on a per-service basis. They must not be classified as employees and should not be included to determine ALE status.

Takeaway

Accurately classifying your employees is essential for ACA compliance and failing to do so might result in significant IRS penalty assessments. The IRS is currently issuing ACA Letter 226J penalty assessments to employers who did not comply with ACA for the 2018 tax year.

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