If you're a growing business, it's important to know whether the Affordable Care Act (ACA) considers your organization an applicable large employer (ALE). Your ALE status determines whether you're subject to the ACA's employer shared responsibility provisions (ESRP), commonly called the employer mandate.
So, why is determining your ALE status important? If your organization is an ALE, it must offer affordable health insurance coverage to at least 95% of its full-time employees. Failing to offer coverage, or not offering the right level of coverage, can result in steep fines.
The IRS uses a specific calculation based on your full-time employees and full-time equivalent employees (FTEs) during the previous calendar year to determine whether or not you’re an ALE. However, part-time employees can count toward the 50-employee threshold, so your employee headcount alone isn't enough.
As you prepare for the next calendar year, it’s crucial to calculate your FTEs correctly to avoid tax penalties and compliance risks.
An ALE is an organization that had an average of at least 50 full-time employees or FTEs during the preceding calendar year. For example, an employer uses its 2026 workforce to determine whether it's an ALE for 2027.
The IRS defines a full-time employee as someone who averages at least 30 work hours per week or 130 hours per month1. You determine your FTEs by combining the hours of non-full-time employees and converting those hours into FTEs.
If an employer is an ALE, it’s subject to the ACA’s employer mandate. This means an ALE must offer health coverage. Specifically, it must offer a benefit with minimum essential coverage (MEC) that’s affordable and provides minimum value to at least 95% of its full-time employees and their dependents. If it doesn’t, it may owe an employer shared responsibility payment in the form of a tax penalty.
For ALE purposes, the IRS separates your workforce into two groups:
In most cases, an FTE isn't one individual employee. Several part-time employees whose combined hours equal 120 hours worked in a month equal one FTE for purposes of determining whether your organization is an ALE.
If you are an ALE, you won’t count part-time employees as full-time workers when determining who to offer MEC to avoid an employer shared responsibility payment.
The FTE calculation can be tricky at first. But once you understand the basics, determining whether you’re an ALE each year will become second nature.
Here’s how the calculation works2:
If the final number is 50 or more, the IRS will consider you an ALE for the following calendar year.
We’ll break down each step in more detail with examples in the sections below.
For each calendar month in the previous year, count your full-time employees who averaged at least 30 hours of work per week or who worked at least 130 hours during the month.
For example, if you had 40 employees who met the full-time definition in January, your January full-time employee count is 40.
Repeat this for all 12 months.
Next, calculate the total work hours for employees who didn’t meet the full-time definition during each month. Don’t include any sole proprietors, partners, 2% or more S corporation shareholders, or 1099 contractors.
The IRS requires you to cap any individual part-time employee's hours worked in a month at 120 hours for ALE calculation purposes3.
For example, suppose you have:
Therefore, your total non-full-time hours would be:
|
800 + 600 + 240 = 1,640 hours |
Then, divide the total countable hours from Step 2 by 120 to get your monthly FTEs.
Using the example above, this would be your calculation:
|
1,640 ÷ 120 = 13.67 FTEs |
This means your part-time workforce represents 13.67 FTEs for that month.
Now, add your full-time employee count from Step 1 to your FTE count from Step 3.
For example:
|
40 full-time employees + 13.67 FTEs = 53.67 employees |
Your combined full-time employee and FTE count for that month is 53.67.
Repeat this calculation for each month of the previous calendar year.
Once you've calculated the combined full-time employee and FTE count for all 12 months, add those monthly totals together.
For example, suppose the chart below is your monthly totals for the year:
|
Month |
Full-time employees |
Non-full-time FTEs |
Combined total |
|
January |
40 |
13.67 |
53.67 |
|
February |
40 |
13.67 |
53.67 |
|
March |
40 |
13.67 |
53.67 |
|
April |
40 |
12.50 |
52.50 |
|
May |
40 |
12.50 |
52.50 |
|
June |
40 |
12.50 |
52.50 |
|
July |
39 |
11.67 |
50.67 |
|
August |
39 |
11.67 |
50.67 |
|
September |
39 |
11.67 |
50.67 |
|
October |
38 |
10.83 |
48.83 |
|
November |
38 |
10.83 |
48.83 |
|
December |
38 |
10.83 |
48.83 |
|
Total count |
617.01 |
||
Next, divide the combined total from all 12 months by 12.
Continuing the example above, your calculation would be:
|
617.01 ÷ 12 = 51.4175 |
Last, round the number above to the next lowest whole number per IRS rules. So, you would round 51.4175 down to 51.
Because the result is 51, this organization in this example is an ALE for the following calendar year and is subject to the employer mandate.
If your average workforce is under the 50 FTE threshold during the previous calendar year, the federal government won’t consider you an ALE for the current year, and the employer shared responsibility provisions won't apply to you for that year. You should still offer competitive health benefits regardless of employer size, as it can improve employee morale, satisfaction, and retention. But you aren't subject to the ACA employer mandate and won’t face a penalty.
However, it’s good practice to calculate your FTEs annually. Even if you’re below the threshold one year, you could become an ALE the following year if your average workforce reaches 50 FTEs or more.
Seasonal workers include employees who perform work on a seasonal basis, such as retail workers hired exclusively for the holiday season. If you employ seasonal workers, you may be able to qualify for the seasonal worker exception4.
The IRS won’t treat your company as having more than 50 full-time employees, including FTEs, if its workforce exceeds 50 for 120 days or fewer during the year and the employees above the 50-employee threshold during that period are seasonal workers. Both of these situations must apply for you to receive the exemption.
If your organization is part of a group of companies with common ownership or control, you may need to combine employees across those businesses when determining ALE status.
Under IRC Section 414 rules, a controlled group of two or more organizations under common control must aggregate to determine whether the entire group meets the 50-employee threshold5. If they do, each employer in the controlled group is considered an ALE.
This means a single business with fewer than 50 employees, including FTEs, could still be an ALE if it belongs to a larger controlled or affiliated service group.
Being an ALE doesn't mean you must offer a specific type of health benefit. However, it does mean your organization is subject to the employer mandate. If an ALE fails to meet the ESRP requirements and at least one full-time employee receives a premium tax credit for Marketplace coverage, they may owe an employer shared responsibility payment.
According to IRS Rev. Proc. 2026-22, here are the two employer mandate penalties for 2027:6
An ALE can owe a payment under Section 4980H(a), 4980H(b), or neither for a given month. However, it can't owe both penalties for the same month.
A CHOICE Arrangement (formerly known as an ICHRA) lets an ALE provide competitive and compliant health benefits without offering a traditional group health plan.
With a CHOICE Arrangement, an employer provides a tax-free defined contribution that employees can use to buy qualified individual health insurance. Employees choose health plans that fit their health needs and budget, while the employer determines the monthly contribution amount and plan design.
A CHOICE Arrangement is an eligible employer-sponsored plan for fulfilling Section 4980H(a). Employees must choose qualifying health coverage to participate in the CHOICE Arrangement. This includes ACA-compliant individual health insurance plans, Medicare Parts A and B together, or Medicare Part C. So offering the benefit automatically meets the MEC requirements under the employer mandate. However, you must also ensure your CHOICE Arrangement is affordable to avoid the Section 4980H(b) penalty.
To be affordable in 2027, an employee's health insurance cost can’t exceed 10.22% of their household income7. For the calculation, use the lowest-cost self-only silver plan on the employee’s local exchange, and subtract your employer-provided CHOICE Arrangement contribution from the plan’s premium.
Because you’re unlikely to know what each of your employees’ household income is, you can use ACA safe harbors, most commonly the W-2 wages, rate of pay, or federal poverty level (FPL) safe harbors, to help you determine affordability.
For ALEs looking to manage health benefit costs while giving employees more choice, a CHOICE Arrangement can provide an alternative to a traditional group plan. Remodel Health can help ALEs design and implement an affordable benefit that meets applicable employer mandate requirements, helping employers stay compliant and have greater peace of mind year-round.
Understanding the FTE calculation is the first step in determining whether you’re subject to the ACA employer mandate. Once you know whether you’re an ALE, you can choose the health benefit that complies with the mandate and makes the most sense for your organization. Instead of expensive group health coverage, a CHOICE Arrangement is a personalized, flexible option for ALEs that can meet ACA requirements and give your employees more choice — all while keeping your budget under control.
Need help designing and implementing a CHOICE Arrangement? Contact Remodel Health to learn how our team can help you build a scalable health benefits package that meets your employees' needs while keeping you compliant.