When an employer transitions from under fifty employees to fifty or more, there are several compliance modifications to be aware of. The cross-over to an Applicable Large Employer (ALE) could leave employers facing administrative burdens, budgetary considerations, and new responsibilities bestowed that can seem overwhelmingly intense. This case study examines what an employer must consider after crossing the threshold into the realm of becoming an ALE under the Affordable Care Act (ACA).

The ACA imposes employer shared responsibility requirements on organizations that averaged 50 or more full-time employees, including full-time equivalents (FTEs), during the prior calendar year.  There are additional considerations when calculating a workforce that includes part-time and variable-hour employees (FTEs). For simplicity, this case study will focus on full-time employees only, but in practice, these populations must be included in the calculation method for determining ALE status.

This case study will assume the following criteria

  1. The employer is a small group employer with under 50 employees offering a fully insured group health plan (GHP).
  2. The GHP renews on September 1 (plan year, not calendar year)
  3. As of January 1, 2026, there will be a merger of two companies with a combined employee total of 86.
  4. The employer currently has all the necessary plan documents in place: Cafeteria Plan, SPD, Wrap, Leave of Absence, Wellness Notice, and Attachment B (look-back measurement method for calculating variable-hour and part-time employees).

How an ALE must configure the GHP to comply with the ACA Employer Shared Responsibility Provisions (ESRP)  

  1. Minimum Essential Coverage (MEC): The plan must offer MEC to at least 95% of full-time employees and their dependents (children up to age 26 & spouses are optional).  MEC alone does not guarantee compliance with Minimum Value.  Offering MEC will avoid Penalty A.
  2. Minimum Value (MV): The plan must cover at least 60% of the total allowed cost of the benefits for the standard population typically requiring a major medical plan. Offering MV will avoid Penalty B.
  3. Affordability (aka Play-or-Pay): The employee’s cost for self-only coverage under the lowest-cost MV plan cannot exceed the IRS affordability percentage (9.96% for 2026). Offering affordable coverage will avoid Penalty B.
  4. To avoid penalty A and B, the employer must offer a Minimum Value Plan (MVP – major medical plan) that meets MEC, MV, and affordability.

How to calculate the ACA reporting timeframe when the employer becomes an ALE

The reporting requirements are based on the prior calendar year, even if your GHP does not renew on January 1st. The calculation looks at the full prior calendar year to see if there were on average 50 or more full-time employees employed (there aren’t any exemptions, such as religious beliefs). All common-law employees (part-time, converted to FTEs, and full-time employees), including those of a controlled group or one of new common ownership – One Owner, Many Entities: Are You Accidentally an ALE? – EHD Insurance. When reporting ALE status under IRC 6056 – 1094/1095-C you will report the prior year in the current year.

Jan 1, 2025 – employer has 42 full-time or FTEs:

  • ESRP requirements do not apply
  • No ACA employer reporting obligations in 2025 (carrier will file 1094/1095-B)
  • GHP renews September 1, 2025

Jan 1, 2026 – employer moves from 42 employees to 86:

  • Employer looks back at 2025 → under 50 employees → NOT an ALE for 2026
  • No ACA employer reporting obligations in 2026 (carrier should file 1094/1095-B)
  • GHP renews September 1, 2026
  • Be certain the GHP meets all the ESRP requirements. You will use the ACA affordability percentage of 2026 – 9.96% (this will be critical for 2027)

Jan 1, 2027 – employer has 86 full-time employees: (Compliance is based on calendar year, not plan year)

  • Employer looks back at 2026 → now averaged 86 employees → IS an ALE for all of 2027
  • Must meet the ESRP requirements by offering coverage to all full-time employees for every month of 2027 (if not met at the renewal of 2026, the employer will face penalties A and B for 6 months of 2027)
  • No ACA employer reporting obligations in 2027 (carrier should file 1094/1095-B)
  • GHP renews September 1, 2027
    • Be certain the GHP meets all the ESRP requirements

Jan 1–Mar 31, 2028:

  • Employer looks back at 2027
  • File 1094-C/1095-C for calendar year 2027 (the first ALE reporting year)
  • Reporting reflects compliance for Jan–Dec 2027, based on measurement from 2026

What are the Safe Harbor Methods for measuring affordability in 2026?

  1. Federal Poverty Line (FPL): Always a flat contribution, most conservative (ignores wages & uses a fixed benchmarking), easiest to implement. Costs the employer the most (lowest & highest paid are paying the same monthly rate). Use the individual coverage minimum salary for the FPL and the FPL percentage. The minimum salary often comes out too late to use the most current; therefore, use the prior year’s salary and the current year’s FPL percentage.

Example: $15,650 × 9.96% = $1,558.74 annually ÷ 12 = $129.89 per month

  • Rate of Pay: Flexible but adds complexity. Use the regular rate of pay and always use 130 hours, even if the employee works more. Use the lowest hourly rate to complete the calculation of affordability.

Example: $7.52 × 130 hrs/month = $977.60 × 9.96% = $97.37/month

  • W-2: Flexible, adds complexity, and is projecting. If used, the employees should all be salary. Use the lowest salary to complete the calculation of affordability. Box 1 should include base salary/hourly wages, OT pay, bonuses, commissions, tips, prevailing wage, etc., not pre-tax deductions.  

Example: $30,000 × 9.96% = $2,988 annually ÷ 12 = $249/month

Q: Can an employer use multiple safe harbors among the population of employees?

A: You can have differing categories if applied uniformly.

Only one safe harbor can be used per category:

  • Hourly vs. Salaried employees
  • Geographic location (e.g., different states or regions)
  • Union vs. Non-union employees
  • Job classification (e.g., management vs. non-management)
  • Pay frequency (weekly, biweekly, monthly)
  • Business unit or division (if clearly defined)

Example:

  • Hourly employees → Rate of Pay safe harbor
  • Salaried employees → W-2 safe harbor
  • Employees in very low-wage regions → FPL safe harbor

What are the compliance obligations when becoming an ALE?

  1. Follow all ALE requirements for ESRP and ACA reporting.
  2. Follow and/or implement all plan documents.
  3. Track part-time, variable-hour, and seasonal (additional rules apply) employees for eligibility of coverage. If not already, create a Supplemental B.
  4. Update the leave of absence (LOA) policy to include FMLA.
  5. After 20 consecutive weeks of employing more than 50 employees, administer FMLA accordingly.
  6. Update employee handbooks and plan documents to reflect full-time eligibility at 30 hours.
  7. Complete Section-125 nondiscrimination testing (should already be doing this).
  8. Understand the fiduciary responsibility (should already be doing this).
  9. Confirm your payroll vendor can process the 1094/1095-C forms, if not, partner with a service that can. If you are fully insured the carrier will still file 1095-B
  10. Calculate the payroll contribution safe harbor affordability for individual coverage based on the current plan year renewal. If you are a calendar year plan, you will use the prior year’s affordability or the year you are calculating. Ex: January 1, 2027, renewal – use the 2026 (9.96%) IRS affordability. 

What are the Penalties for non-compliance?

Penalties are indexed annually, calculated monthly, but stated annually for the total penalty.

  1. Part A Penalty: If an ALE fails to offer MEC to substantially all full-time employees and only one full-time employee purchases individual coverage from the exchange and receives a premium subsidy, the employer will be penalized $3,340 annually – $278.33 for all full-time employees (less the first 30 employees) for each month it failed to offer MEC. As an example, an employer with 50 full-time employees who failed to offer MEC to at least 48 employees (95% of 50) could be penalized $60,120 for the year if a single full-time employee purchased insurance on the exchange and received a premium subsidy.

Example: 18 x $278.33 x 12 = $60,119.28

  • Part B Penalty: If an ALE neglects to offer affordable and MV coverage to substantially all full-time employees and one full-time employee purchases individual coverage from the exchange and receives a premium subsidy, the employer will be penalized $5,010 annually – $417.50 per month for each individual who received the premium subsidy.

Example: 2 x $417.50 x 12 = $10,020

  1. If you have to make a financial decision on how to proceed, offer the MEC to avoid penalty A. Penalty B will never exceed the maximum penalty of penalty A.