Why averaging full-time and full-time equivalent employees matters to the IRS

For purposes of the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148), employers average their number of employees across the months in the year to see whether they will be an applicable large employer (ALE). According to a recently-issued tax tip from the iRS, this is important to do because two provisions of the health care law apply only to ALEs and are now in effect. These are the employer shared responsibility provision and the employer information reporting provision for offers of minimum essential coverage. In addition, self-insured ALEs – that is, employers who sponsor self-insured group health plans – have additional provider information reporting requirements.

The IRS provides three terms that can help determine if your organization is an ALE. In general:

• A full-time employee is an employee who is employed on average, per month, at least 30 hours of service per week, or at least 130 hours of service in a calendar month.
• A full-time equivalent employee is a combination of employees, each of whom individually is not a full-time employee, but who, in combination, are equivalent to a full-time employee.
• An aggregated group is commonly owned or otherwise related or affiliated employers, which must combine their employees to determine their workforce size.

The IRS reminds employers that the vast majority of employers will fall below the ALE threshold number of employees and, therefore, will not be subject to the employer shared responsibility provisions.

How to calculate. The following calculation method can be used to determine if your organization is an ALE for a year. Count your organization’s full-time employees and full-time equivalent employees for each month of the prior year.

If you are a member of an aggregated group, count the full-time employees and full-time equivalent employees of all members of the group for each month of the prior year. Then average the numbers for the year.

Employers with 50 or more full-time equivalent employees are ALE. This means that they will need to file an annual information return reporting whether and what health insurance they offered employees. Their ALE status also makes them subject to the ACA’s employer shared responsibility provisions.

The IRS further states that, for more information on the many additional rules on determining who is a full-time employee, including what counts as hours of service, those interested should see the employer shared responsibility final regulations and related questions and answers on IRS.gov. For more information, see the Determining if an Employer is an Applicable Large Employer page on IRS.gov/aca.

SOURCE: IRS Health Care Tax Tip 2016-14, February 3, 2016.

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