In an effort to more efficiently identify and assess ACA non-compliance, the IRS recently began taking a closer look at the way organizations perform full-time employee calculations.
This marks a significant development in how the tax agency monitors organizations’ 1094-C and 1095-C submissions and indicates greater scrutiny for compliance with the ACA’s Employer Mandate.
Under the ACA’s Employer Mandate, Applicable Large Employers (ALEs), or organizations with at least 50 full-time and full-time equivalent employees, must offer health insurance to these full-time employees.
Failing to provide coverage that meets Minimum Essential Coverage, Minimum Value, and affordability criteria may lead to penalties, including Letter 226J.
In this post, we’ll take a look at recent IRS language that indicates the agency’s efforts to test organizations’ method for calculating ACA full-time as well as explore the nuances associated with determining full-time employee classification for compliance purposes.
IRS Requiring Additional Information
A new client of ours recently approached us with a Letter 226J notice. The penalty letter assessed a sizable penalty, which the organization contested, saying specifically that it was not an ALE for the tax year in question.
The IRS responded and requested proof that the organization was not an ALE in the form of ACA full-time employee counts. Specifically, the agency said, “Please provide a signed statement showing the monthly breakdown of the number of full-time employees (including full-time equivalent employees) employed in the year prior.”
The agency further requested that the organization provide another statement explaining why the prior year’s filing counts differ from the reported numbers. In another case, the IRS requested that payroll records and the full-time calculation method be provided to further validate.
This isn’t the first time the IRS has ramped up its process for identifying ACA non-compliance. The agency began cross-referencing organizations’ 1094-C and 1095-C filings for inconsistencies in 2022.
This new information is a continuation of that trend and an indication that the IRS is pursuing ACA non-compliance with hypervigilance. That means employers must be diligent in their compliance efforts, including performing the necessary ACA full-time classification calculations.
Below we’ll make clear how to do that.
What Constitutes ACA Full-Time?
An ACA full-time worker is someone who provides work services for at least 30 hours per week or 130 hours per month. Take, for example, Pizza Joe’s Restaurant, which has a staff of 80. Of the total 80-employee workforce, 40 clock in at least 30 hours weekly, and are thus considered ACA full-time.
For organizations with many variable-hour employees — those with fluctuating schedules — it can be challenging to determine who meets the 30-hour-a-week or 130-hours-a-month threshold.
If this sounds like your organization, or if you find it difficult to accurately codify your full-time employees, you’ll need to utilize the Look-Back Measurement Method to measure and average their average hours worked each month.
How Do Full-Time Equivalents Differ?
Full-time equivalents are not to be confused with ACA full-time employees, as full-time equivalent employees are not actual workers, rather, they are a culmination of all non-full-time staff.
To determine the number of full-time equivalent employees working in an organization, you must aggregate the hours worked by part-time employees, including seasonal workers, on a monthly basis. Additionally, it’s important to note that an employer may not be an ALE if both of the following apply:
- The employer’s workforce exceeds 50 full-time employees (including full-time equivalent employees) for 120 days or fewer during the calendar year, and
- The employees in excess of 50 employed during such 120-day period are seasonal workers.
A seasonal worker is generally defined for this purpose as an employee who performs labor or services on a seasonal basis. For example, retail workers employed exclusively during holiday seasons are seasonal workers.
Begin by adding up the total number of part-time employees and their combined hours of service for a given month. Then, divide the total by 120.
The result represents your full-time equivalent total for that month. Add this figure to your count of regular full-time employees to determine the organization’s ALE status for that period. This should be averaged for the prior calendar year to determine the ALE status for a particular year.
ACA Full-Time Calculation Example
Now that we’ve made clear the difference between ACA full-time and full-time equivalent employees, let’s put the methodology into practice.
In this example, we’ll take a look at Pizza Joe’s Restaurant again. Joe’s has 40 full-time designated employees and 40 variable-hour, part-time workers. Together, the 40 part-time staff work a combined total of 4,000 hours in the month of April.
To figure out the ACA full-time equivalent employees for April, you divide the total hours (4,000) by 120, giving you 33.33, which shows the equivalent full-time employees for April.
Next, add the 33.33 to the 40 designated full-time employees. The total of 73.33 is over the 50 requirements to be an ALE for the month of April. To determine ALE status for the entire year, the calculation must be performed for each month and then averaged.
Why ACA Full-time Classifications Matter
Your employee classifications are significant for three reasons. The first is that ACA full-time and full-time equivalent counts determine if your organization needs to comply with the ACA’s Employer Mandate. As mentioned above, organizations with at least 50 full-time AND full-time equivalent employees are called ALEs and must comply.
The second reason is that the employee classifications, particularly the full-time ones, determine your legal responsibility in terms of the Employer’s Shared Responsibility Payments (ESRP).
You may face penalties for underreporting your full-time counts. Overstating your full-time counts may result in even greater penalties.
Lastly, employees rely on healthcare coverage from their employers. In fact, according to a 2023 Kaiser Family Foundation report, employers covered over 80% of their employees’ self-only coverage and 70% of employees’ family plans.
Failing to accurately classify your workers may prevent employees from gaining access to coverage that we were entitled to. Simply put, it’s the right thing to do.
Get Help with Employee Classifications
Determining employee classifications, and subsequently ALE status, can be challenging. And since the IRS is requesting more detail when assessing instances of ACA non-compliance, organizations can’t afford to get it wrong.
This is where precise tracking of employee classifications across payroll, HCM, and benefits systems, can help.
Trusaic’s ACA Complete solution handles monthly employee data retrieval, tracks service hours, identifies full-time employees, calculates full-time equivalents, and determines ALE status on your behalf. We’ve assisted thousands of clients in establishing ACA compliance processes and prevented over $1B in ACA penalties.
