What Classification Size Is My Company Under the ACA?

Affordable Care ActNuanced is one way to describe the regulations that employers must now navigate to ensure compliance with the Affordable Care Act. Frustrating might be the word favored by some employers.

Under the ACA, even determining a company’s classification size can be a complicated process. At first, it appears a cut-and-dry divide: Companies with 49 or fewer employees are considered to be “small employers,” while those with 50 or more are considered “applicable large employers,” or ALEs.

This is a very important distinction, as ALEs are the companies required to offer healthcare insurance to their full-time employees or be subject to hefty penalties.

But the math used to arrive at how many employees a company actually has can become complicated due to part-time and full-time equivalent (FTE) considerations. Most HR employers know that full-time employees are now defined by the ACA as any individuals who work 30 or more hours a week, instead of the traditional 37.5 or 40 hours. While your company can still choose how to define full-time employees for other benefits, such as for providing a 401k, employers must use the 30-hour designation for health insurance purposes.

It’s also important to note that while the IRS has previously defined full-time employees as those who work 130 hours a month or more, 120 hours is the figure that must be used for determining your ACA classification size. For that reason, the aggregate monthly hours of part-time workers must be divided by 120 to determine how many FTE employees a company has.

Let’s run through a pair of scenarios:

  • A company with 50 individuals who work 31 hours a week would classify as an ALE, and be required to offer healthcare to all 50 employees or be subject to penalties.
  • A company with 40 employees working 40 hours a week, and 20 part-time employees working an average of 60 hours a month, would classify as an ALE, because 20 employees times 60 hours equals 1,200 hours. The 1,200 total divided by 120 hours equals 10 FTE employees, and when the 10 are added to the 40 working 40 hours the company would have 50 employees. Yet this company would only be required to offer health care coverage to employees working an average of 130 hours or more a month to avoid penalties.

Full-time equivalent calculations are rarely this easy. More often, part-time schedules fluctuate on a month-to-month basis, particularly with companies that employ seasonal help. As the ACA originally read, companies are required to use 12 months of payroll data for a given year to find the average monthly hours for each employee.

But for this year only, the ACA is only requiring that companies look at any window of six or more consecutive months in 2014. For example, a company that hired additional seasonal help during the holiday season could potentially use payroll data from March to September to avoid a higher classification for 2015.

In addition, the ACA is also allowing for a one-year-only “mid-sized company” designation, defined as any business with 50-99 employees. This designation affords the same protection to mid-sized companies as it does for those designated as small employers: They will not be penalized for failing to offer healthcare coverage to their full-time employees for their 2015 plan years.

These are only the major exceptions and exemptions provided by the ACA in determining classification size in 2015. Others exist to further address seasonal considerations and employees whose hours fluctuate wildly.

If your company is unsure of its classification or is on the border of a higher designation, it’s highly recommended you seek out the expertise of a firm such as Creative Benefits. The ACA’s complexity continues to grow, and ensuring that your company is correctly calculating its FTE employees is essential to avoid getting assessed a large penalty from the IRS or assuming unnecessary healthcare costs.

About the author: Robin Norgaard is a certified health care reform specialist with Creative Benefits. She serves on the company’s healthcare reform committee and specializes in advising and assisting clients with compliance issues.