Determining ALE Status

November 2025

Determining whether an employer is an Applicable Large Employer (ALE) under the Affordable Care Act (ACA) is critically important as it directly affects whether the employer is subject to the ACA employer mandate that requires an offer of medical coverage to full-time employees and their dependents and its associated ACA reporting obligations.

Determining ALE Status

An employer is an ALE for a calendar year if the employer employed an average of at least 50 full-time equivalents (FTEs) during the preceding calendar year. For example, status as an ALE in 2026 is determined based on whether an employer averaged 50 or more FTEs during the 2025 calendar year, regardless of the employer’s group health plan year. 

Calculating the FTE Count

Step 1: Calculate the number of employees with 120 or more hours of service for each calendar month. (Note: although 130 hours of service is used for determining whether employer mandate penalties may apply, 120 hours is used for purposes of determining ALE status). 

Step 2: Aggregate hours of service for each month for any other employees and divide the total by 120. 

Step 3: Add the numbers obtained in Steps 1 and 2 for each month. 

Step 4: Add up the totals from each month from Step 3 and divide the sum by 12.

TIP: Count hours of service by month for any employee who was employed during the year, even if they were only employed for a partial month. Make sure to include part-time, variable hour and seasonal employees. Do not include independent contractors, owners, or employees who have TRICARE or VA coverage.

Seasonal Worker Exception

Employers with 50 or more FTEs can avoid ALE status if their workforce exceeds 50 FTEs for 120 days or fewer during the calendar year and the employees in excess of 50 employed during such 120-day period are considered seasonal workers. Seasonal workers for this purpose are defined as employees who perform labor or services on a seasonal basis and retail workers employed exclusively during holiday seasons. The term “seasonal worker” relevant for determining ALE status is different than the definition of “seasonal employee” used for determining full-time status under the look-back measurement method.

New Employers

Normally FTEs are averaged over the 12 months of the previous calendar year, but for a brand new employer, since there is no prior year data, it will depend upon the employer’s reasonable expectations at the time the business comes into existence. ALE status for year 1 and year 2 would be determined as follows:

• Year 1 – Status is based on the reasonable expectations upon starting business. For example, if the employer goes into business during 2026 and expects to average 50 or more FTEs for the remainder of 2026, the employer is an ALE for 2026.
• Year 2 – Status is based on the average total FTEs for the period of time the employer was in business during the prior year. For example, if the employer was in business March – December 2026, FTEs should be averaged over the 10 months of 2026 to determine ALE status for 2027. 

Controlled Groups & Affiliated Service Groups

Whether determining whether any member of a controlled group is considered an ALE, the employees of all employers within the group are taken into account. If the combined number of full-time employees (and FTEs) for the group is large enough to meet the definition of ALE, then each employer within the group is considered an ALE even if independently they would not be an ALE. 

Example:

Employers A, B, and C are members of a controlled group under §414 due to 80% or more common ownership. Employer A has 70 FTEs, Employer B has 60 FTEs, and Employer C has 10 FTEs. Employers A, B, and C are all ALEs because collectively the group employs over 50 FTEs (even though Employer C has fewer than 50 FTEs independently). Employers A, B, and C are all subject to §4980H offer of coverage requirements and §6056 employer reporting requirements.

ALE Status in Mergers & Acquisitions

Acquisition of Non-ALE 

If any entity involved in a merger/acquisition is already classified as an ALE, then any smaller, non-ALE entities that join the group are generally treated as ALEs starting on the date of the transaction. As a result, the newly combined ALE will be subject to §4980H offer of coverage requirements and §6056 employer reporting requirements upon the date of the acquisition. 

Merger of Non-ALEs

If two (or more) non-ALEs merge, or one acquires the other, their ALE status may depend on whether the transaction was structured as an asset or stock purchase:

• Asset Purchase: Neither entity is considered an ALE immediately following the transaction, assuming each averaged fewer than 50 FTEs in the prior calendar year. However, they must combine their employee counts for all months after the transaction to determine ALE status for the following year.
• Stock Purchase: Based on IRS guidance given for determining the small employer exception for COBRA, it may be necessary to evaluate the combined average number of FTEs from the prior calendar year. If together they averaged 50 or more FTEs, both entities may be treated as ALEs starting on the date of the stock purchase.

Leaving ALE Group

Although existing guidance is not clear, the cautious approach would be to treat the non-ALE entity leaving the ALE group as an ALE for the remainder of the calendar year following the transaction. 

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