How to Determine If Your Company Is an Applicable Large Employer — and Why the IRS May Disagree

What an Applicable Large Employer Actually Is

Under the ACA's Employer Mandate, an Applicable Large Employer is generally an employer that averaged at least 50 full-time employees — including full-time equivalents — during the prior calendar year. If that threshold was met last year, the organization is an ALE for the entire current calendar year, regardless of how many people are on payroll today.

ALE status is not a live headcount test. It is a prior-year monthly average calculation using the IRS's specific counting rules — and those rules count people differently than most employers do.

The practical consequence of getting this wrong is significant. An employer who miscalculates ALE status and concludes they are not an ALE has no ACA reporting obligation, no need to offer coverage, and no 1094-C or 1095-C filing. If the IRS runs the same math and reaches a different conclusion, Letter 5699 is often how that disagreement surfaces.

How the IRS Actually Calculates ALE Status

Step 1 — Count Full-Time Employees by Month

Under the ACA, a full-time employee is someone who averages at least 30 hours of service per week or at least 130 hours of service in a calendar month. For each of the 12 months in the prior calendar year, the employer counts the number of employees who met that threshold. This is a monthly snapshot, not an annual average of individual employees. Hours of service include hours worked and hours for which an employee is paid or entitled to payment for holiday, vacation, illness, disability, layoff, jury duty, military leave, or leave of absence.

Step 2 — Convert Part-Time Hours Into Full-Time Equivalents

Part-time employees do not count as full-time employees, but they do not disappear from the ALE calculation. Their hours are converted into a full-time equivalent number for each month: add up all hours of service from employees who are not full-time, cap each individual's contribution at 120 hours, then divide the total by 120.

Step 3 — Average the 12 Monthly Totals

Add all 12 monthly totals together and divide by 12. If the result is 50 or more, the organization is an ALE for the entire following calendar year. Fractions are truncated, not rounded — a monthly average of 49.8 is not 50.

The Four Most Common ALE Calculation Mistakes

Counting People Instead of Hours. The most common mistake is using an employee count from payroll or HR systems instead of a monthly hours-based calculation. The IRS counts hours, converts them using the FTE formula, and averages across 12 months.

Ignoring Full-Time Equivalents. If the organization has 42 full-time employees and a substantial part-time workforce generating 8 or more FTEs in the monthly average, it is an ALE — and may be unaware of it.

Ignoring Controlled-Group Aggregation. Many employers analyze ALE status entirely within the boundaries of a single legal entity. If each entity has fewer than 50 employees on its own but the entities are related, the IRS may aggregate them before applying the threshold.

Overestimating the Seasonal Worker Exception. The seasonal worker exception exists, but it is far narrower than most employers believe — and it is applied after the annual average calculation, not instead of it.

Why the IRS May Conclude You Were an ALE When You Thought You Were Not

The IRS reaches a different ALE conclusion than the employer in one of three situations: different inputs (employers use current payroll snapshots; the IRS uses prior-year monthly hours including paid leave), different methodology (employers count employees; the IRS counts hours and converts using the FTE formula), or different scope (employers analyze each legal entity independently; the IRS aggregates related entities).

Most ALE disputes are not about disputed facts. Both the employer and the IRS are looking at the same workforce. They reach different conclusions because they are using different math.

The Controlled Group Problem Most Employers Miss

Under IRC Section 414, employers that are part of a controlled group, affiliated service group, or other related group are treated as a single employer for purposes of counting employees toward the ALE threshold. All employees across all aggregated entities are counted together — and if the combined count meets or exceeds 50, every entity in the group is an ALE, even those that individually have far fewer than 50 employees.

This matters most in family-owned businesses with multiple operating entities; franchise structures; physician groups and professional practices; private equity and investment portfolios; and management companies and operating entities under common ownership.

Why the Seasonal Worker Exception Is Narrower Than Most Employers Think

The seasonal worker exception applies only when both of the following are true: (1) The employer's workforce exceeded 50 full-time employees and FTEs for no more than 120 days during the prior calendar year, and (2) all of the employees who put the count over 50 during that period were seasonal workers as defined by the Department of Labor. Both conditions must be met simultaneously. The 120-day limit is strict — one day over and the exception does not apply.

How to Sanity-Check Your ALE Status Before the IRS Does

The right ALE question is not "Do we think we are under 50?" It is "Can we prove we used the same ALE math the IRS will?" A basic ALE self-audit should work through: prior-year monthly hours by employee; part-time and variable-hour FTE conversion using the 120-hour divisor; controlled-group ownership analysis mapping all related entities; seasonal worker assumption verification; owner and partner exclusions; and ACA reporting alignment.

Key Takeaways