Before the passage of the health care reform legislation, all employers had complete discretion whether to offer health coverage. Tax laws incentivized employers to provide some type of health plan but there was no punishment for not providing health coverage. With the passage of the Affordable Care Act or “Obamacare” as it is commonly called, the rules have drastically changed.


The Affordable Care Act (“ACA”) added Internal Revenue Code Section 4980H, which mandates that certain employers may be subject to a penalty if they do not offer their full-time employees (and their dependents) minimum essential coverage that is affordable and provides minimum value.


The provisions of the employer mandate are first effective on January 1, 2015, but transition relief from certain requirements is available for 2015. Employers with 100 or more full-time equivalent employees must offer minimum essential coverage to at least 70% of their full-time workers (and their dependents) in 2015 and 95% in 2016. Small businesses with 50-99 full-time equivalent employees must insure full-time workers beginning in 2016. The mandate does not apply to employers with 49 or less full-time employees.




An applicable large employer (“ALE”) employs an average of at least 50 full-time employees (including full-time equivalent employees) on business days during the preceding calendar year.

–Please note that for 2015, an employer may determine whether it is an applicable large employer by determining whether it employed an average of at least 100 full-time employees (including full-time equivalent employees) on business days during any consecutive six-month period in 2014.

For Section 4980H purposes, a full-time employee for any calendar month is an employee who is employed for an average of at least 30 hours per week. The number of full-time employees for each month is calculated and the sum of all months is divided by 12 to determine the average for the year (rounded down to the next lowest whole number).

When deciding if an employer is an ALE, all related businesses are treated as one employer. Therefore, all employees of the related businesses are added together in determining whether the group as a whole is an ALE. If the group is determined to be an ALE, each separate entity of the group is considered an ALE.

Full-Time Equivalent

The total hours worked during a month by all employees who are not full-time (i.e., variable-hour, seasonal, or part-time) employees are used to determine a full-time equivalent (“FTE”) value that is added to the total number of actual full-time employees to determine if the employer had at least 50 full-time employees during a month. The FTE value is calculated by dividing the total hours of service for employees who are not full-time employees for the month by 120 hours.

Hourly Employees

To determine hours of service for employees paid on an hourly basis, an employer must use the total actual hours of service from records of hours worked or hours for which payment is made or due (e.g., vacation or holidays).  

Non-Hourly Employees

For non-hourly employees, the employer must use one of three methods to determine hours of service:

  1. Actual hours of service (i.e., the method used for hourly employees).
  2. Days-worked equivalency. The employee is credited with eight hours of service for each day for which the employer is required to pay the individual for a least one hour of service.
  3. Weeks-worked equivalency. The employee is credited with 40 hours of service for each week for which the employer is required to pay the individual for at least one hour of service.

Different methods can be used for different categories of non-hourly employees as long as the categories are reasonable and consistent. A method cannot be used, however, if the result substantially understates an employee’s hours of service in such a way that he or she would not be treated as full-time.

Seasonal Worker

A seasonal worker is defined by the Department of Labor (“DOL”). Under DOL rules, labor is performed on a seasonal basis when ordinarily, the employment pertains to, or is the kind exclusively performed at, certain seasons or periods of the year and which from its nature may not be continuous or carried on throughout the year. If the employer’s workforce exceeded 50 full-time employees for 120 or fewer days during the preceding calendar year, and the employees in excess of 50 during that 120-day period were seasonal workers, the employer is not considered an ALE (referred to as the seasonal worker exception).




Coverage for an employee is “affordable” if the employee-paid portion of the premium (for the lowest-cost self-only coverage) is not more than 9.5% of the employee’s household income. Since most employers are not likely to know the household income of their employees, employers may determine affordability using any of the following three safe harbors:

  1. Form W-2 Safe Harbor (described below)
  2. Rate-of-pay Safe Harbor
  3. Federal Poverty Line (“FPL”) Safe Harbor (described below)

Form W-2 Safe Harbor

Under this safe harbor, an ALE will avoid the penalty if the employee’s portion of the health insurance premium (for the employer’s lowest cost self-only coverage) does not exceed 9.5% of that employee’s Form W-2, box 1, wages from the employer.

Federal Poverty Line Safe Harbor

Under this safe harbor, employer-sponsored coverage is considered affordable if the employee’s monthly cost (for the lowest-cost self-only coverage) does not exceed 9.5% of the FPL for a single individual (calculated by dividing the annual FPL amount by 12). Employers must use the most recently published poverty guidelines as of the first day of the plan year for the state in which the employee works.

Minimum Essential Coverage

Generally, minimum essential coverage includes all government and job-based insurance and most private insurance. Self-insured plans designed to replace private insurance will likely meet minimum essential coverage. Minimum essential coverage does not include coverage providing only limited benefits, such as coverage only for vision care or dental care, and Medicaid covering only certain benefits such as family planning, workers’ compensation, or disability policies.

 Minimum Value

To meet the minimum value requirement, the employer health plan must pay, on average, at least 60% of the costs of covered services. This is the minimum value percentage. The Internal Revenue Service (“IRS”) and Department of Health and Human Services have developed a calculator that fully insured plans offered in the large group market and self-insured group health plans can use to determine minimum value. The calculator is available on the Centers for Medicare & Medicaid Services website at https://www.cms.gov (search “MV Calculator” in the search bar at the top of the page).

Effect on HRAs

A health reimbursement arrangement (“HRA”), commonly referred to as a health reimbursement account, is an employer-funded, tax-advantaged employer health benefit plan that reimburses employees for out-of-pocket medical expenses and/or individual health insurance premiums. Stand-alone HRAs, not integrated with a group health plan, will (in most cases) not meet the requirements for minimum essential coverage or minimum value.



After determining their status as an ALE, employers must then identify which employees qualify as “full-time.” Realizing that the determination of full-time employees can be complicated, the IRS has provided ALEs with the following two methods that can be used to determine if an employee is a full-time employee who must be offered health insurance coverage:

  1. Monthly measurement method, or
  2. Look-back measurement method (described below).

Under either method, the employer determines an employee’s hours of service for an hourly employee using actual hours worked.

Look-back Method

The look-back method is the most popular method because it provides more flexibility, greater predictability on who must be offered coverage (and for what time period), and facilitates the administrative processes for the employer, insurer, and the IRS.

Under the look-back measurement method, the employer determines an employee’s status (e.g., full-time, part-time or seasonal) during a look-back measurement period. That status is used for a corresponding stability period during which the employee is offered coverage (if determined to be a full-time employee), or not offered coverage (because he or she was not determined to be a full-time employee).

Measurement Period

A standard measurement (i.e., testing) period is a defined time period that the employer selects to determine whether an ongoing employee is a full-time employee. It cannot be less than three or more than twelve consecutive months. The employer has the flexibility to determine when the standard measurement period starts and ends. The employer can adjust the beginning and ending dates to coincide with the beginning and ending of regular payroll periods.

Stability Period

The stability (i.e., coverage) period immediately follows and is associated with a measurement period. A stability period must be at least six consecutive calendar months but no shorter in duration than the standard measurement period. The stability period can also begin after an administrative period.

Administrative Period

The administrative period allows time for employers to determine which employees are eligible for coverage. The administrative period must overlap with the prior stability period, so ongoing employees eligible for health coverage during the stability period maintain their coverage.

Generally, when an employee is hired, the employer knows if that employee will be working full-time or not. If, at the employee’s start date, he or she is reasonably expected to be a full-time employee, the employer must offer affordable health insurance coverage that provides minimum value.

An initial measurement period is used to determine a new variable-hour, seasonal, or part-time employee’s eligibility for coverage. It can begin on any date between the employee’s start date and the first day of the first calendar month after the employee’s start date and must last at least three consecutive calendar months.

In addition to an initial measurement period, an ALE can have an administrative period in connection with an initial measurement period and before the start of the stability period for a new variable-hour, seasonal, or part-time employee who is determined to be a full-time employee. The combined length of the initial measurement period and administrative period must be no more than 13 months, plus a fraction of a month after the employee’s start date.


  1. Determine your ALE status, considering related businesses.
  2. If you are an ALE, confirm coverage is offered to at least 70% of your full-time workers (and their dependents) in 2015.
  3. Calculate whether coverage is Affordable.
  4. Confirm with your plan administrator that employer-provided health coverage is ACA-compliant (i.e., provides Minimum Essential Coverage that meets the Minimum Value requirement).
  5. Confirm that coverage alternatives (such as HRAs) are ACA-compliant.


As always, if you have questions or concerns please feel free to contact us:  865-769-0660 or email your Pugh CPAs representative.

The entire series is posted on our Industry News page.

Elizabeth Wright, Tax Manager

Ready to take the next step?

Let's Get Started


Join our mailing list to receive the latest news and updates from our team.

You have Successfully Subscribed!