Are You an Applicable Large Employer (ALE)? The 50-Employee Test and 4980H Penalties

What Is an Applicable Large Employer?

An applicable large employer is a business that averaged at least 50 full-time employees, including full-time equivalents (FTEs), during the prior calendar year. Your 2026 numbers decide whether you are an ALE for 2027.

• Full-time employee: at least 30 hours of service a week, or 130 hours in a calendar month.
• Full-time equivalent: part-time hours added together and converted into full-time employees.
• New businesses: a company that did not exist last year is an ALE if it reasonably expects to employ, and does employ, an average of at least 50 full-time employees (with FTEs) this year.

How Do You Count Full-Time Equivalents?

For each month, add the hours of all employees who are not full-time, counting no more than 120 hours per person. Divide the total by 120. Add that FTE figure to the month’s full-time count, then average the 12 months.

Worked example: A landscaping company has 42 full-time employees every month of 2026. It also has 18 part-time employees who each work 80 hours a month.

• Part-time hours each month: 18 × 80 = 1,440 hours
• FTEs each month: 1,440 ÷ 120 = 12
• Monthly total: 42 + 12 = 54, the same in all 12 months
• Average: 54. The company is an ALE for 2027.

If the average is not a whole number, round it down. An average of 49.8 is 49, so that employer is not an ALE.

Do Related Companies Count Together?

Yes. Companies under common ownership or control are combined under the section 414 controlled group rules to test ALE status. Two restaurant entities with 30 full-time employees each, owned by the same person, can together be an ALE.

Each company in the group is an “ALE member.” The IRS then figures any penalty separately for each member, and each one files its own Forms 1094-C and 1095-C. Ownership rules are technical, so have your advisor confirm how your entities group.

How Does the Seasonal Worker Exception Work?

You are not an ALE if your workforce goes over 50 full-time employees (with FTEs) for 120 days or fewer in the year, and the employees above 50 in that period were seasonal workers. You may use four calendar months in place of 120 days.

The days and months do not have to be in a row. The exception helps a business that is under 50 for most of the year and adds summer or holiday staff. It does not help a business that is already over 50 with its year-round staff, like the landscaping company above.

What Are the 4980H Penalties?

Section 4980H has two penalties. The “A” penalty applies if you do not offer coverage to at least 95% of full-time employees. The “B” penalty applies to coverage that is unaffordable or below minimum value. Either one starts only when a full-time employee gets a premium tax credit.

Both penalties are figured month by month at 1/12 of the annual amount. Penalty amounts follow the calendar year. The affordability percentage follows the plan year that starts in that year.

• “A” example (2026): 80 full-time employees, no offer, and one employee gets a premium tax credit: (80 - 30) × $3,340 = $167,000.
• “B” example (2026): coverage is offered, but 6 full-time employees find it unaffordable and get a premium tax credit: 6 × $5,010 = $30,060. The “B” amount can never be more than the “A” amount.

What Makes Coverage Affordable?

Coverage is affordable if the employee’s share for the lowest-cost self-only plan that gives minimum value is no more than 9.96% of household income for 2026 plan years (10.22% for 2027). Minimum value means the plan pays at least 60% of covered costs.

You do not know employees’ household income, so the IRS lets you test against one of three safe harbors: the employee’s Form W-2 wages, their rate of pay, or the federal poverty line.

What Does ALE Status Mean for a Section 125 Plan?

Our Section 125 program requires at least 50 employees, so many companies that qualify are ALEs or close to it. Run the full-time and FTE test above to be sure, because the two counts are not the same.

The program works alongside your existing health insurance. It does not replace your ACA offer. If you need it, a minimum essential coverage (MEC) policy is available on request. See our compliance and state availability page and the full list of employee benefits.

Most employers in the program save $650–$850 per employee per year in payroll taxes, which can help with the cost of meeting your ACA duties. Learn more in our 2026 cafeteria plan guide for employers, and check this year’s figures in 2027 employee benefit limits.

Frequently Asked Questions

How many employees make you an applicable large employer?

An average of at least 50 full-time employees, including full-time equivalents, during the prior calendar year. Full-time means at least 30 hours a week or 130 hours a month.

Do part-time employees count toward ALE status?

Yes, as full-time equivalents. Add each month’s part-time hours (up to 120 per person), divide by 120, and add the result to that month’s full-time count.

What is the 4980H penalty for 2026?

$3,340 per full-time employee, minus the first 30, under 4980H(a). Or $5,010 per full-time employee who gets a premium tax credit under 4980H(b). For 2027 the amounts are $3,780 and $5,670.

Do related companies count together for the ALE test?

Yes. Companies under common control, such as a parent and its subsidiaries, are combined under section 414 to test ALE status. Each company then has its own penalty exposure.

Does an ALE have to offer health insurance?

No law forces the offer. But an ALE can owe a 4980H payment if a full-time employee gets a premium tax credit because coverage was not offered, not affordable, or below minimum value.

Sources

The rules and figures on this page come from these sources.

• Employer mandate: 26 U.S.C. § 4980H
• ALE test and related companies: IRS: Determining if an employer is an ALE
• Counting employees and seasonal workers: 26 C.F.R. § 54.4980H-2
• Penalties and affordability: IRS: Employer shared responsibility Q&A