You may think that you can skip this section because you already know that your employer is or is not an applicable large employer (ALE). But be careful . When considering whether your city is an ALE, for example, you must typically include the municipal liquor store, golf course, library, or fire department (other than volunteer firefighter relief organizations), even if they have separate payrolls, employer identification numbers, and boards of directors (if the city appoints enough board members to put them under common control).  Taken together they are an “Aggregated ALE Group,” and if the Aggregated ALE Group as a whole has 50 or more full-time employees and part-time employee equivalents, each separate “ALE Member” will be treated as an ALE regardless of the size of each ALE Member.

The HSA self-only contribution limit for 2025 is $4,600 (Rev. Proc. 2025-YY, 2025-YY I.R.B. YYY).

The term “applicable large employer” (or “ALE”) means an employer that employed an average of at least 50 full-time employees (including full-time equivalent employees (“FTEs”)) on business days during the preceding calendar year.

Keep in mind that the following calculation is a high-level summary only.  Additional special rules apply. For now, the basic calculation to determine whether your employer is an ALE is as follows:

Employers on the bubble need to take care, but a transition rule applies to an employer’s first year as an applicable large employer. Full time employees must be offered coverage no later than April 1 of the first year an employer is an applicable large employer. If they are not offered coverage, they may be liable for penalties under 4980H(a) or (b). The penalties will apply not just for April through December, but for January through March of that year. It’s an added kick in the pants for not getting it right by April.

D-1. Consider Controlled Group Rules

The controlled group rules were created to counter efforts by lawyers and accountants to help doctors and dentists avoid paying benefits to members of their staffs. The doctors, dentist and similar professionals did this by setting up separate companies. Company A would employ the doctors and dentists and offer rich benefits. Company B would employee their staff and offer no benefits. Congress closed this loophole by requiring that companies under “common control” be treated as a single employer. Unfortunately, these rules are among most complex in the Internal Revenue Code.[1] 

The drafters of the ACA had similar concerns. They worried that employers would break up into small employers with less than 50 full-time employees and FTEs so they could avoid offering health coverage. They borrowed and incorporated the control group rules to determine who is an applicable large employer.

The controlled group rules were created to counter efforts by lawyers and accountants to help doctors and dentists avoid paying benefits to members of their staffs. The doctors, dentist and similar professionals did this by setting up separate companies. Company A would employ the doctors and dentists and offer rich benefits. Company B would employee their staff and offer no benefits. Congress closed this loophole by requiring that companies under “common control” be treated as a single employer. Unfortunately, these rules are among most complex in the Internal Revenue Code.[1]

The drafters of the ACA had similar concerns. They worried that employers would break up into small employers with less than 50 full-time employees and FTEs so they could avoid offering health coverage. They borrowed and incorporated the control group rules to determine who is an applicable large employer.

A “parent-child subsidiary” (vertical) control group exists where a corporation, trade or business owns at least 80 percent of another business.[2]  Local governments are none of these things, but under rules that apply to not-for-profit, non-stock corporations (which are kind of similar to local governmental entities), common control exists if at least 80 percent of the directors or trustees of one organization are either representatives of, or directly or indirectly controlled by, the other organization.[3]

Phil is the manager of Paradise, a city with 100 employees. Paradise City is an ALE. The city library has its own board and separate payroll for 10 full-time employees, but it doesn’t offer a health plan. Because the board of directors of the city selects the board of directors of the library, the city controls at least 80% of the directors of the library. Although the guidance remains vague, this likely means that Paradise City and its library are under common control, which makes the library an ALE, even though they only have 10 employees. When you have separate entities with separate payrolls that are linked in this manner,

• Each entity is an “Aggregated ALE Group Member.”[4] Memorize that phrase if you want to impress your neighbors at the next barbeque. You will also see this phrase in the instructions to IRS Forms 1094 and 1095, because they couldn’t think of something shorter.
• Each Aggregated ALE Group Member, including the library, must offer affordable coverage that meets minimum value to its full-time employees.
• The employer information reporting requirements (i.e., forms 1094 and 1095) are applied separately to each Aggregated ALE Group Member. But Form 1094 also requires you to report other Aggregated ALE Group Members.
• If the library fails to offer affordable coverage, the library will face penalties but the city will not (assuming the city offers affordable coverage that meets minimum value to its full-time employees). This is good news for the city, who would otherwise be subject to the Awful penalty under 4980H(a) for failing to offer minimum essential coverage (“MEC”) to 95% of its full-time employees and their dependents. But it doesn’t help the library.
• The opposite is also true – if the city fails to comply with the Employer Shared Responsibility rule but the library does, only the city will be penalized.

The IRS played a game of cat and mouse with accountants and lawyers over the treatment of dentists and doctors until the controlled group rules went down a rabbit hole. It’s difficult to imagine how a reasonable, good faith interpretation of “brother-sister groups” and “affiliated service groups” could apply to a city, county, or school district.

E-1. Employees versus independent contractors. The ACA provides a good reason to take a fresh look at who is an employee versus who is an independent contractor, a temporary employee, or a leased employee.[1] Identifying who is an employee is important for both (1) determining applicable large employer status and (2) identifying who must be offered coverage under the Employer Shared Responsibility rule. But there are other consequences if you get it wrong.

According to the Minnesota Attorney General’s office, as many as 20% of employers misclassify at least one employee, and the reasons for doing so are as follows:

To avoid paying employees the minimum wage;

To avoid paying employees overtime wages;

To get out of paying their fair share of Workers’ Compensation insurance;

To get out of paying their fair share of Unemployment Insurance;

To avoid complying with employment discrimination laws;

To avoiding employer-based health and pension obligations;

To get out of complying with immigration laws;

To avoid dealing with union organizing; and

To get out of obligations to pay social Security and Medicare (FICA) taxes.[2]

To this list we’ll add one more:  “Because guidance from the government on who is an employee versus an independent contractor is vague.”  But the list above is daunting – it also serves as a reminder of the penalties and back taxes an employer may owe to the state and federal government if they get this determination wrong.

The ACA provides a good reason to take a fresh look at who is an employee versus who is an independent contractor, a temporary employee, or a leased employee.[1] Identifying who is an employee is important for both (1) determining applicable large employer status and (2) identifying who must be offered coverage under the Employer Shared Responsibility rule. But there are other consequences if you get it wrong.

According to the Minnesota Attorney General’s office, as many as 20% of employers misclassify at least one employee, and the reasons for doing so are as follows:

To avoid paying employees the minimum wage;

To avoid paying employees overtime wages;

To get out of paying their fair share of Workers’ Compensation insurance;

To get out of paying their fair share of Unemployment Insurance;

To avoid complying with employment discrimination laws;

To avoiding employer-based health and pension obligations;

To get out of complying with immigration laws;

To avoid dealing with union organizing; and

To get out of obligations to pay social Security and Medicare (FICA) taxes.[2]

To this list we’ll add one more:  “Because guidance from the government on who is an employee versus an independent contractor is vague.”  But the list above is daunting – it also serves as a reminder of the penalties and back taxes an employer may owe to the state and federal government if they get this determination wrong.

If you have the right to direct or control the manner and means in which services are performed, you have behavioral control over the worker. You do not have to actually direct or control the way work is done, so long as you have the right to do so.

These behavioral control factors indicate the worker is an employee:

You direct how, when, or where the work will be done

You specify which tools or equipment will be used

You specify the sequence in which services will be performed

You determine who will be hired to assist with the work

You decide where supplies and services will be purchased

These factors illustrate how you and your worker perceive your relationship and indicate your worker is an employee:

The worker has the right to quit without incurring liability

You have the right to fire the worker

The Employer Shared Responsibility rule cites a ruling from 1970 as an example where a temporary staffing agency is treated as the employer. The Ruling concluded that a staffing agency for retail store clerks was the “employer” where (1) the staffing agency trained retail clerks on the systems of prospective clients; (2) the agency furnished clerks to help with sales and holiday events, (3) the agency placed a supervisor in each store, and the supervisor reported hours and performance, (4) clerks forwarded timecards to the agency, (5) clerks were subject to the instructions and control of the agency supervisor, and not to the store, and (6) the agency carried all relevant liability insurance, workers compensation, etc. It’s just an example, and it doesn’t mean that every temporary agency must operate in the same manner. But using it illustrates the high bar that the IRS considers in making this determination.

Many bus drivers and other school workers are employed by staffing companies rather than school districts. School bus drivers, in particular, are typically viewed as common law employees of the staffing company  Assuming they meet the requirements to be treated as common law employees of the staffing company, the staffing companies count their hours over the calendar year in determining full-time status, and they do not follow rules specific to school districts which require that they ignore summer breaks and holidays in determining whether an employee works an average of 30 hours per week. As a result, most bus drivers and school district workers who are common law employees of staffing companies aren’t treated as full-time employees.

Similarly, for most employers, if an employee has a break in service of more than 13 weeks, the employee will be treated as a new employee when they are rehired, and prior hours will be disregarded in determining whether they are full-time employees. The break in service period for educational institutions, however, is 26 weeks. Bus drivers and other workers who provide services to school districts through a staffing company are subject to the 13-week rule, making it even more difficult for bus drivers and other school workers employed by staffing companies to attain full-time employee status.

For employers on the bubble of being an applicable large employer, it is critically important to know who is and who is not an employee.  If you work for a “small” employer but use workers from staffing companies, temporary agencies, or PEOs, it is possible that the IRS will look at your workforce and determine that, under common law standards, your organization is the employer of these workers. 

In all cases, workers from PEOs should be counted in determining whether you are an applicable large employer.  In most cases, workers from temporary agencies will not be counted in determining whether you are an applicable large employer.  Bus drivers are typically viewed as employed by the staffing company, or as more commonly called, the bus company.  As a result, they are not usually counted in determining large employer status.  Other workers from staffing companies require a deeper dive and review as to who their employer is under common law standards. 

The final Employer Responsibility rules provide that hours need not be counted for employees of government entities that are “bona fide volunteers.”  The intent was to permit exclusion of hours from persons who work part time as volunteer firefighters or EMTs,[10] but is not limited to those persons. Individuals are treated as a bona fide volunteers if the only compensation received for performing services is in the form of,

• Reimbursement for (or a reasonable allowance for) reasonable expenses incurred in the performance of such services,

• Reasonable benefits (including length of service awards), customarily paid by employers in connection with the performance of such services, including stipends, contributions to employee benefit plans, and nominal wages.[11]

Applicable large employers have 50 or more full-time or part-time equivalent employees in the previous calendar year.  The following is a high level summary of that calculation, taking into account what we learned in Section 3.

Step 1:  Identify Controlled Groups as described in Section 3.4

The IRS calls these “Aggregated ALE Groups.”  The regulations refer to entities that are part of these groups as “applicable large employer members.” Aggregated ALE Groups may occur any time a public employer effectively controls the board of directors or similar leadership structure of another public entity.

Enter employees from Aggregated ALE Groups here:          

Step 2: Identify any outsourced workers that should be treated as employees as described in Section 3.4  

Employers should routinely review their temporary workforce and adopt practices to protect them from the retroactive reclassification of outsourced workers as employees.

Enter possible employees among your outsourced workforce here:

(You can evaluate in more detail later if this number pushes you into ALE territory).

Step 3:  Identify full-time and part-time employees by counting hours as described in Section 3.4

Full-time employees are employees who work an average of 30 hours per week.  Alternatively, an employer may classify full-time employees as employees who work 130 hours per month.  Divide your workers into full-time employees and part-time employees.  Include all W-2 employees, seasonal employees, and workers from Step 1 and Step 2 of this Section 3.5.

Full-Time Employees:

Part-Time Employees:

Step 4:  Monthly Calculation

For each month in the previous calendar year, determine the number of full-time (FT) employees during each month of the calendar year. List them in Table A, Line a.

For each month in the previous calendar year (not the plan year), add up all of the hours for part-time employees, not exceeding 120 hours for any one employee, and divide by 120 hours.  Put that number in Table 1, Line b.

Add lines a and b and put that number in Table A, Line c.

Table A:  All employees including seasonal employees in previous calendar year

2021       Jan     Feb      Mar     Apr      May     Jun      Jul       Aug     Sep      Oct               Nov    Dec

Step 5:  Annual Calculation

Add together the total for all 12 months in Table A, Line c. Divide that number by 12.

Result here:  

If the result in Step 5 is less than 50, the employer is not an ALE for the current calendar year. If the result in Step 5 is 50 or more, the employer is an ALE for the current calendar year, unless the seasonal worker exception applies.

Step 6:  Seasonal Worker Exclusion

Does the sum of the full-time employees and FTEs in Line c of Table A above exceed 50 employees in 120 days or less, or in four or fewer calendar months during the calendar year?  The 120 days and four calendar months do not need to be consecutive. If yes, continue to Step 7. If no, stop. You may not exclude seasonal workers.

Step 7: 

Are the employees in excess of 50 during the four or fewer calendar months (or 120 days) seasonal employees?   If yes, the employer is not an applicable large employer for the current calendar year.

You’ve done it!