When you hit 50 employees, there are rules you have to follow for small business health insurance. No big deal – counting 50 employees is a simple task. That is, until the IRS gets involved.
Fifty employees doesn’t just mean 50 people showing up to work every day. Part-time hours, other companies you own, and seasonal workers make it a little more complicated than that.
When health coverage is no longer optional
Most small businesses aren’t federally required to offer health insurance. But once you become an Applicable Large Employer (ALE), things change.
Under the Affordable Care Act (ACA), ALEs are subject to what’s called the employer shared responsibility provisions. Translation: these businesses are usually required to offer qualifying health insurance or risk some pretty hefty penalties.
An ALE usually has an average of at least 50 full-time employees, including full-time equivalents (FTEs), during the previous calendar year. Keep in mind that these are federal rules, and state requirements may be different.
But insurance is never that simple, and this is no exception.
The 50-employee rule isn’t just your headcount
For ACA purposes, full-time usually means at least 30 hours per week or 130 hours per month. But you can’t ignore everyone who works fewer hours.
To get your full-time equivalents, you’ll need to add up your part-time employees’ hours each month, counting no more than 120 hours per person. Then divide that number by 120. Notice that 130 hours are used to define full-time employees, while 120 hours are used to calculate FTEs. We guess one number would’ve been too easy.
For example, say you have 40 full-time employees and 20 part-timers who each work 60 hours per month. Those part-time hours equal 10 FTEs, bringing your total to 50. That potentially makes you an ALE.
You’ll need to average these monthly totals across the previous calendar year. If you own multiple businesses, the IRS may require you to count their employees together. For example, if you own two companies that each have 30 full-time employees, both could be considered part of an ALE under the IRS’s common-ownership rules. So dividing employees among separate companies isn’t a workaround. Nice try, though.
There is a limited exception for seasonal workers. If your workforce exceeds 50 for no more than 120 days (or four calendar months) and the workers pushing it over the line are seasonal, you may not be an ALE. Think holiday retail staff or seasonal farmworkers, not just any temporary hiring spree.
By now, you should have an idea of whether the 50-employee rules apply. Unfortunately, that’s only the beginning. The plan you offer has requirements of its own, and getting those wrong could cost you.
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Just offering insurance isn’t enough
ALEs generally are required to offer minimum essential coverage to at least 95% of their full-time employees and their dependents. Sorry, spouses – for this rule, dependents usually means children under age 26.
To avoid another potential penalty, the coverage must also be affordable and provide minimum value.
Minimum value means a plan covers at least 60% of expected allowed medical costs and provides substantial coverage for hospital and physician services.
Affordability looks at what employees must pay for the lowest-cost self-only plan that provides minimum value. Employers can’t exactly peek into everyone’s household finances, so the IRS offers three safe harbors: W-2 wages, rate of pay, or the federal poverty line.
And if coverage rules aren’t enough, why not throw in some paperwork? ALEs have reporting responsibilities using Forms 1094-C and 1095-C.
What happens if you don’t comply?
Not following the rules comes at a pretty hefty cost. There are two potential ACA penalties, but neither is automatic.
Say your business is required to offer health insurance but doesn’t. One of your full-time employees buys coverage through the ACA Marketplace and qualifies for a tax credit that lowers their monthly premiums. That single employee’s tax credit could trigger a penalty for your business.
What do those penalties look like? Spoiler: it isn’t pretty.
If you don’t offer coverage to at least 95% of full-time employees: For 2027, the potential annual penalty is $3,780 per full-time employee. That’s usually calculated after subtracting the first 30 employees. So, a standalone business with 60 full-time employees throughout the year could owe $113,400 if the penalty applies all year. That’s a lot of money to spend on absolutely nothing.
If you offer coverage but it falls short: Coverage that is unaffordable, lacks minimum value, or isn’t offered to certain full-time employees has a different penalty. In 2027, that’s $5,670 annually for each full-time employee who receives a qualifying Marketplace premium tax credit. If 10 employees trigger it for the full year, that’s $56,700.
The second penalty is capped at what the first would have been. Both are calculated monthly, amounts change annually, and the calculations use actual full-time employees, not the part-time equivalents used to determine ALE status.
What if you’re below the threshold?
If you’re not an ALE, you usually don’t have to offer health insurance under the federal rules. But you can still choose to provide benefits. Plus, eligible small employers may be able to use the Small Business Health Options Program (SHOP) and qualify for tax incentives.
The takeaway is that you can’t decide you’re exempt based on a quick headcount. Calculate your full-time employees and equivalents, consider related businesses and seasonal workers, and confirm which requirements apply. It’s better to count your employees now than count the zeros on an IRS penalty later.
