What the applicable large employer determination tells you about company size

What does the applicable large employer determination measure?

The applicable large employer, or ALE, determination is the Affordable Care Act test that decides whether an employer is subject to the employer shared responsibility provisions and the annual information reporting on Forms 1094-C and 1095-C. It looks back at the prior calendar year, averages full-time employees plus full-time-equivalent employees built from part-time hours, and combines employers under common ownership. An employer whose average reaches 50 under that method is generally an ALE for the current year.

If your CAS or payroll team runs payroll or ACA reporting for a client, the answer is probably already in your files. That makes ALE status a fast first filter when you wonder which clients might meet SourceX's size baseline, as long as you remember that the two tests count different people over different periods.

How is ALE status calculated?

The method comes from Internal Revenue Code section 4980H and the IRS's ALE guidance, and it works month by month across the prior calendar year.

1. Count full-time employees each month. A full-time employee averages at least 30 hours of service per week; 130 hours of service in a calendar month is treated as the monthly equivalent.
2. Convert part-time hours into full-time equivalents. Add the hours of service of everyone who was not full-time that month, counting no more than 120 hours for any one person, and divide the total by 120.
3. Add the two figures for each month. Full-time employees plus full-time equivalents gives the month's total.
4. Average the twelve months. Add the monthly totals and divide by 12. An average of 50 or more generally makes the employer an ALE for the current year.
5. Check the seasonal worker exception. An employer that exceeded 50 for 120 days or fewer during the year, where the employees above 50 during that period were seasonal workers, is not an ALE.
6. Combine related employers. Companies treated as a single employer under the common-ownership rules are counted together, and if the group reaches 50, each member is an ALE member.

An ALE generally files Form 1094-C with the IRS and furnishes Form 1095-C to its full-time employees, which answers the frequent client question about 1095-C filing. Check the current-year instructions for both forms before relying on this summary.

Illustrative: a fictional distributor has 40 full-time employees every month plus 20 part-time staff who each work 90 hours a month. The part-time hours total 1,800, which is 15 full-time equivalents, so each month counts 55 and the company is an ALE. It still has only 40 full-time employees, which is exactly why ALE status cannot stand in for SourceX's baseline.

How does ALE status compare with SourceX's size baseline?

The headline number matches; almost everything else differs.

A third definition can muddy the conversation. The SBA's Office of Advocacy, in its 2026 small business FAQ, defines a small business for research purposes as an independent business with fewer than 500 employees. Most companies SourceX looks for, roughly 50 to 500 employees, are small businesses by that measure, so an owner who calls the company small may still be a fit.

When is ALE status a good signal, and when does it mislead?

Treat it as a reason to look closer, never as confirmation.

• Part-time-heavy workforces. As the distributor example shows, full-time-equivalent math can make a restaurant group or retailer an ALE while it employs far fewer full-time staff than the baseline requires.
• Group aggregation. Common-ownership rules can make a small entity an ALE because of its affiliates. The company whose records would be licensed may be much smaller than the group.
• Past the peak. Illustrative: a software company that had 120 full-time employees three years ago and 40 today is not an ALE now, but its peak may still meet the baseline.
• Acquired or wound down. A company that has been acquired or has closed no longer files as an ALE, yet it can still qualify if its data still exists.
• Contractor-heavy models. Neither test counts independent contractors. The IRS page on reporting payments to independent contractors describes the Form 1099-NEC reporting that applies to them instead, which shows how much of a client's workforce sits outside payroll.

How do you confirm headcount before an introduction?

1. Pull payroll registers for the client's busiest periods over recent years and find the highest count of full-time W-2 employees.
2. Leave out 1099 contractors and workers supplied by staffing agencies.
3. If the client belongs to a commonly owned group, note which entity actually employed the staff and created the records.
4. Check the rest of the baseline: several years of documented operations, rights to license the data, and an owner, CEO, CFO or authorized representative willing to sponsor.
5. Run the company fit checker for a preliminary, non-binding read, then compare the result with who qualifies.
6. Ask the client whether they want an introduction before sharing anything about them.

Deal CFOs run a similar check on acquisition targets; see deal CFOs for independent sponsors.

What does this mean for a CAS practice?

A CAS team can screen its client list for size in an afternoon. For how CAS teams fit the program more broadly, see the analysis of CAS growth at Top 100 accounting firms and the fractional CFO partner page. The data still carries obligations: use headcount facts inside the firm, keep payroll detail out of any outside conversation, and let the client decide whether to apply.

Partners earn 25% of the eligible platform fees SourceX actually collects from the referred company's licensing deals, capped at $100,000 per referred company. Rewards become payable only after the buyer pays and SourceX receives its fee; a lead, meeting or signed agreement alone does not trigger payment, and no reward is guaranteed. SourceX pays it from its own fee, so the client's proceeds are untouched. If your practice sits inside a CPA firm, check professional and state rules on referral fees and disclosure before you register, and confirm after any merger who holds the relationship; accounting firm M&A in 2026 covers that question.

What are the limits of this comparison?

The steps above are the headline method. Crediting hours of service, defining seasonal workers, new-employer rules and common-ownership aggregation each have detailed rules that this page does not cover. Use the IRS's current ALE guidance and the client's benefits or payroll adviser for the determination itself; this page uses ALE status only as a screening signal.

This is general information, not legal, tax or financial advice. Confirm with your own counsel, tax adviser or professional body before acting.

Next step

Sort your payroll clients by ALE status, then confirm peak full-time headcount for the top few. When one passes and the owner wants to explore licensing, register as a partner and pass the owner your link.