Health Care Reform Alert: Are You Subject to the Employer Shared Responsibility Mandate?
Reforms to employer-provided health care are rapidly being instituted, and actions businesses take now will impact the future of the health coverage they offer.
With the Supreme Court’s ruling upholding the constitutionality of the Patient Protection and Affordable Care Act (ACA) almost in its entirety, despite ongoing legal and legislative challenges, the implementation of extensive health care reform continues. For employers, the ObamaCare provision of most concern is almost certainly the employer shared responsibility mandate.
Generally, beginning in 2014, the ACA requires large employers—those with 50 or more full-time (or “full-time equivalent”) employees for the preceding calendar year—to offer affordable, minimum-value health care coverage for their full-time employees or pay an annual penalty for employees receiving a premium tax credit or cost-sharing reduction for purchasing individual coverage.
The Internal Revenue Service (IRS), the Center for Consumer Information & Insurance Oversight (CCIO), and other federal agencies are issuing ongoing guidance and tools for determining whether coverage is affordable and meets minimum coverage and value standards.
Update: Employers won't be penalized for not offering health care coverage in 2014. With health care reform’s employer shared responsibility mandate mere months away from implementation in 2014, on July 2, 2013, President Obama's administration announced that it is providing an additional year before the ACA mandatory employer reporting requirements begin. Therefore, the employer shared responsibility mandate will not be enforced in 2014, and penalty payments will not apply until 2015.
Citing employer compliance concerns as the basis for the delay, the Treasury Department will issue formal guidance, simplifying the reporting requirements for employers covered by the mandate. In the meantime, the feds have issued transition relief for 2014.
Many small business owners may mistakenly believe that they are not subject to the mandate because they don’t have the required number of full-time employees to be considered large employers. However, determining who is counted as a full-time employee requires including part-time workers’ hours (the aforementioned full-time equivalents), which means that even if you don’t have a single full-time employee, you can fit the mandate’s definition of a large employer.
Don’t confuse which employees are counted for purposes of determining who is a large employer and subject to the mandate with which employees are counted in calculating the assessable payment for employers covered by the mandate but in non-compliance. Full and part-time employees are counted in determining whether an employer meets the 50 or more full-time employee threshold. If a large employer is subject to the shared responsibility mandate, only full-time employees are counted for purposes of calculating the penalty for failure to comply.
Perhaps you’re of the mindset that because the mandate doesn’t go into effect until 2014, you have plenty of time to put off dealing with its implications. Think again. Although the actual employer shared responsibility provision does not become effective until 2014, whether you are a large employer is determined annually, and is based on your average number of employees across the months of the previous year.
If you have 50 or more full-time employees or full-time equivalents (FTEs) for 2013, you may be considered a large employer for 2014, when the employer shared responsibility provisions go into effect. Don’t wait until 2014 to determine whether this piece of health care reform will impact your business. The time is now for employers to determine whether the provision applies to them, and if so, prepare accordingly.
Except for the smallest of businesses, determining whether an employer meets the 50 or more full-time employee threshold subjecting it to the employer shared responsibility mandate is not as simple as it sounds. Due to the complexity involved, the IRS has issued extensive guidance employers can rely upon in making this determination.
Defining Employer and Employee
The definitions of the terms “employer” and “employee” can vary, depending on the law or application in question. For purposes of the employer shared responsibility mandate, the common-law standard is used to determine who is an employer and an employee.
Common-law standard. Under common-law, if a person performs services for you and you have the right to direct and control what will be done and how it will be done (whether you exercise that right or not), you are the employer and that person is your employee. In other words, the criteria to determine whether a worker is your employee or an independent contractor applies.
In making this determination, leased employees, sole proprietors, partners in a partnership, or shareholders in a 2-percent S corporation are not considered employees.
Successor and predecessor employers. For purposes of determining large employer status, the term “employer” includes a predecessor and successor employer.
Counting Employees to Determine Employer Status
For purposes of determining who is counted as a full-time employee for large employer status, a full-time employee is one who, with respect to a calendar month, is employed for an average of at least 30 hours of service per week. In addition, 130 hours of service in a calendar month is treated as the monthly equivalent of at least 30 hours of service per week—with the caveat that an employer must apply this equivalency rule on a reasonable and consistent basis.
Full-time employees are defined for purposes of individual laws, and employees considered full-time under certain statutes are part-time workers under others and vice versa. The 30-hour definition discussed here is for purposes of determining whether an employer is a large employer and, therefore, subject to the employer shared responsibility provisions.
Hours of service defined. “Hours of service” are defined as hours for which an employee is paid for the performance of duties for an employer. Hours of service also include hours for which an employee is paid (or entitled to payment) during which an employee is on vacation, holiday, illness, disability, layoff, jury duty, military duty or certain other absences (hence, the use of the term “hours of service” as opposed to hours worked).
Non-hourly pay. If you have employees who are paid on a non-hourly basis, you have a choice of three methods you can use to calculate their hours of service:
- using actual hours of service from records of hours worked and hours for which payment is made or due
- using a days-worked equivalency—the employee is credited with eight hours of service for each day for which the employee would be required to be credited with at least one hour of service under the calculation for hourly employees, or
- using a weeks-worked equivalency—the employee is credited with 40 hours of service for each week for which the employee would be required to be credited with at least one hour of service under the calculation for hourly employees
While employers have a choice, they must use one of the above methods to calculate the hours of service for non-hourly employees.
Employers can’t use the days- or weeks-worked equivalency methods if either method substantially understates an employee’s hours of service. The hours of service calculated using the days- or weeks-worked equivalency method must generally reflect the hours the employee actually worked and the hours for which he or she is paid.
The following is an example of a scenario in which an employer cannot use the days-worked equivalency method:
Clay generally works three days a week, for ten hours each day. The days-worked equivalency method would calculate Clay’s hours of service as 24 per week (Clay is credited with eight hours of service for each day he works: 8 x 3 = 24). Clay’s employer cannot use the days-worked equivalency method to calculate Clay’s hours of service because the equivalency would substantially understate Clay’s hours of service as 24 hours of service per week and result in Clay not being treated as a full-time employee.
On the other hand, employers aren’t required to use the same method for all their non-hourly employees. In addition, employers may apply different methods for different classifications of non-hourly employees as long as the classifications are reasonable and applied consistently.
Full-time equivalent employees (FTEs). You should be aware that even if you have only part-time employees or a combination of full-time and part-time workers, you may be considered a large employer under the full-time equivalent rule.
For purposes of determining whether you are a large employer subject to the employer shared responsibility provisions, a combination of part-time employees (employees who individually are employed on average for less than 30 hours per week) are counted as the equivalent of a full-time employee or an FTE.
The number of FTEs is determined for each calendar month by calculating the aggregate number of hours of service for that calendar month for employees who were not full-time time employees, up to 120 hours of service per employee, and dividing that number by 120. Note that fractional amounts are taken into account for purposes of this calculation.
For each calendar month of 2015, Brooke’s Home Furnishings has 20 employees, each averaging 35 hours of service per week. Brooke’s also has 40 part-time employees, and each of them averages 90 hours of service per month.
For purposes of determining how many full-time employees Brooke’s has for 2015, Brooke’s must count each of the employees averaging 35 hours of service per month as one full-time employee for each month. To determine each month’s number of FTEs, the total hours of the part-time employees’ service are aggregated and divided by 120. Therefore, Brooke’s Home Furnishings has 30 FTEs for each month in 2015 (40 part-time employees x 90 average hours of service per month = 3,600; 3,600 divided by 120 = 30 FTEs). As a result, Brooke’s has 50 full-time employees (20 full-time employees + 30 FTEs = 50 full-time employees) during each month in 2015, and is a large employer for 2016. (Remember, whether you are a large employer is determined annually, and for the next year is based on your average number of employees across the months of the previous year.)
Special transition relief for 2014. Employers trying to determine whether they will be considered large employers for the first year the employer shared responsibility provisions apply may use a special transition rule. An employer may measure whether it has 50 full-time employees or FTEs using any six consecutive month period in 2013.
If you think you might be considered a large employer or it might be close, take advantage of the transition rule. Calculate whether you have 50 or more full-time employees or FTEs using the first six months of 2013 or using a six month consecutive period as early in the year as possible. Doing so can give you a invaluable heads up as to whether you need to worry about the employer shared responsibility provisions for 2014.
New businesses. So what do you do if you started a business in the middle of the preceding year? An employer not in existence for the entire preceding calendar year is considered a large employer for the current calendar year if:
- it is reasonably expected to employ an average of at least 50 full-time employees or FTEs during the current calendar year, and
- it actually employs 50 or more full-time employee or FTEs during the calendar year.
Jennifer’s Optical, Inc. is incorporated on January 1, 2015. On the day of incorporation the company has four employees. The owners of Jennifer’s Optical, Inc. already own an optical lab and intend to open within one month of incorporation and employ approximately 75-100 people on a full-time basis. Jennifer’s Optical, Inc. employs 80 full-time employees by mid-February 2015.
Jennifer’s Optical, Inc. is a large employer for 2015. The company can reasonably be expected to employ the threshold 50 full-time employees during 2015, as well as actually employing an average of at least 50 full-time employees during 2015.
Controlled groups of entities. All employees of a controlled group of entities or an affiliated service group are taken into account in determining whether the members of the controlled or affiliated service group together are a large employer.
If two or more companies have a common owner (or are otherwise related), the companies are combined together when determining whether they employ 50 or more full-time employees or FTEs. Each separate company is subject to the employer shared responsibility provisions if the combined total meets the 50 full-time employee threshold. This is true even if separately, each company does not employ 50 or more full-time employees or FTEs.
Sun & Fun, Inc. owns 100 percent of all the stock of Surfing, Inc. and Boating, Inc. Sun & Fun, Inc. does not have any employees during the 2015 calendar year. However, both Surfing, Inc. and Boating, Inc. have 50 full-time employees each during every month in 2015, for a total of 100 employees. As a result, for 2016, all three companies—Surfing, Inc., Boating, Inc., as well as Sun & Fun, Inc., are considered large employers for purposes of the employer shared responsibility rules.
Exception for seasonal workers. Do you employ seasonal workers? If so, a special rule applies to determine whether you are a large employer.
Seasonal workers are workers who perform labor or services on a seasonal basis, such as retail workers employed exclusively during holiday seasons.
Currently, under IRS guidelines, employers may use a “reasonable, good faith interpretation” of the term seasonal worker.
You are not a large employer for the current calendar year if:
- you have more than 50 full-time employees and FTEs for 120 days or less during the preceding calendar year, and
- the employees in excess of 50 who were employed during the no more than 120 day period are seasonal workers.
Up to four calendar months may be treated as equivalent to 120 days, but the four calendar months and the 120 days do not have to be consecutive.
Horton’s Holiday Shop has 40 full-time year-round employees and also has 80 full-time seasonal workers who are employed for four months out of the year at Horton’s, from September through December 2015. Under the special rule for seasonal workers, Horton’s employed 50 or more full-time year-round and full-time seasonal employees for no more than four calendar months (considered the equivalent of 120 days). Because Horton’s full-time employees number less than 50 during September, October, November and December if the seasonal workers were not counted, Horton’s Holiday Shop is not considered to employ more than 50 full-time workers and is not a large employer for the next calendar year (2016).
Keep in mind that the result in the example above could differ if an employer has FTEs, and some of them are seasonal workers outside of the 120-day/four month safe harbor.
What action should you take if you are a large employer for purposes of the shared responsibility mandate? The answer varies widely from business to business. If you currently offer health care benefits and plan to continue doing so, we recommend you contact your insurance provider or plan administrator to assess your health care coverage choices and make sure the coverage you offer meets the requirements imposed by the ACA in the most cost-effective manner.
If health care coverage isn’t an employee benefit you offer, while you may not be able to change your large employer classification under the mandate, what you can do is determine if it is advisable to revamp your workforce to reduce the number of full-time employees who would be included for purposes of calculating the shared responsibility penalty. Consult your tax advisor for guidance regarding the details of how the assessable payment is calculated. Also, keep in mind that the people who work for you are a large part of whether your business succeeds and thrives. Therefore, critical business decisions impacting your work force shouldn’t be made based on tax savings alone.