HOW THE ACA AFFECTS EMPLOYERS
©Michael Canan, Shareholder
When Employers Will Be Treated As Having 50 Full-Time Employees And Be Subject To the “Shared Responsibility” Requirement; Temporary Tax Credits For Small Employers That Provide Health Coverage
Questions answered in this chapter--
Less than 50 Full-Time Employees
50 or More Full-Time Employees
4. Can you give me a brief summary of how to determine whether my business has 50 or more full-time employees; and if it does, what responsibility it has under the ACA to provide health coverage to its employees?
Cadillac Plan Tax
Other ACA Penalties Imposed On Employers
Tax Credit If Less Than 25 Full-Time Employees
Less than 50 Full-Time Employees
If your business has fewer than 50 full-time employees or the equivalent of 50 full-time employees, you will not have to pay a monetary penalty if you do not provide health plan coverage to them, although your business will have some other responsibilities under the ACA, discussed in Question 2. If you are close to having 50 full-time employees, you will want to look at this question more thoroughly, and you will find a summary of these matters and the effect of being a “large employer” discussed below in Question 4. If the business has 50 or more full-time or full-time equivalent employees, it will be treated as a large employer for purposes of the ACA and will be subject to what is called “shared responsibility” for health plan coverage of its employees.
Even if your business employs less than 50 full-time employees, you must be careful that it observes certain rules under the ACA if it provides any kind of medical plan to employees, even though the plan is not a "qualified health plan." For example if your business consisted of 10 full time employees and it provided health insurance to each of them, but the insurance had a life-time cap of $1 million, your business would be violating the restriction in the ACA that prohibited a life-time limitation on health coverage, and would be subject to the penalties discussed in Question 28.
If your business uses the Exchange to purchase group coverage for its employees, the group plan purchased will be a qualified health plan (QHP), which offers minimum health benefits, does not exceed the permissible maximum deductibles, and meets other requirements under the ACA.
If your business offers an uninsured health plan to some but not all employees, the coverage must pass the nondiscrimination requirements discussed in Question 23. Presently those requirements are suspended by IRS Notice 2011-1, but when they become effective, violation of them will result in taxable income to the highly compensated employees who are covered by the insured plan.
Your business will have reporting requirements to the IRS regarding health insurance coverage provided or not provided to its employees and W-2 information it must provide to its employees, discussed in Questions 19 and 20.
If your business offers a group health plan to its employees, it must observe the applicable requirements of the ACA or risk significant penalties, which may be as much as $100 per day for each employee not properly covered, imposed by Internal Revenue Code § 4980D, discussed in Question 28.
You should carefully review the discussion below. If your business presently offers a health plan to employees, it almost certainly is an insurance-based plan (typically only larger companies maintain self-funded health plans). Your insurance agent is a good person to discuss this with. Depending on what you conclude after reading the discussion below and talking with your insurance agent, you may want to talk to a consultant or lawyer who is knowledgeable in the area. The stakes are high, so you want to be sure you know before 2015, now that the effective date for penalties imposed on large employers has been postponed from 2014 to 2015, whether your business will be considered a large employer with a responsibility to provide health coverage.
50 or More Full-Time Employees
4. Can you give me a brief summary of how to determine whether my business has 50 or more full-time employees; and if it does, what responsibility it has under the ACA to provide health coverage to its employees?
Beginning January 1, 2015 (as extended by Executive Order in July 2013), an employer with 50 or more full-time employees, including full-time equivalent employees, will be penalized for failing to offer “minimum essential coverage” to its full-time employees (but not its part-time employees even though they are counted in determining whether the employer has 50 actual or equivalent full-time employees) and their dependents. An employer with 50 or more full-time equivalent employees is referred to under the ACA as a “large employer.” “Minimum essential coverage” has not yet been defined for a large employer. For a small employer the term has been defined, at least if the small employer is purchasing group health insurance coverage on the Exchange. In those cases the small employer will need to purchase a plan that provides “essential health benefits,” a term that has been defined for small employers. The large employer will need to provide “minimum value”, which means it must cover at least 60% of the cost of the plan; and the plan will need to be “affordable,” which means that the employee will not be required to pay more than 9.5% of his or her “household income” for a self-only policy. However, it appears that under the ACA a large employer may provide a health plan to its employees that does not cover all the “essential health benefits,” or at least does not weight them in the proportions that would be required for a small employer insured plan. This is discussed further in Question 15.
The status of your business’ employees may be crucial in determining whether you have 50 or more employees and which employees are full-time and must be covered—
- Full-time and part-time employees--many employers have a combination of full-time and part-time employees. Full-time employees are those who are regularly scheduled to work at least 30 hours per week, including vacation time and sick leave. Even though part-time employees will not need to be provided with health insurance, their hours worked each month will be counted in determining whether an employer has 50 or more full-time equivalent employees, and is, therefore, a “large employer.”
- Seasonal employees--will not be treated as being employees of the employer, and if the employer is a large employer, it will not be required to offer seasonal employees health plan coverage.
- Leased employees--probably they are excludable but the administrative guidance is not clear.
Businesses owned by the same person or group of people may, depending upon the exact ownership, be grouped together in determining whether they constitute a large employer.
If an employer is a large employer and it fails to offer a health plan that provides minimum essential coverage and is affordable, it will be subject to an annual penalty of $2,000 times the number of its full-time employees, but will have an allowance excluding the first 30 full-time employees. (At least one full-time employee must actually purchase insurance on the Exchange and receive a premium assistance credit or cost sharing reduction to trigger the $2,000 penalty.) Instead the employer may offer a health plan that provides essential health benefits and minimum value to its full-time employees, but the plan is not “affordable” to some of its employees (requires some of them to pay more than 9.5% of “household income” to purchase self-only coverage). The employer will be subject to a penalty of $3,000 per year as to each employee for whom the plan is not affordable, or for whom the employer does not provide “minimum value” (at least 60% of the cost of the plan), provided at least one such employee receives financial assistance in purchasing insurance on the Exchange. The employer will not be subject to the $3,000 per year penalty if it is subject to the $2,000 per year penalty on all full-time employees. See Question 16. Both the $2,000 and $3,000 penalties will be adjusted for cost of living increases beginning in 2015.
5. Is there any exception to the rule that a large employer must provide health plan coverage beginning January 1, 2015?
If your business had a health plan established on December 27, 2012 that had a fiscal plan year (one that was not a calendar year) it can continue to use that fiscal year and will not be required to offer health coverage to full-time employees until the first day when the 2015 plan year begins. (This administrative exception originally applied when the effective date of the penalties was 2014; it is not known at this time if it will be extended to 2015.) At least 25% of the business’ employees must have participated, or at least one-third of the businesses’ employees must have been offered the opportunity to participate in the last general enrollment period prior to December 27, 2012. Further, if the employer has other employees who were not covered by any health plan of the employer that had a calendar plan year as of December 27, 2012 they may also be covered under the fiscal year plan. The test of whether the employer meets the 25% or one-third requirement can be based on information from the general enrollment period immediately prior to December 27, 2012, or based on payroll information available at any time between October 1, and December 31, 2012.
6. When is the 50 or more full-time employees threshold determined
Each year the employer looks back to the prior year for the number of its full-time employees and full-time equivalent employees and determines whether there are 50 or more employees. If there are 50 or more, the employer is a large employer.
The law also provides that if a new business expects to have 50 or more employees during the year, it may be a large employer during its first year of business. It is not clear when an employer would be affected by this provision, although a rapidly growing start-up company might be affected. A company that was new because the assets of the business had been purchased or transferred from an existing company to a new company with a different owner might well be considered a large employer in its first year of business if it had more than 50 or more full-time employees.
An individual who is hired with the understanding that he or she will be regularly scheduled to work on average at least 30 hours a week, and who actually does work on average at least 30 hours a week is clearly a full-time employee. Sick leave and vacation will be counted in determining hours worked per week. However, seasonal employees are not treated as full-time employees even though they work 30 hours per week; leased employees are not treated as employees as long as they are not considered common-law employees. Also not treated as employees are sole proprietors, a partner, a member of a limited liability company taxed as a partnership, and a 2-percent or more S corporation shareholder.
Part-time employees can be the equivalent of full-time employees for purposes of determining whether the business employs at least 50 full-time employees or their equivalent. To determine the number of full-time equivalent employees, the total hours worked in a month by all employees who do not work at least 30 hours a week must be added together and that number is divided by 120.
Suppose that your business has 45 full-time employees, and 10 part-time employees who each work 20 hours per week. Thus, in a typical month, the 10 part-time employees will have worked a total of 866.66 hours (20 hours per week X 4.33 weeks X 10 part-time employees = 866.66 hours). The equivalent of full-time employees is determined by dividing 866.66 hours by 120 hours, which equals 7.22 employees, so there would be a total of 52.77 employees. Thus, in this example your business would have over 50 full-time employees. However, it would not be required to offer health plan coverage to the part-time employees.
Employees may be hired as variable-hour employees, so it is not known initially if they will be full-time or part-time employees. If they are ultimately determined to be part-time employees, they will still be counted for purposes of the 50 full-time equivalent employee test used to determine if the employer is a large employer. However, if they are not full-time employees, the employer will not be penalized if it does not offer them health coverage.
The law allows the employer to establish a standard “look-back” period of between three months and twelve months to make that determination, and then allows periodic updates in that determination. During that period the hours worked by a variable-hour employee will be monitored. At the end of that period the employee will be determined to have been a part-time or full-time employee for the look-back period. The employee must then be treated as a full-time or part-time employee, as applicable, for a "stability period.” The stability period must be the same length of time as the look-back period, except that it cannot be less than 6 months, even if the look-back period was less than 6 months. If the employee is determined to be a full-time employee at the end of the first look-back period, he or she will need to be offered health plan coverage during the stability period that follows.
After completion of the first stability period, the employer could have a second look-back period and again review whether the individual is a full-time or part-time employee; however, if he or she had been determined to be a full-time employee during the first look-back period, and so was regarded as a full-time employee during the first stability period, the employer might prefer to continue the individual as a full-time employee, eligible for health insurance. For example, Steve is hired in early January 2014 and his hours vary between 20 and 35 hours per week. The employer can select a look-back period of 12-months and determine whether Steve was a part-time or full-time employee during that period. Then that determination would be used for the following 12-month stability period. So if Steve worked less than 30 hours per week (including vacation and sick leave) during the first 12-month look-back period in 2014, he would be treated as a part-time employee during the following 12-month stability period in 2015.
This process will probably not be so important in determining whether the business has 50 full-time equivalent employees (unless it has a number of variable-hour employees), since a part-time employee who has at least 120 hours per month will, in effect, be counted as a full-time employee for purposes of determining whether the business is a large employer. However, if the business is a large employer, it will only be required to cover individuals who are full-time employees. To determine whether an employee is a full-time employee who is required to be provided health plan coverage (or risk subjecting the business to a monetary penalty), the number of hours the employee works must be divided by 130 per month, rather than 120, making it slightly less likely that the employee will need to be provided coverage, a slight advantage to your business.
Guidance under the ACA also allows the employer an “administrative period” of up to 90 days following the look-back period before it has to cover an employee who has been determined to be a full-time employee. For example, suppose a variable-hour employee is hired and the employer has a 6-month look-back period. (The look-back period may be as long as one year, starting anytime between the employee’s start date and the first day of the following month.) At the completion of the 6-month look-back period, if the employee is determined to be a full-time employee, he or she must be offered health coverage. Following the completion of the look-back period, the employer has an administrative period of up to 90 days before the employee must actually be covered. However, the government does not want the combination of the look-back period and the administrative period to stretch out too far the point in time at which an individual who is determined to be a full-time employee is actually covered. Therefore, the regulations provide that the combination of the look-back period and the administrative period cannot extend beyond the first day of the first calendar month following one year and one month after the first day the employee was hired. (If the employee was hired on the first day of the calendar month the maximum allowable period would be exactly 13 months.)
If, during a look-back period, the variable-hour employee is given a different job that is clearly a full-time job, the individual must then be treated as a full-time employee, and must be offered health plan coverage no later than the end of a 90-day administrative period following the change in status; or, if sooner, within 30 days of the end of the completion of the initial look-back period if the individual is determined to be a full-time employee during the look-back period.
The hours of part-time employees for the month are totaled and that number is divided by 120. For example, the employer has twelve part-time employees who each worked 100 hours for the month, or a total of 1,200 hours. (One hundred hours per month would be approximately 23 hours per week, clearly not full-time.) Twelve-hundred hours divided by 120 equals 10 employees. This means that if the employer had 42 full-time employees, the addition of 10 full-time equivalent employees would equal 52 full-time or full-time equivalent employees and the employer would be a large employer.
No; seasonal employees will be excluded for all purposes. The regulations allow the employer to use a “look-back” period similar to that permitted for variable-hour employees, to determine if an individual is a seasonal employee. Traditionally seasonal workers are thought of as agricultural or clerical workers; however, at least under the present interpretation of this provision, seasonal employees are not limited to any specific kinds of tasks.
The definition of “seasonal worker” is important for two different reasons. First, an employer can exclude seasonal employees who work for the employer no more than (i) 120 days, or (ii) four months (the employer may choose either (i) or (ii)) during the year in determining whether the employer is a large employer. Second, seasonal employees, even though they work for the employer more than 120 days or four months during the year, are not required to be offered health coverage under the ACA.
There is a definition of a migrant or seasonal worker for agricultural purposes that the government has quoted in giving guidance on the issue of who is a seasonal worker, but this should be regarded as an example of a seasonal worker for agricultural purposes and there can be other kinds of seasonal workers. The Migrant and Seasonal Agricultural Workers Protection Act provides that, “Labor is performed on a seasonal basis where, ordinarily, the employment pertains to or is of the kind exclusively performed at certain seasons or periods of the year and which, from its nature, may not be continuous or carried on throughout the year. A worker who moves from one seasonal activity to another, while employed in agriculture or performing agricultural labor, is employed on a seasonal basis even though he may continue to be employed during a major portion of the year.”
Leased employees are not automatically treated as employee for purposes of the ACA. If they are not treated as employees, they will not need to be counted. However, the administrative guidance issued by the federal government so far on this subject, suggests that leased employees who are considered common law employees will be counted.
The guidance in this area makes it difficult to determine, in many cases, whether leased employees are your business’s common law employees. In the IRS’ view, the critical test is whether the leasing company or the onsite employer has the right to direct and control the employee. That determination is not necessarily an easy one to make. There are leasing companies that are simply payroll companies; that is, the onsite employer employs and controls the employees but has a separate company write payroll checks; in most cases these will probably not be considered the common law employer. Alternatively, there are PEOs (professional employer organizations), that typically provide not only payroll service but human resource services, worker’s compensation coverage, and maintain retirement plan and health benefits. The written agreement between the PEO and the onsite employer may be crucial as to whether the individual workers will be considered common law employees of the PEO or onsite employer. It appears that if an affordable qualified health plan is provided by the PEO, whether the individual workers are common law employees of your business or the PEO will not matter—your business’s coverage requirements under the ACA will have been met.
An employer may have one or more full-time or part-time employees who reside outside the United States. If these individuals are eligible to exclude their compensation from taxable income pursuant to Internal Revenue Code § 911, because they reside outside the United States for the taxable year and meet certain other requirements, they will be treated as receiving “minimum essential coverage” even though they are not actually covered under the employer’s health plan, which means that the employer’s requirement will be met as to any such employee and that the employer will not be subject to penalty for failure to offer health insurance.
Individuals who are bona fide residents of U.S. possessions are treated in a similar fashion. For example, an employer who has a number of employees in Puerto Rico would be able to treat those employees as having minimum essential coverage.
A full-time employee must be offered health coverage no later than 90 days after the first day of employment. It is not acceptable to begin coverage the first day of the month following 90 days of employment. Therefore, if the employer wishes to provide coverage beginning on the first day of the month for its new employees, as many do, the employer should require that employees have no more than a 60-day waiting period with coverage to be on the first day of the month.
If a part-time employee becomes a full-time employee, the employer is generally allowed an “administrative period” of up to 90 days before it is required to offer health coverage.
A large employer must offer a health plan that provides “minimum essential coverage” in order to avoid the monetary penalties discussed in this chapter. In the case of a small employer, at least if the employer provides coverage through insurance policies purchased on the Exchange, this means that the employer will provide an "essential health benefits package" as described further in this question. However, a health plan provided by a large employer is not specifically required to provide an essential health benefits package even though the plan must provide “minimum value” and be “affordable.”
The health plan offered by the large employer must provide “minimum value.” This means that the employer must provide at least 60% of the cost of coverage. With an insured plan, this is easy to determine because the employer would pay a minimum of 60% of the cost of the insurance coverage. With a self-insured plan, the Department of Health and Human Services has developed a minimum value calculator that the employer should use in determining the value of the plan. If the plan had design features not addressed by the value calculator, an actuary retained by the employer would certify that the plan meets the minimum value requirement.
The insurance must be “affordable.” The insurance is not affordable if the employee is required to pay over 9.5% of his or her “household income” for the coverage. This restriction, however, does not apply to the cost of coverage for the employee’s family should one or more family members elect coverage. With a lower income employee, it would not be surprising if the employee would be offered affordable self-only coverage but the cost of family coverage would substantially exceed 9.5% of the employee’s income. This would not result in the employer having to pay the penalties under the ACA for noncompliance. Because it will be difficult for an employer to know what an employee’s “household income” is, guidance has been developed under which an employer may rely on the employee’s W-2 income in determining whether the insurance being offered the employee is “affordable.”
The plan must be offered not only to the employee but to the employee’s dependents. Because of the way the ACA is written, the employer is not required to offer health insurance coverage to an employee’s spouse, only to “dependents” of the employee which has been interpreted as the employee’s children. However, it is unlikely that employers will make this distinction in practice.
The ACA is specific about what are considered to be “essential health benefits” for a small employer, one that has less than 50 full-time employees. For a small employer, an “essential health benefits package” includes items and services within the following 10 categories--
- ambulatory patient services
- emergency services
- maternity and newborn care
- mental health and substance use disorder services, including behavioral health treatment
- prescription drugs
- rehabilitative and habilitative services and devices
- laboratory services
- preventive and wellness services and chronic disease management
- pediatric services, including oral and vision care.
To meet the “essential health benefits package” requirements, the group health policies for a small employer to be offered on the Exchange must have a maximum deductible of $2,000 for an individual (self-only) policy and $4,000 for a family policy, and must also limit cost sharing by employees to maximum out-of-pocket costs to the health saving account maximum for the year ($6,350 self-only and $12,700 family for 2014). Of course, it can have a plan that provides for lower deductibles and out-of-pocket costs.
If your business is required to provide affordable minimum essential coverage, it must provide information about the plan to eligible employees. This information consists of a “summary of benefits and coverage” (SBC) and a “summary plan description” (SPD). Many employers will combine the information required so that only one document needs to be distributed to employees. This document must be distributed when employees are first eligible for coverage and again at the beginning of each annual open enrollment period. The SBC and SPD combined will provide information on benefits offered under the plan, enrollment information, the cost of the plan, appeals rights, and information about the plan sponsor.
Because the ACA does not specifically require that large employers offer an “essential health benefits package” even though the Exchanges to be established under the ACA are required to offer this package for individual policies and small employer group plans, it is not clear whether all of the requirements of the essential health benefits package will be required for large employers.
There are two ways to compute the penalties to which the business could be subject—
- If the business does not provide any health plan coverage at all, the penalty on a business that employs 50 full-time equivalent employees would be $2,000 each year for each full-time employee over the first 30 fulltime employees, or $40,000, plus $2,000 for each additional full-time employee over 50 not covered. (At least one employee must purchase insurance on the Exchange and receive a subsidy to trigger the penalty.)
- If the business provided health insurance that constituted “minimum essential coverage” but was not “affordable” for one or more employees or did not provide minimum value, and one or more of these employees got insurance coverage and received financial assistance from the Exchange, a $3,000 penalty would be assessed for each such employee each year. For example, if there were six employees for whom the insurance was not considered “affordable,” the business would have a penalty of $3,000 X 6 = $18,000. (The insurance will be considered “affordable” if the employee’s self-only portion of the insurance does not exceed 9.5% of his or her W-2 compensation.)
However, the $3,000 penalty will not be imposed if the $2,000 penalty applies.
Prior to the extension of the first penalty year for employers from 2014 to 2015, an administrative safe harbor had been provided for the year 2014. If the employer, acting in good faith in offering the required coverage for all of its full-time employees, has covered at least 95% of its full-time employees, it would be deemed to have complied with the ACA requirements and will not be subject to a penalty for the year 2014. Thus, if an employer who had 100 full-time employees covers 95%, it would be deemed to meet the coverage requirements under the ACA for the year 2014. An employer who had less than 100 employees would instead want to take advantage of the fact that the exclusion applies to a minimum of five employees. Therefore, an employer that had, for example, 55 employees could fail to cover as many as five employees and still avoid a penalty. It is not known at this time if the relief will be extended to 2015.
Under the ACA, fully insured collectively bargained medical plans will automatically be treated as “grandfathered,” until the collective bargaining agreement in existence on March 23, 2010 expires. After that, whether the plan is grandfathered will be based on the rules that apply generally to grandfathered plans. Employees can be transferred to a grandfathered plan from a collectively bargained plan where a benefit package had been lost and the transfer will not cause the grandfathered plan (whether or not collectively bargained) to lose grandfather status.
The fact that the plan is grandfathered gives it some protection, against change, but most of the important changes under the ACA will apply to both grandfathered and non-grandfathered plans by 2014. This is a significant departure from prior legislation in the employee benefits area, which typically allowed collectively bargained plans to delay changes in the law until the existing collective bargaining agreement had expired, although most collectively bargained agreements in effect on March 23, 2010 would probably have terminated before 2014. Collectively bargained medical plans that are not insured will not automatically be grandfathered.
Generally collectively bargained medical plans will be analyzed the same way as non-collectively bargained medical plans under the ACA, except for the grandfathered plan issue. However, one way in which special treatment will be extended concerns variable–hour employees. If the employer has variable-hour employees and wishes to use the look-back and stability periods discussed in Question 9, collectively bargained employees can be grouped separately from other employees and different look-back and stability periods applied to them than to other categories of employees. Thus, employees in different collective bargaining units can be grouped separately and collectively bargained and non-collectively bargained employees can be considered separately in meeting the requirement that variable-hour employees be treated in a similar fashion.
Details of how the penalty will be determined and assessed by the IRS have not been fully disclosed. However, by each January 31st, beginning January 31, 2016, each large employer will be required to provide to the IRS an information report, with a copy to the employees, on whether the employer offered minimum essential coverage to its full-time employees and their dependents. If the employer certifies that it did, it must provide details for the prior calendar year regarding the coverage including—
- Number of full-time employees for each month during the year
- Name, address, and social security number of each full-time employee for each month during the year and the number of months the employee and any dependents of the employee were covered by any of the employer’s health plans
- Information about the employer’s health plan(s) including:
- Length of any waiting period for coverage
- Months during the calendar year the coverage was available
- Monthly premium for the lowest cost option in each of the enrollment categories
- Share of total costs under the plan provided by the employer.
In addition by each January 31st, beginning 2016, the employer must also provide each employee, with a copy to the IRS, to whom it provided minimum essential coverage during the prior year a report to that effect, although the IRS is trying to eliminate duplication in the two reports.
The information provided to the IRS, coupled with the information it will receive from the Exchanges, will provide it with a basis for knowing whether the large employer is subject to a penalty under the ACA for failure to offer its full-time employees affordable minimum essential coverage.
Beginning with W-2s filed by January 31, 2013 for the year 2012, employers have been required by the ACA to report to employees on their W-2s information on the cost of health care coverage provided to the employees during the prior year. For W-2s for the 2012 year, this requirement was limited to employers that filed at least 250 W-2s in the prior year. That limitation will continue to apply until the IRS issues further guidance.
For those employers required to report the cost of health care coverage on the employees’ W-2s, peripheral or limited types of coverage are not required to be reported. Types of coverage excluded from reporting are—
- Coverage only for a specified disease or illness, such as cancer insurance
- Hospital indemnity or other indemnity insurance
- Coverage only for accident, or disability income insurance, or any combination thereof
- Coverage issued as a supplement to liability insurance
- Liability insurance including general liability insurance and automobile liability insurance
- Workers’ compensation or similar insurance
- Automobile medical payment insurance
- Credit-only insurance other secondary or incidental types of insurance
They may be grouped together depending upon the exact ownership. There are detailed technical requirements that apply to whether businesses will be grouped together for purposes of determining if, when combined, they have 50 or more full-time employees or full-time equivalent employees. Some examples of how this would apply are as follows--
- Suppose an individual owns a corporation that has 45 full-time employees and also has a separate unincorporated business that has six full-time employees. The two businesses would be grouped together since he is the 100% owner of both, and each would be treated as being a large employer.
- The same individual owns the same corporation that has 45 employees. His wife owns a separate corporation that has six employees. If the individual has no ownership or involvement in his wife’s business and his wife has no ownership or involvement in his business, both businesses are active businesses, and either spouse is free to dispose of his or her respective business, the two businesses will not be treated as one. But if each of these conditions is not met, the businesses will be grouped together.
- A corporation that has 30 employees has two 100% owned subsidiaries, each of which has 15 employees. All three businesses will be grouped together and will be treated as a large employer.
- Two brothers are each 50% owners of a business that has 75 employees. One of the brothers is a professional who is the sole owner of his professional medical, legal, or accounting practice, which employs fewer than 50 full-time employees. The business and the professional practice will be treated as separate because of the way they are owned. The business the brothers own together will be treated as a large employer. The professional practice owned by the one brother will not be treated as a large employer.
Suppose you own two businesses, each of which has 40 full-time employees. If the $2,000 per employee penalty is applicable to one or both of the businesses, the two businesses will be required to divide the 30 employee exclusion to the penalty between them in proportion to the number of full-time employees employed by each. If neither business offers health coverage, this will make minimal, if any difference. However, if one of the businesses provides minimum essential coverage to its employees and the other does not, the one that does not will only get the benefit of an exemption from the penalty for the first 15 employees because the other 15 employee exemption will be allocated to the employer that provides health plan coverage and will be lost.
The rules on whether two or more businesses are grouped together can be even more complicated than the above examples suggest. Different kinds of groupings--“controlled groups,” “brother/sister groups,” “affiliated service groups,” and “management company” arrangements—can all result in the entities involved, whether corporations, LLCs, partnerships, or unincorporated businesses being grouped together and treated as a large employer. Whether they are grouped together can depend on the exact ownership, the nature of the businesses, and the family and business relationships of the different owners. If you believe you have such a situation, you should seek professional advice from someone who is knowledgeable in this type of tax/legal problem.
If your business is a large employer and it is going to meet the shared responsibility requirement, it will be required to offer, beginning in 2015, “minimum essential coverage" that provides “minimum value” to its full-time employees and their dependents who have been employees for at least 90 days and the health plan offered must be “affordable.” Key to this discussion is the fact that the coverage is considered affordable if it does not cost the employee more than 9.5% of his or her W-2 or household income for self-only coverage. Coverage must be offered to the employee’s dependents, but even if their cost for family coverage substantially exceeds 9.5% of the W-2 or household income, your business will still have met its shared responsibility obligation. If your business offers the employees the required coverage, neither the employee nor his or her dependents will be eligible for a premium assistance credit on the Exchange. That will be true even if they decline employer coverage.
If your business decides to offer health coverage to its employees that meets the ACA requirements, but requires that employees pay 40% of the cost of the coverage, not to exceed the 9.5% of their W-2 income, your business can offer employees additional financial assistance in the form of a cafeteria plan that has a flexible spending account (FSA), or a health savings account (HSA), both discussed in Chapter 17. The employees who wish to enroll in the health plan can also elect to participate in the cafeteria plan and defer compensation to pay part or all of the amount of their required contribution for the cost of the health plan; or the employer can establish a premium-only plan in which the employee’s share of the premium is automatically taken out of the employee’s compensation. In either case the employees will save the cost of FICA contributions so it will benefit them and the employer will not have to pay FICA contributions on the amount deferred to the FSA.
The principal alternative to providing the coverage is to make a calculated decision not to offer coverage and to recognize that there will be a penalty. In terms of the cost of coverage, this may be an option your business seriously considers. The cost of not providing the coverage will be $2,000 per full-time employee after excluding the first 30 employees; the $2,000 per employee penalty will not be deductible, so the tax consequences should be factored in, and will result in an effective cost of approximately $3,000 per employee for employers with a 35% marginal combined federal and state tax rate. This may be less than the present cost per employee to your business of providing health plan coverage, particularly if the business currently provides some of the cost of family coverage, as many do. (The advantage of the exclusion of the first 30 employees, as a percentage of the cost of coverage of all employees, will be greatest if your business has slightly over 50 employees and will gradually diminish as the number of full-time employees increases. For example, if your business has 60 full-time employees, the penalty, even after taking into account the non-deductibility, would average approximately $1,500 per employee.) In contrast, amounts paid by your business for health coverage are presently deductible and will continue to be. (Instead your business could elect to provide minimum essential coverage that offered minimum value but was not affordable as to all employees, exposing the employer to a $3,000 per employee penalty ($4,500 after taking into account non-deductibility), but for a much smaller group of employees; this alternative is discussed later in this question.
Ironically, if your business cares about its employees, but must keep a watchful eye on the cost of health plan coverage, it might choose not to offer coverage to its employees, particularly if they are low-income employees, earning on average slightly more than minimum wage. This is because the net cost to low-income employees and their families of purchasing health coverage on the Exchange will in many cases be less to them, due to the very generous subsidies offered by the Exchange, than their portion of the cost for coverage under the employer’s plan.
Suppose, for example, that almost all of your businesss’ employees are paid between $10 and $15 per hour. Assuming no overtime, this means the employees earn an average of between approximately $20,000 and $30,000 annually. Assuming the employees and their families, if applicable, have little or no income outside of what is paid by your business, so their W-2 incomes and their household incomes will likely be similar. A single employee with a household income of $20,628 a year earns 138% or less of the federal poverty level (FPL) and is expected to pay only 2% of the cost of his or her health insurance coverage on the Exchange or $412.56 annually ($34.38/month)—in most cases this is much less than the employee would be required to pay for his or her share of the cost of employer-provided health coverage. A family of three with a household income of $29,295 would have income equal to 150% of the FPL, and would have to pay 4% of household income or $1,171.80 annually ($97.65/month) for its share of health insurance coverage on the Exchange. In addition to the relatively low cost for health insurance coverage on the Exchange because of the premium assistance credit, the Exchange also provides cost sharing reductions in upgrading the policy (see Chapter 4, Question 20), so, for example a silver level policy might be upgraded to a gold or platinum level policy at no additional cost to the employee or family.
One alternative to your business not offering any health coverage, and paying the $2,000 per employee penalty, is to offer minimum essential coverage with minimum value (the employer pays 60% of the cost) but not to provide affordable coverage for all full-time employees. That is, if only a few employees would have to pay more than 9.5% of W-2 compensation, to offer the health program to all employees, hoping that most or all of the small number of employees who would have to pay more than 9.5% either elect to enroll in your business’ program or decide not to purchase insurance on the Exchange. Instead the business could provide that no employee would pay over 9.5% of W-2 compensation for coverage; this would cause some unevenness in employee contributions but it would avoid penalties. If the employees decide to enroll in your business’ health plan despite the fact that they could go to the Exchange, no penalty will be imposed on the employer. Similarly if they do not get insurance and receive a premium assistance credit on the Exchange, there will be no penalty. If they go to the Exchange, qualify for assistance, and purchase a policy, your business will be subject to the non-deductible $3,000 per employee per year penalty.
One other concern, particularly if your business decides not to offer its employees a health plan, is that the management employees of the employer will still want coverage, and would like to have coverage that is better than that offered rank and file employees. Prior to the passage of the ACA, nondiscrimination rules generally prevented the employer from offering some or all of its employees coverage under a self-funded health plan. The nondiscrimination rules prevented or limited discrimination in favor of (i) any of the five highest paid officers of the employer, (ii) any shareholder who owned more than 10% in value of the stock of the employer, and (iii) any other employee who was among the highest paid 25% of employees. Generally individuals described in the prior sentence who receive discriminatory benefits were (and will continue to be) taxed on those benefits. Because these rules did not apply to fully insured health benefits it was common for employers to provide better insured health benefits to a small number of key employees than it offered to all other employees, or to provide insured health benefits to key employees at little or no cost to the employee.
The ACA expands these nondiscrimination rules to insured health plans that are not grandfathered. Although the rules are now effective under the ACA, the IRS has issued Notice 2011-1 (available on the internet) that allows employers to continue to offer discriminatory coverage in insured health plans until more detailed guidance on the new rules has been developed. Notice 2011-1 also points out that, once the guidance is issued and this part of the new law becomes effective, employers that offer discriminatory insured health coverage will be subject to a penalty of $100 per day with respect to each employee who is discriminated against.
Employers that maintain at least one health plan, had more than 200 full-time employees in the prior 12 months and that are subject to the Fair Labor Standards Act (FLSA), are required to automatically enroll their “new full-time employees” in a health plan. Under the ACA this requirement was originally to be effective January 1, 2014. However, there are a number of questions as to how this requirement is to be applied, and that has caused the Department of Labor to announce a delay in implementing the requirement. Among the questions that have been raised and not yet decided are—
- Who is a full-time employee for purposes of this requirement? It would seem that the definition should be similar to the 30-hour requirement of a full-time employee under the ACA, but this definition is different than the FLSA, which applies to both full-time and part-time employees
- Must family members also be automatically covered? Under the ACA dependents (but not spouses) are required to be offered coverage; if the employee’s family is required to be covered automatically, rather than simply being offered coverage, how will the employer know, for example, how many children the employee has and their ages, so it can determine whom to cover?
- Who pays for family coverage if it is required to be included in automatic enrollment? If the employer is required to pay the whole cost, the expense will be prohibitive. If the employee can be required to pay part of the cost, will automatic wage deductions be permitted?
- What rules will apply to permit employees to opt out of coverage?
A small employer will be able to purchase health plan coverage for its employees on the Exchange beginning in 2015, provided it offers coverage under a Qualified Health Program (QHP) to all its full time employees. (This date was extended from 2014 to 2015 by administrative action late in 2013.) For most purposes a “small employer” is one that has less than 50 full-time employees in the prior year. However, for allowing access to the Exchange to purchase insurance for their employees, a “small employer” is any employer with from one to 100 employees, although before 2016 the state can limit the definition to 50 full-time employees if it chooses. In 2017, states may allow large employers to purchase health coverage for their employees on the Exchange. Consistent with the special definition of small employer for this purpose, a large employer is one that employed at least 101 employees in the prior year and employs at least one employee in the current year.
The principal advantage to small employers using the Exchange to purchase health plan coverage for their employees is expected to be that more favorable rates will be offered to employers purchasing coverage for their employees than those employers would otherwise have available without the bargaining power of the Exchange. The purchases will be made through the Small Business Health Options Program (SHOP), which is a fancy name for an Exchange for small employers. The state may choose to maintain a separate Exchange for individuals and one for small businesses—the SHOP, or it may combine them into one Exchange.
Many of the functions carried out by both the Exchange for individuals and the SHOP Exchange will be the same, but the SHOP will not perform functions related to determination of individual eligibility for exemptions from the coverage requirement for individuals, for Medicaid programs, for premium assistance credits, and the like. If the two Exchanges are operated together, a similar division of duties will apply.
In 2013 for the year 2014, SHOP Exchanges run by states are open to employers; SHOP Exchanges run by the federal government will not be open until 2014 for group policies for the year 2014. However, the employer can purchase policies through a federally managed SHOP Exchange in 2014 but must do so through an insurance agent or by phone, rather than using the internet. For the year 2014, on any of the federally run Exchanges the employer can choose a single health plan for its employees through SHOP. For years beginning 2015 and later, for the federal Exchanges the employer is expected to be able to utilize an “employee choice model” under which it will choose a “metal” level of coverage, such as bronze, silver, or gold, and its employees will be able to select any policy offered on the Exchange within that level. State run Exchanges are already allowing the employees of the employer a choice of plans, based on parameters established by the employer, for the 2014 year.
The plan must be purchased for a 12-month period. At least 30 days before the termination of the 12-month period, the employer must be notified that it may change (or cancel) the plan. The SHOP can impose a minimum participation requirement, in the same way that pre-ACA group plans do. If the SHOP is run by the federal government, it will require at least 70% participation. The participation level refers to the total number of eligible employees of the employer, not the percentage choosing a particular policy (if more than one policy type is offered).
Before employees enroll, the employer will be required to tell the Exchange what percentage or amount it will pay towards the cost of employee coverage.
The plan must allow employees an annual open enrollment period of at least 30 days. In addition, employees will be entitled to special enrollment periods similar to the special enrollment periods allowed under employer plans not purchased through SHOP. These include—
- The loss of minimum essential coverage by an individual
- An individual becomes or gains an dependent through marriage, birth, adoption, or placement for adoption
- An individual permanently moves to a geographic area that offers new qualified health plan access
- An individual’s enrollment or failure to enroll is unintentional or erroneous and is the result of error, misrepresentation, or inaction by the Exchange.
The SHOPs are intended to be designed so that the employer receives one bill for all the employees covered, and that the bill indicates the employer and employee cost (based on what the employer determines for its program).
Cadillac Plan Tax
A “Cadillac tax” is a 40% nondeductible excise tax imposed on health plans provided to an employee to the extent the cost of coverage under the plans exceeds $850 per month ($10,200 annually) for the employee or $2,266.66 per month ($27,200 annually) for family coverage. These limitations include amounts paid by employees for their coverage. If a majority of an employer’s employees work in a “high risk” profession (such as police, fire, construction, or mining), the threshold is increased to $987.50 monthly ($11,850 annually) for employee only and $2,579.16 monthly ($30,950 annually) for family coverage. Individuals who install or repair electrical or telecommunications lines are also in the higher risk category. These higher thresholds also apply to retirees who are at least age 55, are receiving coverage because they are retirees, and are not yet eligible for Medicare. These amounts can be adjusted in the future for cost of living and medical cost increases, and for age and gender. These rules apply to group health plans established by private employers and to group health plans established primarily for civilian employees by federal, state, and local employers.
The tax is based on the cost of group health plans provided by or through the employer after 2017. (An individual who is employed by two unrelated employers and provided less than $850 per month of medical coverage by each would not trigger an excise tax even though the total cost of the medical benefits provided exceeded $850 per month.)
Generally the cost of coverage as determined for COBRA purposes will be the cost taken into account. Certain kinds of specialized limited coverage will not be included such as accident or disability, workers compensation, and cancer insurance. Dental and vision insurance is excluded. The amount of total excess coverage must be determined by the employer and then allocated among the different providers, each of which will be responsible for its proportionate share of the tax. For example, if an employee has annual coverage of $10,500 from a health insurance policy, $5,000 from an HSA and $3,000 from a supplemental plan provided by the employer, the individual would have a total of $18,500 or $8,300 over the permissible cap, on which there would be an excise tax of $3,320. The health plan insurer would pay the excise tax on the proportionate excess cost of the health insurance policy ($1,884), the employer would pay an excise tax on the proportionate excess cost of the HSA ($897), and the “plan administrator” (which would normally be the employer) would pay the excise tax on the supplemental plan ($539).
Care should be taken by the employer in computing the allocation of the costs, because a 100% excise tax will be imposed on the employer for any shortfall in its calculations, although this excise tax will not apply if the employer corrects the error within 30 days of learning of it. Further, the excise tax can be waived for reasonable cause.
Other ACA Penalties Imposed On Employers
The ACA imposes the same penalties as the whistleblower statute under the Occupational Safety and Health Administration (OSHA). The employer is prohibited from discriminating against an employee as to compensation, terms and conditions of employment, and other privileges of employment because the employee—
- Receives a premium assistance credit or a cost sharing reduction
- Provides information to the employer or law enforcement authorities of which the employee reasonably believes is a violation of the ACA
- Testifies or assists in a proceeding regarding a violation, or
- Refuses to participate in any activity, policy, or practice because the individual reasonably believes that it was a violation of the ACA
These prohibitions apply not only to employees, but job applicants and former employees. These penalties became effective as to the employer upon the passage of the ACA. On January 1, 2014, they will also apply to insurers that provide health coverage, even though they are not the employer.
A penalty provision that has not been discussed much publicly but that can be significant for an employer that violates some of the provisions of the ACA is Internal Revenue Code section 4980D. This provision applies to non-governmental employers that maintain a group health plan and imposes a penalty of $100 per day per affected employee for violation of certain requirements with respect to group health plans. With a single-employer plan, the maximum penalty is the lesser of 10% of the amount of the cost of the employer’s group health plan for the prior year or $500,000 if the failure was not willful, although there are exceptions to this penalty discussed further in this question. For this purpose, a “group health plan” is virtually any health plan provided to employees or self-employed individuals. Section 4980D was enacted long before the ACA, but the ACA amended section 4980D to include violations of the ACA as being subject to this penalty.
A failure of a large employer to provide any health plan coverage to its employees would not result in a penalty under section 4980D, even though it would trigger the $2,000 per employee penalty. Similarly, a large employer that offered a qualified health plan to all its full-time employees would not violate section 4980D even if the plan was not affordable as to some employees, causing a $3,000 penalty as to those employees (assuming they received premium assistance credit on the Exchange). However, violation of any of the following ACA requirements--all of which are effective by 2014--whether by a small or a large employer, could trigger the penalty—
- No lifetime limit on essential health benefits
- No annual limits on essential health benefits—$2 million in 2013 with no limitation beginning 2014
- Coverage of children on parents’ policy up to age 26
- No pre-existing condition exclusion for children under age 19
- No pre-existing condition exclusion for adults—effective beginning 2014
- Retroactive denial or cancellation of coverage, except in cases of fraud
- Assurance that women can have access to obstetrical and gynecological care without referral by a primary physician; and that a child can have a primary care physician who specializes in pediatrics—already effective, except for employer-sponsored “grandfathered” plans
- Preventive and wellness health services required to be provided at no cost, such as immunizations, diabetes screening, and HIV screening for adults with high risk—already effective, except for employer sponsored “grandfathered” plans
- Improved appeals process in case of denial of benefits—already partially effective and fully effective beginning in 2014
There are exceptions that provide relief. For example, if the failure to comply was due to reasonable cause, and the failure is corrected within a 30-day period beginning on the first date the employer knew or should have known that there was a violation, no penalty will be imposed.
With an employer that has 50 or fewer employees, if the potential penalties arise in connection with a fully insured health plan, no penalties (except in the case of coverage of a newborn child and its mother) will be imposed if the violation was solely with respect to the insurance coverage provided.
Tax Credit If Less Than 25 Full-Time Employees
There could be a significant tax credit to the business for a few years. Employers with fewer than 25 full-time workers, whose employees earn average annual wages of not more than $50,000 per employee, and that pay at least 50% of the cost of health insurance premiums of the employees are eligible for a credit. The credit can be carried back one year and forward 20 years.
The tax deduction your business would normally take for paying the employer portion of the cost of coverage must be reduced by the amount of the credit claimed. However, a tax credit of 35% for years before 2014 and 50% for two years beginning on or after 2014 will normally be significantly more advantageous than a tax deduction of that amount.
Part-time employees will be counted based upon the number of total hours of service they have for the year. Consequently, an employer that has 46 half-time employees will be treated as having 23 full-time equivalent employees. All full-time equivalent employees must be taken into account even though not all of them are enrolled in the employee’s health insurance plan.
The credit is 35% for tax years beginning after 2009 and before 2014, and 50% for years beginning after 2013, multiplied by the lesser of the following two amounts:
- The amount of the employer’s contribution for the employees’ health plan coverage, or
- The average cost of health insurance premiums in the small group market for the state the employer is located in (the amounts vary from state to state but averaged approximately $5,000 for individual coverage and $12,000 for family coverage in 2010 as shown in state by state tables published by the IRS).
The maximum permissible credit is for 10 or fewer employees earning an average of $25,000 or less. If your business has more than 10 employees, or the employees earn an average of more than $25,000 per year, the credit will be reduced proportionately for the number of employees between 11 and 25 and for average compensation of employees between $25,000 and $50,000.
To qualify for the tax credit the employer will be required to pay at least 50% of the cost of coverage for each employee, but can pay less than 50% for family coverage. For example, if the cost of coverage for an employee is $5,000 and the cost of family coverage is $12,000, the employer could pay $2,500, whether the employee chose self-only or family coverage.
You may ask why the computation would matter for years before 2013 if your business has already filed a tax return for those years. The answer is that your business can file amended returns for 2010, 2011, 2012, and 2013, provided the tax year is still open for filing an amended return.
For example, if a business employed 10 full-time employees who earned an average of $25,000 or less annually and it provided health insurance for them and paid an average of $8,000 per employee for the health coverage (some of the employees had self-only coverage and some had family coverage), the total amount paid would be $80,000. A tax credit of $28,000 could be claimed for the year. ($80,000 in total health insurance cost X 35% = $28,000 tax credit.) If the employees had average compensation of $40,000, the $28,000 tax credit would be reduced to $11,200. ($28,000 X $15,000/$25,000 = $16,800 (the reduction). $28,000 - $16,800 = $11,200 tax credit.)
The form on which this credit is claimed is IRS Form 8941, which explains the computation in more detail.
The computation will be the same as for years before 2014 except that the tax credit is 50% of the amount paid for insurance (before any reductions), instead of 35%. The credit will only be available, however, if the employer buys the insurance coverage on the Exchange. For example, if a business employed 10 full-time employees who were earning an average of $25,000 or less and it provided health insurance for them, purchased on the Exchange, and paid an average of $8,000 per employee (some for self-only coverage and some for family coverage), the total amount paid would be $80,000. A tax credit of $40,000 could be claimed for the year. If the employees had average compensation of $40,000, the $40,000 tax credit would be reduced to $16,000. ($80,000 in total health insurance cost X 50% = $40,000. $40,000 X $15,000/$25,000 = $24,000 (the amount of the reduction). $40,000 - $24,000 = $16,000.)
In the preceding example, if the number of employees was increased from 10 to 15, but their average compensation remained at $25,000, and the total amount paid for their insurance increased from $80,000 to $120,000 for the year 2014, the amount of the credit would be $120,000 X 50% = $60,000 before reduction for the fact that the employer had 15 employees rather than 10 or fewer. $60,000 X 5/15 = $20,000 (the reduction), so the $60,000 credit would be reduced to $40,000.
The form on which this credit is claimed is IRS Form 8941, which explains the computation in more detail.
The credit can only be taken in the two consecutive two-year periods after 2013 in which the employer offers one or more qualified health plans to its employees through an Exchange. In other words, the tax credit is really a “teaser.” If your business is providing health insurance anyway, it will help before 2014 and may provide a significant tax benefit for 2014 and 2015. If your business does not now provide health insurance but at any time wants to begin providing it, this will give you a two-year tax benefit that will help ease the initial cost of the program. However, after you have gotten two years tax credit for years beginning on or after 2014, you will receive no further government tax credit unless the law is changed.
No. A sole proprietor, partner, a shareholder owning more than 2% of an S corporation or 5% or more of any other business, or a family member or member of a household of any of those individuals will not be considered an employee for purposes of determining the credit, so no credit will be available with respect to that individual.
©Michael Canan, Shareholder