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The New Math
The employer mandate under the Patient Protection and Affordable Care Act (ACA), which requires large employers to provide health insurance for their full-time employees or pay a penalty, is set to take effect on Jan. 1, 2015. (A special transition rule, described below, delays the effective date until 2016 for some of these large employers.) Regulations released by the Internal Revenue Service on Feb. 12, 2014, set forth the final rules that an employer must use to determine whether it is a large employer subject to the mandate. See, 79 Fed. Reg. 8543 (Feb. 12, 2014). With just over six months to go, the time is ripe for employers to determine whether they will be considered large employers and if so, to determine appropriate next steps.
A large employer is one that employed an average of at least 50 full-time employees and full-time equivalent employees (FTEs) on business days during the preceding calendar year. That is, whether an employer is a large employer in 2015 will depend on how many full-time employees and FTEs it employed on business days during 2014. An employer must take a number of steps in order to make this determination.
Aggregation of Related Entities
First, in making the large employer determination, an employer must be aggregated with other businesses if those businesses would be treated as part of a controlled group as determined under the qualified retirement plan rules. These “controlled group” and “common control” tests generally require that businesses sharing common ownership be aggregated for purposes of determining whether they meet the large employer threshold. For example, a chain of corporations connected through stock ownership will be part of a “parent-subsidiary” controlled group in a number of circumstances, including if at least 80% of the total combined voting power of all classes of stock entitled to vote of each corporation, except the common parent, is owned by one or more of the other corporations; and the common parent corporation owns, directly or indirectly, at least 80% of the total combined voting power of all classes of stock entitled to vote of at least one of the other corporations (stock held by subsidiaries is disregarded). The rules regarding aggregation are lengthy and complicated, and there are a number of provisions regarding various types of controlled groups and groups of trades or businesses under common control, as well as rules regarding attribution of various types of ownership interests.
The aggregation requirement will likely have a significant effect on franchisors who own multiple units, and on entrepreneurs who own multiple businesses. In fact, the U.S. House Small Business Committee held hearings on these issues in late 2013. Witnesses testified that aggregation would have a negative impact on small businesses and entrepreneurs, and further argued that requiring businesses to analyze the aggregation rules with respect to their own entities would be an expensive proposition, requiring a significant investment of time and money. See, http://1.usa.gov/1jXKye7. Despite this testimony, there are no signs that the government will change the aggregation requirement with respect to making the large employer determination.
Counting Employees
Once aggregated, the employer (or employer group, if aggregation applies) must tally all full-time employees for each month. The ACA considers any employee working at least 30 hours of service per week, or 130 hours of service per month, a full-time employee. Hours of service include each paid hour of work, as well as any hour for which the employee is not working but paid due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. For hourly employees, an employer must simply tabulate these hours of service (the Actual Hours Method). For salaried employees, an employer has a number of options for calculating hours worked, which include:
- Calculating hours using the Actual Hours Method;
- Using a days-worked equivalency method, crediting each salaried employee with eight hours of service for each day an hour would be credited under the Actual Hours Method; and
- Using a weeks-worked equivalency method, crediting each salaried employee with forty hours of service for each week an hour would be credited under the Actual Hours Method.
An employer cannot use an equivalency method if it would substantially understate an employee's hours of service, regardless of whether use of such method would affect the employee's classification as a full-time employee. For employees whose hours of service are particularly challenging to identify or track (such as hours for a commissioned salesperson), an employer must use a reasonable method of crediting hours of service, consistent with the methods described above.
Next, an employer must tally its FTEs for each month. To do so, it must count up hours worked by non-full-time employees, using the above-described methods, up to a maximum of 120 hours of service per month for each such employee. This number should be divided by 120 to determine the number of FTEs for the applicable month. Because full-time equivalents are included in the calculation, an employer with fewer than 50 full-time employees can still be considered a large employer under the ACA.
Then, for each month, the employer must add the number of full-time employees and FTEs, including any fractional FTEs to the nearest one hundredth. The monthly totals must then be added together, and divided by 12. The result is rounded down to the next lowest whole number. If the end result is 49 or fewer, the employer is not a large employer, and the “pay or play” mandate does not apply. If the end result is 50 or more, the employer must take further steps.
Relief for Entities with Seasonal Workers
An employer with an average of 50 or more full-time employees and FTEs, but whose workforce includes a large number of seasonal workers, may qualify for an exception from large employer status. Under this exception, an employer is not a large employer even if it averages 50 or more employees if: 1) the employer's workforce exceeded 50 full-time employees and FTEs for four calendar months or fewer; and 2) the excess was solely attributable to seasonal workers. Seasonal workers include, for example, retail workers who are employed exclusively during a holiday season.
Special Rules for New Entities
A new employer will be a large employer during its first year (or partial year) of existence only if the employer reasonably expects to employ 50 or more full-time employees and FTEs during that calendar year. This is the case even if the entity actually employs 50 or more full-time employees or FTEs during the calendar year. Any new entity making a determination that it does not reasonably expect to be a large employer during its first year should document this determination, as well as a reasoned explanation for its estimates.
After an employer's first year (or partial year) of existence, such employer's “large employer” status is determined using the look-back method. For example, an employer formed on July 1, 2015 must estimate its full-time employees and FTEs for the period from July 1, 2015 ' Dec. 31, 2015 to make its large employer determination for 2015. The employer will use actual data from July 1, 2015 ' Dec. 31, 2015 to make its large employer determination for 2016. In making its determination for subsequent years, the employer will use data from the full, preceding calendar year.
Short Measurement Period for 2015
The recently issued regulations provide a transition period that applies solely to the large employer determination made for the calendar year 2015. An employer may choose to look at any consecutive six-month period for 2014, rather than the whole of 2014, in making its determination. However, an employer taking advantage of the seasonal worker exception must make that determination based on the entire 2014 calendar year.
Transition Relief for Some 'Small' Large Employers
Employers with at least 50 and fewer than 100 full-time employees and full-time equivalents will not incur a penalty under the ACA during 2015 if they meet certain requirements, even if they do not offer health insurance coverage to full-time employees. To avoid a penalty, the employer must not reduce its workforce or hours of service in order to become eligible for the relief (though a decrease in employees or hours for bona fide business reasons other than qualifying for transition relief is acceptable). The employer must also maintain any health coverage that was already in place, on substantially the same terms, and must certify it meets the requirements to qualify for the transition relief.
Penalties
A large employer under these rules must then elect to offer health insurance coverage to its full-time employees, or pay a penalty. Note that the analysis of who is considered a full-time employee for purposes of determining large employer status may be different than the analysis of who is considered a full-time employee for purposes of the employer mandate.
An employer that elects not to offer health insurance coverage to substantially all of its full-time employees will be penalized if any one of those employees purchases coverage in a health insurance exchange and is eligible for a premium tax credit or cost-sharing reduction. The penalty rules are complex, but generally, such an employer would pay a $2,000 penalty (the Availability Penalty) per year for each full-time employee not offered health insurance coverage, minus the first 30 full-time employees. The penalty is applied to each member of an aggregated group of employers based on each member's number of full-time employees, and the 30 employee reduction is applied ratably amongst all members the group. For 2015 only, a transition rule provides that applicable large employers with 100 or more full-time employees and FTEs may reduce this penalty by 80 employees, rather than 30 (again, applied ratably for members of an aggregated group of employers).
Even employers that elect to provide health insurance coverage to substantially all of their full-time employees can be required to pay a penalty under the ACA. Such an employer could be penalized $3,000 per year (the Affordability Penalty) for individual full-time employees if, for example, coverage was not offered to that employee, or the coverage offered is unaffordable. While the dollar amount of the Affordability Penalty is larger than the Availability Penalty, there is a key difference: the Availability Penalty, once triggered, is calculated with respect to all full-time employees. The Affordability Penalty only applies with respect to individual full-time employees that purchase coverage in a health insurance exchange and are eligible for a premium tax credit or cost-sharing reduction. For example, assume an organization with 200 full-time employees offered compliant, affordable coverage to 190 of these full-time employees, offered unaffordable coverage to five of these employees, and failed to offer coverage to the remaining five employees. Such an employer could find itself paying a penalty for the 10 individuals who were not offered coverage, or were offered unaffordable coverage, but only to the extent that those individuals purchased coverage in an exchange and were eligible for a premium tax credit or cost-sharing reduction.
Act Now
Time is running out for employers to determine whether they are large employers subject to the employer mandate and if so, to make arrangements to provide coverage to employees. Employers should begin tallying their employee hours to make this determination, and owners of multiple units or businesses should consult their tax and legal advisers to determine whether they could be subject to the aggregation rules.
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The employer mandate under the Patient Protection and Affordable Care Act (ACA), which requires large employers to provide health insurance for their full-time employees or pay a penalty, is set to take effect on Jan. 1, 2015. (A special transition rule, described below, delays the effective date until 2016 for some of these large employers.) Regulations released by the Internal Revenue Service on Feb. 12, 2014, set forth the final rules that an employer must use to determine whether it is a large employer subject to the mandate. See,
A large employer is one that employed an average of at least 50 full-time employees and full-time equivalent employees (FTEs) on business days during the preceding calendar year. That is, whether an employer is a large employer in 2015 will depend on how many full-time employees and FTEs it employed on business days during 2014. An employer must take a number of steps in order to make this determination.
Aggregation of Related Entities
First, in making the large employer determination, an employer must be aggregated with other businesses if those businesses would be treated as part of a controlled group as determined under the qualified retirement plan rules. These “controlled group” and “common control” tests generally require that businesses sharing common ownership be aggregated for purposes of determining whether they meet the large employer threshold. For example, a chain of corporations connected through stock ownership will be part of a “parent-subsidiary” controlled group in a number of circumstances, including if at least 80% of the total combined voting power of all classes of stock entitled to vote of each corporation, except the common parent, is owned by one or more of the other corporations; and the common parent corporation owns, directly or indirectly, at least 80% of the total combined voting power of all classes of stock entitled to vote of at least one of the other corporations (stock held by subsidiaries is disregarded). The rules regarding aggregation are lengthy and complicated, and there are a number of provisions regarding various types of controlled groups and groups of trades or businesses under common control, as well as rules regarding attribution of various types of ownership interests.
The aggregation requirement will likely have a significant effect on franchisors who own multiple units, and on entrepreneurs who own multiple businesses. In fact, the U.S. House Small Business Committee held hearings on these issues in late 2013. Witnesses testified that aggregation would have a negative impact on small businesses and entrepreneurs, and further argued that requiring businesses to analyze the aggregation rules with respect to their own entities would be an expensive proposition, requiring a significant investment of time and money. See, http://1.usa.gov/1jXKye7. Despite this testimony, there are no signs that the government will change the aggregation requirement with respect to making the large employer determination.
Counting Employees
Once aggregated, the employer (or employer group, if aggregation applies) must tally all full-time employees for each month. The ACA considers any employee working at least 30 hours of service per week, or 130 hours of service per month, a full-time employee. Hours of service include each paid hour of work, as well as any hour for which the employee is not working but paid due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. For hourly employees, an employer must simply tabulate these hours of service (the Actual Hours Method). For salaried employees, an employer has a number of options for calculating hours worked, which include:
- Calculating hours using the Actual Hours Method;
- Using a days-worked equivalency method, crediting each salaried employee with eight hours of service for each day an hour would be credited under the Actual Hours Method; and
- Using a weeks-worked equivalency method, crediting each salaried employee with forty hours of service for each week an hour would be credited under the Actual Hours Method.
An employer cannot use an equivalency method if it would substantially understate an employee's hours of service, regardless of whether use of such method would affect the employee's classification as a full-time employee. For employees whose hours of service are particularly challenging to identify or track (such as hours for a commissioned salesperson), an employer must use a reasonable method of crediting hours of service, consistent with the methods described above.
Next, an employer must tally its FTEs for each month. To do so, it must count up hours worked by non-full-time employees, using the above-described methods, up to a maximum of 120 hours of service per month for each such employee. This number should be divided by 120 to determine the number of FTEs for the applicable month. Because full-time equivalents are included in the calculation, an employer with fewer than 50 full-time employees can still be considered a large employer under the ACA.
Then, for each month, the employer must add the number of full-time employees and FTEs, including any fractional FTEs to the nearest one hundredth. The monthly totals must then be added together, and divided by 12. The result is rounded down to the next lowest whole number. If the end result is 49 or fewer, the employer is not a large employer, and the “pay or play” mandate does not apply. If the end result is 50 or more, the employer must take further steps.
Relief for Entities with Seasonal Workers
An employer with an average of 50 or more full-time employees and FTEs, but whose workforce includes a large number of seasonal workers, may qualify for an exception from large employer status. Under this exception, an employer is not a large employer even if it averages 50 or more employees if: 1) the employer's workforce exceeded 50 full-time employees and FTEs for four calendar months or fewer; and 2) the excess was solely attributable to seasonal workers. Seasonal workers include, for example, retail workers who are employed exclusively during a holiday season.
Special Rules for New Entities
A new employer will be a large employer during its first year (or partial year) of existence only if the employer reasonably expects to employ 50 or more full-time employees and FTEs during that calendar year. This is the case even if the entity actually employs 50 or more full-time employees or FTEs during the calendar year. Any new entity making a determination that it does not reasonably expect to be a large employer during its first year should document this determination, as well as a reasoned explanation for its estimates.
After an employer's first year (or partial year) of existence, such employer's “large employer” status is determined using the look-back method. For example, an employer formed on July 1, 2015 must estimate its full-time employees and FTEs for the period from July 1, 2015 ' Dec. 31, 2015 to make its large employer determination for 2015. The employer will use actual data from July 1, 2015 ' Dec. 31, 2015 to make its large employer determination for 2016. In making its determination for subsequent years, the employer will use data from the full, preceding calendar year.
Short Measurement Period for 2015
The recently issued regulations provide a transition period that applies solely to the large employer determination made for the calendar year 2015. An employer may choose to look at any consecutive six-month period for 2014, rather than the whole of 2014, in making its determination. However, an employer taking advantage of the seasonal worker exception must make that determination based on the entire 2014 calendar year.
Transition Relief for Some 'Small' Large Employers
Employers with at least 50 and fewer than 100 full-time employees and full-time equivalents will not incur a penalty under the ACA during 2015 if they meet certain requirements, even if they do not offer health insurance coverage to full-time employees. To avoid a penalty, the employer must not reduce its workforce or hours of service in order to become eligible for the relief (though a decrease in employees or hours for bona fide business reasons other than qualifying for transition relief is acceptable). The employer must also maintain any health coverage that was already in place, on substantially the same terms, and must certify it meets the requirements to qualify for the transition relief.
Penalties
A large employer under these rules must then elect to offer health insurance coverage to its full-time employees, or pay a penalty. Note that the analysis of who is considered a full-time employee for purposes of determining large employer status may be different than the analysis of who is considered a full-time employee for purposes of the employer mandate.
An employer that elects not to offer health insurance coverage to substantially all of its full-time employees will be penalized if any one of those employees purchases coverage in a health insurance exchange and is eligible for a premium tax credit or cost-sharing reduction. The penalty rules are complex, but generally, such an employer would pay a $2,000 penalty (the Availability Penalty) per year for each full-time employee not offered health insurance coverage, minus the first 30 full-time employees. The penalty is applied to each member of an aggregated group of employers based on each member's number of full-time employees, and the 30 employee reduction is applied ratably amongst all members the group. For 2015 only, a transition rule provides that applicable large employers with 100 or more full-time employees and FTEs may reduce this penalty by 80 employees, rather than 30 (again, applied ratably for members of an aggregated group of employers).
Even employers that elect to provide health insurance coverage to substantially all of their full-time employees can be required to pay a penalty under the ACA. Such an employer could be penalized $3,000 per year (the Affordability Penalty) for individual full-time employees if, for example, coverage was not offered to that employee, or the coverage offered is unaffordable. While the dollar amount of the Affordability Penalty is larger than the Availability Penalty, there is a key difference: the Availability Penalty, once triggered, is calculated with respect to all full-time employees. The Affordability Penalty only applies with respect to individual full-time employees that purchase coverage in a health insurance exchange and are eligible for a premium tax credit or cost-sharing reduction. For example, assume an organization with 200 full-time employees offered compliant, affordable coverage to 190 of these full-time employees, offered unaffordable coverage to five of these employees, and failed to offer coverage to the remaining five employees. Such an employer could find itself paying a penalty for the 10 individuals who were not offered coverage, or were offered unaffordable coverage, but only to the extent that those individuals purchased coverage in an exchange and were eligible for a premium tax credit or cost-sharing reduction.
Act Now
Time is running out for employers to determine whether they are large employers subject to the employer mandate and if so, to make arrangements to provide coverage to employees. Employers should begin tallying their employee hours to make this determination, and owners of multiple units or businesses should consult their tax and legal advisers to determine whether they could be subject to the aggregation rules.
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