Proposed rules issued under the Affordable Care Act clarify the determination of “large employer” status and the calculation of the penalty for controlled groups of employers. This guidance confirms that the penalty is assessed with respect to each entity, rather than the controlled group as a whole.
For calendar years beginning on and afterJanuary 1, 2014, a “large employer” (i.e. an entity that employs at least 50 full-time employees and full-time equivalents in the preceding calendar year) that fails to offer minimum essential coverage to its full-time employees or that offers minimum essential coverage to its full-time employees that is either unaffordable or does not provide minimum value will be subject to a “shared responsibility payment” (i.e. the penalty), provided at least one full-time employee is certified to the employer as having received a premium tax credit or cost-sharing reduction to purchase coverage on an insurance exchange. The penalty for failing to offer minimum essential coverage is based on the employer’s number of full-time employees, reduced by 30 (i.e. the “30-employee reduction”), while the penalty for failing to offer minimum essential coverage that is valuable and affordable is based on the number of full-time employees who receive a credit or other subsidy from an insurance exchange.
For purposes of determining whether a company is a large employer, individuals employed at all members of the company’s controlled group must be included. Accordingly, the division of employees among different subsidiaries or affiliates will not allow the company to avoid “large employer” status. Furthermore, there is no exclusion of individuals employed in a separate line of business.
That being said, the calculation of the penalty (which, frankly, is the real issue) is determined separately with respect to each entity within the controlled group of entities. This means that the penalty will be calculated based solely on that entity’s full-time employee population. For example, if a single entity employed 100 full-time employees and failed to offer minimum essential coverage, then the entity would be subject to a penalty equal to $2,000 for all of its full-time employees, reduced by 30. So, the penalty in this situation would be calculated as follows:
$2,000 x 70, or $140,000
On the other hand, assume a controlled group consists of five companies, each with 20 full-time employees. If one subsidiary did not offer minimum essential coverage to its full-time employees, then the penalty would be assessed against that subsidiary and would be calculated as follows:
$2,000 x 14 (20 – 6), or $28,000
The calculation of the penalty in this latter scenario takes into account only full-time employees of the entity failing to provide minimum essential coverage. Note, however, that the 30-employee reduction is ratably allocated among the controlled group members based on the number of full-time employees at each entity. Accordingly, this subsidiary does not get the benefit of the entire 30-employee reduction even though it is the only “offender” in this scenario.
All in all, this guidance is welcome news for healthcare companies, restaurant groups and other employers with affiliated entities.