Only applicable large employers may be assessed a penalty under the employer shared responsibility mandate of the Affordable Care Act. An applicable large employer is defined by the regulations as one that has employed an average of at least 50 full-time employees (taking into account full-time equivalent employees or FTEs) on business days during the preceding calendar year.
An employee is defined using the common law standard – an employment relationship exists when the person for whom the services are performed has the right to control and direct the individual who performs the services. Leased employees, sole proprietors, partners in a partnership, members (owners) of an LLC taxed as a partnership, and 2% S-corporation shareholders are not employees.
A full-time employee is an employee who was employed on average at least 30 hours of service per week. Hours of service include not only hours worked, but also all hours for which employees are paid or entitled to payment even when no work is performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. Hours of service generally do not include hours worked outside of the United States. However, all hours of service for which an individual receives U.S. source income are counted as hours of service for purposes of the employer shared responsibility mandate.
All employees of a controlled group or affiliated service group are taken into account in determining whether the group together constitutes an applicable large employer. In general, this means if a parent owns 80% or more of the equity in a subsidiary, or if the same 5 or fewer persons own 80% or more of the equity in another company and collectively own more than 50% of both companies, the companies will be considered controlled groups and all employees of the controlled group must be combined together for purposes of calculating whether an employer is above or below the 50 full-time equivalent employee threshold.
The identification of full-time employees for purposes of determining status as an applicable large employer is performed on a look-back basis using data from the prior year, taking into account the actual hours of service of all employees employed in the prior year (full-time and non-full-time employees). This means to determine if you are an applicable large employer on January 1, 2014, your counting period started last month (January, 2013).
To determine if you are an applicable large employer, for each month in the preceding calendar year calculate:
1. the number of full-time employees, including seasonal workers (those working an average of 30 hours of service per week) [for example, you employed 39 full-time employees in January]
2. the number of FTEs, including seasonal workers (which takes into account the total number of hours of service – but not more than 120 hours of service for any one employee – for all employees not employed on average 30 hours of service per week for that month / 120) [for example, all of your non-full-time employees worked 1,260 hours in January / 120 = 10.5 FTEs in January]
3. Add 1 and 2 to determine your total full-time employees (including FTEs) for the month [39 + 10.5 = 49.5 FTEs in January]
4. Do this calculation for each month, then add all of the FTEs for the entire year and divide by 12, dropping the fraction. If this number is 50 or more, you are an applicable large employer and will be responsible for complying with the employer shared responsibility mandate.
Seasonal worker exception. If your workforce exceeds 50 full-time employees for 120 days or less during the preceding calendar year, and the employees in excess of 50 who were employed during that period of no more than 120 days were seasonal workers, you are not an applicable large employer. Seasonal workers are defined in the regulations as workers who perform labor or services on a seasonal basis and retail workers employed exclusively during the holiday seasons. The regulations also state that for purposes of this particular exception, four calendar months may be treated as the equivalent of 120 days, and that the four calendar months and 120 days are not required to be consecutive.
An employer not in existence during an entire preceding calendar year is an applicable large employer for the current calendar year if it is reasonably expected to employ an average of at least 50 full-time employees (taking into account FTEs) and does employ least 50 full-time employees on business days during the current calendar year.
In summary, make sure you understand the controlled group rules and take employees of controlled groups into account when determining if you are an applicable large employer under the Affordable Care Act. If your organization employs close to 50 employees now and you want to avoid being an applicable large employer for purposes of the employer shared responsibility mandate, keep a careful eye on your full-time hiring and the number of hours your non-full-time employees work throughout 2013.