So, by now, most readers are aware of the postponement of the Affordable Care Act’s (“ACA”) on-line application process to small business under the SHOP (Small Business Health Options Program) marketplace until 2014 for benefits available to employees in 2015. For now, small businesses that want to utilize the SHOP exchanges and the significant tax credits that may be available will have to enroll through an insurance agent or broker or directly with a health insurance company. Companies with current benefits that expire at the end of the year have until December 23 to choose a health plan that will be in effect on Jan 1. The coverage for employees under SHOP will be selected by the employer and not the employees.
What, the harried business owner may ask, is a “small business? Easy enough, a business employing less than 50 full-time or full-time equivalent employees (“FT” or “FTE”) is a “small business” which may, but is not required to, furnish health insurance to employees. But here is where things become “sticky”. What many small business owners do not understand is the use of the IRS’s complex “business aggregation rules” to determine if the “business” employs 50 or more FT/FTE employees so as to trigger the requirement to offer health insurance to their employees (the “employer mandate”) or suffer significant penalties.
Let’s review the “employer mandate”: Effective Jan. 1, 2014, the Affordable Care Act (ACA) imposes a penalty on large employers that do not offer minimum essential coverage to substantially all FT/FTE employees (generally those working an average of 30 hours a week) and their dependents. (The Affordable Care Act does not define “dependents” for purpose of imposing the penalty. The proposed regulations discussed below define “dependent” for that purpose as an employee’s child (i.e., son, daughter, stepson, stepdaughter, or eligible foster child) who is under age 26. Apparently, the term “dependent” does not include an employee’s spouse.) Large employers that offer coverage may still be liable for a penalty if the coverage is unaffordable or does not provide minimum value. The ACA’s employer penalty is often referred to as a “pay or play” penalty or an employer shared responsibility payment.
There are two keystone issues to the determination of the “employee headcount”. The first is the definition of “employee”. The close second is a determination of which employees are attributed to a particular “business”. While the answer to the second issue may be simple for a business owner with an interest in a single business, it may be much more complex for a business owner with multiple business interests. The result may be that different lines of business with different types of labor pools may be lumped together as one entity under the ACA.
On Jan. 2, 2013, the Internal Revenue Service (IRS) released long-awaited proposed regulations on the ACA’s employer shared responsibility provisions. Although the proposed regulations are not final, employers may rely on them until further guidance is issued.
The IRS’ proposed regulations:
Address how ACA’s pay or play rules apply to companies that have a common owner or are otherwise related;
Apply aggregation rules to determine if a company is a large employer subject to the pay or play rules; and
Do not apply the aggregation rules to calculate a company’s liability for a shared responsibility payment.
Although the rules are quite complex and probably not discernible to a small business owner without professional advice and assistance, we attempt to summarize them below for our readers.
If an employer fails to offer an eligible health plan and at least one FT/FTE employee receives subsidized coverage through a health plan exchange, the annual penalty is $2,000 per FT/FTE employee (less 30 employees). If an employer offers an eligible health plan, but at least one FT/FTE employee receives subsidized coverage through a health plan exchange because the employer’s plan does not provide minimum value or is not affordable, the annual penalty is the lesser of (i) $2,000 per FT/FTE employee (less 30 employees) or (ii) $3,000 per FT/FTE employee receiving subsidized coverage through a health plan exchange.
Generally, the ACA requires aggregation of employees under the rules for same pursuant to the Internal Revenue Code. However, the ACA does not address employer aggregation for purposes of determining whether an employer is assessed a penalty for not offering the requisite coverage or determining the amount of a penalty. The proposed regulations provide that the employer aggregation rules do not apply for these purposes, subject to an exception in which the calculation of the penalty for failure to meet the mandate (which is assessed per employee) is reduced by 30 employees pro rata among all related employers. Therefore, in the case of a parent-subsidiary relationship of two businesses, if a parent corporation has 30 FT/FTE equivalent employees and its wholly-owned subsidiary corporation has 30 FT/FTE employees, both entities will be subject to the play or pay mandate since the entities on a combined basis have at least 50 FT/FTE employees. However, if the parent provides the requisite coverage and the subsidiary does not, the parent will not be subject to a penalty and the penalty assessed on the subsidiary will be calculated by counting only the subsidiary’s employees (less 15 employees, i.e., the subsidiary’s share of the 30-employee reduction).
As to the determination of FT or FTE employees, previous IRS guidance on the issue for the ACA as incorporated into the proposed regulations allows employers to measure employees’ hours over one period (a “measurement period”) and “snapshot” or “freeze” their status for purposes of the penalty based on their hours in the measurement period for a forward-looking period (“stability period”).visions of the IRS’ earlier guidance. Therefore, employers should have been recordkeeping in 2013 to take advantage of this approach.
Some employees, such as commissioned sales people or whose hours are limited by other regulations or laws, do not fit handily into the 30-hour requirement. Employers of such persons, until further guidance is issued on the subject, must use a “reasonable method for crediting hours of service that is consistent with the purposes of [the play or pay mandate].”
Until final regulations are issued by the IRS pertaining to “employee aggregation” under the ACA, employers may rely on the proposed regulations. Even if the rules should change, the preamble to the proposed regulations assures that employers will be provided with time to come into compliance with the final regulations.
The rules implementing the “play or pay mandate” and aggregation of employees in determining the “employee census” are complicated. The penalties for failing to comply can be significant. If employers have not already done so, they need to move into high gear to attempt to comply with the rules. PK Law’s Employment and Labor Group and its Corporate and Business Services Group can assist employers with advice regarding the ACA’s employer mandate. Contact firstname.lastname@example.org for additional information or to schedule an appointment.