For better or worse, the ACA or Health Care Reform is still with us. If you do not want to end up in the penalty box in 2014, you must know whether you are subject to the employer shared responsibility provisions of the ACA and, if so, make decisions immediately about whether you will “pay” or “play.” In order to take full advantage of all of your pay or play options, you should have your compliance game plan in place by July 1, 2013. 1 If you thought you did not have to comply because you are a tax-exempt entity or a governmental employer – think again. These rules apply to all employers. First, you need to understand the rules of the game and some ACA terminology. Second, you need to understand that employers are confused about whether these rules apply to them.
What is the “employer-shared responsibility?”
This is a provision of the Affordable Care Act that only applies to certain “applicable large employers,” so it will be important to know if you are one. If so, you may be subject to certain penalties. These can be assessed if three things occur: (1) (A) you do not offer any health care coverage to substantially all of your “full-time employees” or (B) you offer insufficient and/or unaffordable coverage to your “full-time employees,” (2) one or more of your employees gets health coverage through a state or federally-run insurance marketplace (exchange – i.e., Travelocity for health plans), AND (3) one or more of your employees qualifies for government subsidies to purchase exchange coverage. This is sometimes called the “pay” or “play” rules, but it is not an either/or proposition. You may decide you do not want to offer coverage at all and “pay” the penalties. Alternatively, you may decide to offer insufficient or unaffordable coverage, in which case you run the risk of both paying penalties and playing, by offering coverage, but in this case the penalties are likely to be less onerous.
What is your risk?
Without getting overly detailed, we can tell you that the penalties can be significant – and, they are not deductible. If you offer no coverage at all a global penalty can apply, which is $2,000 annually multiplied by the total number of your full-time employees (less 30 – a “toss away”) – even if just one of your full-time employees obtains subsidized exchange coverage. If you offer insufficient (some type of “bare bones” coverage 2) or unaffordable coverage, the penalty is more targeted - $3,000 annually multiplied by the number of your full-time employees who obtain subsidized exchange coverage. The approach of just providing some type of bare-bones coverage.
Are you an “applicable large employer?”
An applicable large employer is any employer that employed, on average, at least 50 full-time and full-time equivalent employees in the previous year.
Be careful before you conclude you do not have 50 full-time employees.
You must understand that a “full-time employee” is someone who works, on average, at least 30 hours per week or 130 hours per month. Also, if you have employees who do not work “full-time,” you must add up all of their hours in a month and divide the result by 120 to come up with your full-time equivalent employees. Then, you add your number of full-time employees to your full-time equivalent employees to see if you meet the definition of an applicable large employer. While counting both your full-time as well as full-time equivalent employees is required to determine whether you are an “applicable large employer,” the pay or play rules require you to offer health coverage only to your “full-time” employees.
But wait, there is one more step you must take before you can conclude you do not have 50 full-time employees.
Complicated IRS “controlled and affiliated service group” rules that are not at all intuitive can deem even the smallest employer to have 50 employees. These are the same rules that apply to company tax-qualified employee benefit plans. You have to take these rules into consideration before concluding you have fewer than 50 full-time employees. In general, these complex and technical rules come into play where several companies – including family-owned and closely held companies- have a certain percentage of common ownership (including deemed ownership because of family relationships) or where one company performs certain services for another company forming an affiliated service group.
If your company forms part of a controlled or affiliated service group, you must add the full-time and full-time equivalent employees of all the employers in the group. If the total number of full-time employees of all employers in the aggregate is 50 or more for the preceding year, each employer in the controlled or affiliated service group is deemed to have 50 full-time employees, and is an “applicable large employer.” However, each employer is responsible for its own “pay or play” compliance obligations and is not penalized if another member of the group fails to comply.
To illustrate: Assume Jack and Jill each own 50 percent of Company A with seven full-time employees in the previous year, and also each own 50 percent of Company B with 45 full-time employees in the previous year. It may be tempting to conclude that Companies A and B are not subject to pay or play. But, because of the application of the controlled group rules, the full-time employees of both companies must be added together. The result in this case is that both companies are deemed to have 50 full-time employees, therefore both A and B are subject to the “pay or play” rules in 2014.
If you are an applicable large employer, but some or all of your controlled group members, standing alone, have fewer than 50 full-time employees, you might consider breaking the chain of ownership. However, this step requires serious consideration of whether you, as an owner, want to relinquish ownership interests to other individuals or entities and whether any reorganization makes sense from a business and tax perspective.
If you have questions about whether you are an applicable large employer or you need advice on this topic or other Affordable Care Act matters, contact the authors of this Alert, Sally Church (firstname.lastname@example.org), Paul Kasicky (email@example.com) or Joni Landy (firstname.lastname@example.org), Saul Ewing employee benefits and executive compensation attorneys, Dan Brandenburg (email@example.com), Joanne Jacobson (firstname.lastname@example.org) and Kevin Wiggins (email@example.com), or any Saul Ewing lawyer with whom you regularly work.
IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting marketing or recommending to another party any transaction or matter addressed in this communication (on in any attachment).
1. Certain optional methods for determining whether someone must be offered coverage in 2014 require the implementation of measuring periods and the ability to track hours worked. For calendar year plans, this measuring period must begin no later than July 1, 2013.
2. See: Christopher Weaver and Anna Wilde Mathews, Employers Eye Bare Bones Health Plans under New Law, Wall St. J., May 20, 2013.