Beginning in 2015, if you (your business) employs at least 100 full-time employees (and for 2016 and beyond at least 50 full-time employees), you may become subject to the employer mandate that was enacted as part of the Affordable Care Act (ACA); if you fail to meet its requirements, you may owe a nondeductible excise tax.
You could potentially be subject to the excise tax if any of your full-time employees are certified, as described below, as having received “health care assistance,” and you either (1) do not offer health care coverage for all of your full-time employees; or (2) offer “minimum essential” coverage under your group health care plan that either is not “affordable” or does not provide “minimum value” to your employees. Full-time employees are those employees who work at least 30 hours a week.
In order to determine if the provisions apply to you, the ACA has set measurement guidelines to calculate your full-time equivalent employees (FTEs) on a per month basis for the year. Hours used in the calculation include all hours used in determining the employee’s pay: Hours for service, vacation, illness, disability, jury duty, military service and leaves of absence are all included. A special seasonal worker exemption applies to those employers whose workforce exceeds 100 employees (50 employees starting in 2016) for 120 or fewer days during the year.
If you are considered to be a large employer and you do not offer health care coverage to your full-time employees, the excise tax for 2015 will be $2,000 times the number of full-time employees, reduced by a 30-person threshold. This excise tax is calculated on a per month basis.
If you do offer health care coverage to employees, but it is not affordable or does not provide minimum value, the excise tax for 2015 will be $3,000 times the number of full-time employees for any month who receive health coverage assistance, reduced by the number of those employees who were offered the opportunity to enroll in “minimum essential coverage” under your group health plan that meet the requirements of employer mandate. In addition, the amount of any excise tax that you may owe as a consequence of this aspect of the excise tax cannot exceed the amount of the excise tax owed if you failed to offer health care coverage at all. Affordability is defined as the employee’s portion of health insurance premium not exceeding 9.5% of household income. As no process is in
place to identify an employee’s household income, temporary regulations allow the employer to base affordability on the wages paid to the employee.
In the event you have an employee who received health care assistance outside your company, the IRS is required to notify you in accordance with procedures designed to ensure you will have the opportunity to respond before the issuance of any notice and demand for payment of the excise tax. Contact from IRS for a given year will not occur until after an employee’s individual tax return is due for that year, and after the due date for you to file information returns identifying your full-time employees and describing the health coverage that you offered, if any.
The IRS has also warned of costly consequences to an employer that doesn’t establish a health insurance plan for its employees, but reimburses them for premiums they pay for a health insurance plan purchased individually. According to the IRS these arrangements, called employer payment plans, are considered to be group health plans subject to the market reforms of the Affordable Care Act. These reforms include the prohibition on annual limits for essential health benefits and the requirement to provide certain preventive care without cost sharing. Such arrangements cannot be integrated with individual policies to satisfy the market reforms. Consequently, such an arrangement fails to satisfy the market reforms and may be subject to a $100/day excise tax per applicable employee.
The above is a very simplified explanation of the employer mandate and the applicable excise taxes and penalties, which can be draconian. Any employer who may be subject to the larger employer mandate under the ACA should seek professional advice due to the complexity of the mandate and the severe consequences for not meeting the requirements of the act. In addition, businesses close to the 50 employee threshold that employ a significant part-time workforce or utilize seasonal labor should ensure they understand how to apply the full-time equivalence calculations for determining if they are considered a larger employer.
Brian Newhouse , CPA is a partner at Alegria & Company PS. He can be reached at firstname.lastname@example.org