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The Top 5 Affordable Care Act Questions For Employers

By Joe Wondra on February 7, 2013 in Articles, Industry, Joe Wondra CPA

As a tax manager, Joe works with individuals and corporations to understand that there's more to taxes than just compliance. Learn more about MarksNelsonThe Patient Protection and Affordable Care Act (ACA) was signed into law in 2010, and the Supreme Court upheld the majority of the ACA in 2012.  While the ACA will have a wide sweeping impact in general, many business owners are still struggling to come to terms with what the ACA will mean to their businesses, especially in 2014 when many of the Act’s provisions relating to health insurance come into effect.  Large employers will have some difficult decisions to make between now and 2014.  This article addresses some of the issues business owners are facing relating to the ACA and the applicable employer health insurance mandate.

Am I an Applicable Large Employer subject to the employer health insurance mandate?

The ACA requires an “Applicable Large Employer” with 50 or more full-time equivalent employees to provide minimum essential health insurance coverage to full time employees and their dependents in 2014.  It is important to note that the full-time equivalent in this case is based on a less stringent standard of only 30 hours per week standard instead of a typical 40 hours per week.  Strictly for purposes of determining an Applicable Large Employer, part-time and seasonal employees are taken into account to determine full-time equivalents.  However, an employer is exempt from the excise tax if its workforce exceeds 50 full-time employees for 120 or fewer days during the previous calendar year and the employees in excess of 50 employed during the 120 day period are seasonal workers.  Most employers that employed an average of 50 full-time equivalent employees during the previous calendar year will qualify as an Applicable Large Employer.  Therefore, the number of employees during 2013 will be used to determine whether your company is an Applicable Large Employer in 2014.

In order to avoid the mandate penalty, some companies may decide to have their employees work fewer than 30 hours a week.  This is an effective strategy because while part-time hours are counted for the purposes of determining whether an employer is an Applicable Large Employer, the penalty itself only applies for actual full-time employees who work more than 30 hours per week.  If a company is slightly under the 50 employee calculation, it may consider not hiring more employees in order to stay exempt from the mandate.  It is also important to note that businesses treated as a single employer under Sections 414(b)(controlled group of corporations), 414(c)(controlled group of other businesses), 414(m)(affiliated service groups) and 414(o)(businesses aggregated under the regulations) are treated as a single employer for purposes of defining the term “applicable large employer”.  This means that single companies with fewer than 50 full-time equivalents that have similar ownership or related service groups could be classified as an Applicable Large Employer if the entire group has 50 or more full-time equivalent employees.

What is the penalty if I’m subject to the health insurance mandate but don’t comply?

Starting in 2014, if your company is an applicable large employer and fails to offer full-time employees and their dependents the opportunity to enroll in minimum essential health coverage under an employer-sponsored plan, your company will be penalized up to $2,000 annually for each full-time employee in excess of 30 (assuming at least one employee is eligible for a federal subsidy and participates in an Exchange, which is presumed to be likely).  The penalty is calculated on a monthly basis, such that for each month of failure to comply, an excise tax is levied equal to the number of full-time employees in excess of 30 multiplied by one-twelfth of $2,000.  In the case of a controlled group of companies, only one 30 person reduction is permitted per controlled group of employers and is allocated among each company in relation to the number of full-time employees employed by each such company.

For example, in 2014, Employer A fails to offer minimum essential coverage and has 100 full-time employees.  For each employee over the 30 employee threshold, the employer owes $2,000, for a total annual penalty of $140,000 ($2,000 multiplied by 70(100-30)).  This penalty is assessed pro rata on a monthly basis.

I’m an Applicable Large Employer and provide health insurance coverage to my employees and their dependents.  Therefore, I am surely not subject to any type of penalty, correct?

Wrong!  Your company still might be subject to an excise tax penalty.  Even if a company provides health insurance to its employees and their dependents, if an employee opts to go with a plan from one of the State exchanges instead of using company insurance and receives a premium tax credit or cost-sharing reduction (eligible to individuals and families between 100-400% of the federal poverty level), the company could be subject to a $3,000 penalty for that employee.  However, this $3,000 annual penalty would only be assessed if the cost of the self-only employee premium provided by the company exceeds 9.5% of the employee’s W-2 wages (household income test) or if the plan’s share of the total allowed costs of benefits provided under the plan is less than 60 percent of such costs (minimum value rule).  This penalty is assessed on a monthly basis.  Also, the maximum penalty is capped at the amount of penalty that would have been assessed for a failure to provide any coverage ($2,000 penalty calculation).

For example, in 2014, Employer A offers health insurance coverage and has 100 full-time employees, 20 of whom receive a tax credit for the year for enrolling in a State exchange offered plan.  For each employee receiving a tax credit, the employer owes $3,000, for a total penalty of $60,000.  The maximum penalty for this employer is capped at the amount that would have been assessed for a failure to provide coverage, or $140,000 ($2,000 multiplied by 70(100-30)).  Since the calculated penalty of $60,000 is less than the maximum amount, Employer A would pay the $60,000 penalty.

For calendar years after 2014, the $2,000 and $3,000 penalty amount will be adjusted by the amount the average per capita premium for health insurance coverage in the United States for the preceding calendar year exceeds the average per capital premium for 2013, as determined by the Secretary of HHS.  This adjustment should be estimated by the Secretary no later than October 1 of the preceding calendar year.

What if I’m an employer with 25 employees or less?  How does this all affect me?

Employers with 25 employees or less, based on full time equivalents using 40/hrs week, who pay at least half of the insurance premiums for single coverage on behalf of their employees can qualify for a tax credit (35% for 2010-2013, 50% in 2014) if the average wage of the employees is less than $50K.  Please note that owners and related family members are excluded from these calculations.  Amended returns can be filed to claim the credit if it has been previously missed.  After 2013, only insurance purchased through the new Exchanges will qualify for the credit.

What else might I need to know if I’m an employer?

Any excise penalty assessed in regards to the employer mandate is non-deductible for tax purposes.

Businesses with fewer than 100 employees can use the state-run exchanges in 2014.  Larger businesses will be allowed to use the exchanges starting in 2017.

Businesses with 200 or more employees will be required to automatically enroll employees in their health coverage starting in 2014.  The employee can opt out of coverage.

Large employers must report the value of employer sponsored health care coverage on 2012 W-2’s (issued in January 2013).  Employers filing fewer than 250 W-2’s are exempt from this requirement until further notice.

A 40% Excise Tax on insurance companies that offer high cost (Cadillac) plans that exceed aggregate costs of $10,200 for single coverage or $27,500 for family coverage begins in 2018.  The value of coverage includes both employer and employee contributions.

The impact of the Affordable Care Act should not be taken lightly.  Please consult your MarksNelson professional or Joe Wondra at 816.743.7700 or if you have any questions.

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