After our earlier Affordable Care Act (ACA) articles, ACA – What Must A Small Employer Do? – Part 1 – Issues Affecting Employers of All Sizes and ACA – What Must A Small Employer Do? Part 2 – Mandatory Coverage, clients asked for more information about calculating the “size” of the employer, i.e. the number of employees. At 50 full time employees, the pay-or-play penalties kick in. If an employer has 200 employees, then the automatic enrollment requirements apply. The requirement to include the value of the insurance coverage on the W-2 applies for employers that issued 250 or more W-2s in the prior year.
Determination of “Applicable Large Employer” Status
An employer is subject to the pay-or-play rules and noncompliance penalties in 2014 if it is an “applicable large employer.” An applicable large employer in 2014 is an employer that, in the prior calendar year (2013), employed an average of 50 or more full-time employees. The payroll for each month is evaluated and then the fulltime employee count in each month is determined and the totals for each month of the year are averaged. The results from the 2013 data will determine the applicable large employer status for all of 2014, regardless of any payroll fluctuations in 2014.
Different groups of employees are counted differently in determining the size of an employer. The easiest group is the regular full-time employees as defined by the ACA. According to the ACA, these are all employees who regularly work 30 or more hours per week. Each of them counts as one full-time employee, even if they work more than 40 or 60 hours per week. Part-time employees (employees not regularly working 30 or more hours per week) are counted differently. These employees are aggregated as an equivalent number of “full time equivalent” employees. For this determination, we add together all the hours worked in a month by each part-time employee (up to a maximum of 120), and divide the total by 120.
Here is how it works in practice. For January of 2013, determine the number of employees who worked at least 120 hours – each of them count as a full-time employee – that is the first number. Next, determine the total number of hours worked by the remaining employees and divide the total hours by 120 – that is the second number. Add the first and second numbers, and the result is the number of “full time equivalent” employees (FTEs) for the month. Repeat the exercise for February through December 2013. Total the number of employees in each of the 12 months (including fractions) and divide by 12. Round down to the nearest whole number and that is the number of FTE’s in 2013, and this determines applicable large employer status for 2014.
There is a special rule for seasonal employees when determining applicable large employer status. If the number of nonseasonal employees is less than 50 FTEs and the employer exceeds 50 FTEs for 120 days or less due to additional seasonal employees, then these seasonal employees may be ignored in determining applicable large employer status.
Some employers have asked whether they may create additional brother/sister corporations or subsidiaries to break up the workforce so no entity exceeds 50 and thereby avoid applicable large employer status. This is not a simple solution since the determination is done on a controlled group wide basis (e.g., two 40-employee brother/sister corporations will be aggregated if required by the controlled group rules, and they will be considered an applicable large employer). However, the penalty taxes discussed later are assessed against each corporation independent of the other controlled group members, which may be advantageous in some cases.
Consequence of Applicable Large Employer Status – The Other Kind of “Full-Time” Employee
An applicable large employer faces two possible penalty taxes if it fails to offer “affordable,” “minimum value” health benefits to substantially all of its full-time employees. One penalty tax (the “A” penalty tax) is applied if the employer does not offer “some” health coverage to 95% or more of all full-time employees. (A special rule changes the permissible exclusion from 5% to the greater of 5% or five employees.) This penalty is applied to all such full-time employees even if they have employer-provided coverage. Coverage does not need to meet the “minimum value” or “affordable” standards to get over this hurdle. Even if the employer offers coverage to 95% of its full-time employees, the other penalty tax (the “B” penalty tax) is assessed based on the number of full-time employees who do not take the coverage or whose coverage does not satisfy the minimum value or affordability requirements. However, the test for full-time status for purposes of the penalty tax determinations is different from the test for full-time status for applicable large employer status determinations.
For penalty tax purposes, the simple “full-time” test is that any employee working an average of 30 hours/week is full-time. An employer may determine this by using the alternative monthly equivalency of 130 hours/calendar month (not 120). An employee who works (including paid time off) at least 130 hours per calendar month is full-time for purposes of the obligation to offer affordable coverage or pay a penalty.
Of course, not all employees fit predictably into this “full-time” classification. Employees with fluctuating work schedules may find themselves eligible for coverage one month and ineligible another. Or the employer may find that it is exposed to the pay-or-play penalties in one month but not the next.
To deal with these situations, the ACA allows employers to use an optional lookback measurement method for variable hour and seasonal employees whose coverage under the ACA is not clear except through passage of time. This method allows an employer to examine workloads in an “initial measurement period”. The employer may select a measurement period of three, six or 12 months to determine whether an employee is “full-time” and thus eligible for insurance coverage, which will be provided during a future period (a “stability period”). The stability period must be at least six months or the length of the initial measurement period if that is longer. Benefits need not be offered to variable hour employees in their initial measurement period.
There are some special lookback issues worth a brief note:
- There are some differences in the application of the lookback measurement rule in 2014 for ongoing variable hour and seasonal employees versus new variable hour and seasonal employees.
- As a general rule, if the employer adopts the lookback measurement method for an employee, the full-time status determination will not be changed due to changes in hours or duties during the stability period. However, if there are significant changes in the duties and job classification of a formerly variable hour or seasonal employee during the initial measurement period, then a change in classification will occur.
- The regulations allow further delay in offering coverage after the conclusion of the initial measurement period. The employer completes its review of eligibility and completes the enrollment process, if applicable, during an “administrative period” that is not longer than 90 days.
Note that part-time employees are aggregated into FTEs for purposes of determining applicable employer status, but are not considered in determining satisfaction of the 95% test and are not considered for purposes of determining the amount of either of the two penalty taxes.
To summarize, when determining exposure to the pay or play penalty taxes an employer determines whether it has crossed the 50-employee threshold on a prior year basis using aggregate hours for part-time and variable hour employees. This status is fixed for the entire year. To determine the amount of the pay or play penalty taxes, the full-time employee count generally considers only the active, present employees and this determination varies on a month-to-month basis. The employer may use the optional look-back method for variable hour and seasonal employees and the employee retains the determined characteristic for the length of the stability period.
In Part 2, we included some simple examples of the determination of the “A” and “B” penalty taxes. We have received several questions asking for more detail. We will apply the lessons learned in Part 2 from last month and the current Part 3 in a more detailed discussion of penalty tax application in our next installment. If you would like information on how these and other ACA issues will affect your business, contact one of the labor attorneys at Mika Meyers.