Author: John T. Murray, CPA,Tax Senior Manager
The new Patient Protection and Affordable Care Act (ACA) will redefine employers’ requirements in providing healthcare to their employees. This blog post will help explain how to determine affected employers and count the number of employees in relation to the new regulations, including how to determine “assessable payments”.
Will this affect me (employer)?
While statistically, only 4 percent of employers have greater than 50 employees, the mandate weighs heavily on all business owners’ minds. Further, only 4 percent of small businesses do not offer healthcare making the pool of uninsured relatively small. However, the far-reaching effects of the ACA have an economic impact that effect all businesses and ultimately individuals, insured or not.
What will cause me (employer) to pay the assessable payments?
Under the new code section, you are an employer if you employ individuals who pass the common-law test. The common-law test is a set of criteria that determine whether you are working with employees or independent contractors as defined by the Internal Revenue Code Reg. §31.3401(c)-(1)(b). You are an “applicable large employer” if you have an average of 50 or more employees during the preceding year. Once you are classified as an “applicable large employer,” you will be required to make “assessable payments” if you do not provide minimum essential coverage (MEC) that meets affordability requirements. The employee count can be tricky. It is a total of your full-time employees plus full-time equivalents. However, you will only be required to provide healthcare or pay assessable payments for your full-time employees.
What if my company is affiliated with other companies?
You must first determine if there is common control among the affiliated companies (refer to IRC §414(b), (c), (m) or (o) & §4980H(c)(2)(C)(i)). Then, if you are determined to be a controlled group, you must include all employees in the calculation to determine if you have reached large employer status. This means that you must treat employees of different members of the controlled group as if they were employees of the same entity. For example, assume that a group of entities (affiliated) has 100 full-time employees. Eighty are employed by a subsidiary that has employer- provided coverage; the other 20 are employed by a different subsidiary that does not have coverage. Both subsidiaries share the same ownership, thus both subsidiaries are treated as a large employer. Since the first subsidiary has employer-provided coverage for its employees, it is not subject to the assessable payments (assuming MED and affordability requirements are met). The second subsidiary, however, is subject to a penalty. Some good news, there is a penalty exception for the first 30 employees subject to the assessable payments. This 30 person exception rule is pro-rated between the subsidiaries.
This is a complex area and if there is any overlap in ownership, especially for common ownership among a family group, we strongly encourage you to seek advice from your service provider.
Who is considered a full-time employee, full-time equivalent (FTE) and how do I calculate an FTE?
Calculate full-time employee status on a monthly basis. A full-time employee is one who works an average of least 30 hours a week or 130 hours in a given month.
The FTE calculation includes part-time employees in your employee count. To determine FTEs for a given month, total your part-time employee hours (not to exceed 120 hours). Divide that total by 120 to find the FTEs for that month. Add the FTEs to your regular full-time employees and carry any fractions. The average of all months is your total employee count when determining if you are an applicable large employer. If an employee changes from part-time to full-time, do not include their hours in the FTE calculation when they are classified as full-time for a given month.
So what’s the total?
Your total employee count = Full time employees + Full time equivalents (FTE)
Note: Round your total employee count down to the nearest whole number at year end.
Are there any other methods to determining the status of my employees?
Yes. Due to issues of practicality when determining employee status on a monthly basis, the IRS and Treasury are offering another method for determining the full- or part-time status of your employees. This method, known as the “look-back” or “stability safe harbor method,” allows you to use the past status of an employee to determine his or her current status when calculating your employee count. You can determine an employee’s status based on a “look-back” period of your choice, as long as it is between three and twelve months (inclusive). If an employee is deemed full-time, the period that you can consider that employee as such must be at least six consecutive months and no smaller than the look-back period. If the employee is deemed part-time, he or she will remain so for a period no larger than the look-back period. This method might be beneficial to you if employees oscillate between part-time and full-time from month to month.
Is there any difference in accounting for seasonal workers?
You can exclude seasonal workers if your employee count exceeds 50 for 4 months or less due to seasonal workers. If this is the case, you are not an applicable large employer. This is true even if your average employee count exceeds 50 for the year. So in practice, if an employee works less than 4 months (120 days) they may be excluded in all calculations.
What are considered hours for an hourly employee?
Under existing labor regulations an hour of service includes all of the following:
- Any hour for which an employee is paid or entitled to payment for doing work.
- Any hour for which an employee is paid or entitled to payment where no work is done due to vacation, PTO or sick time (not to exceed 160 hours).
How do I calculate hours of service for a non-hourly employee?
This is essential to you if you have part-time salaried employees, because they must be included in your FTE calculations. The three methods for calculating the hours of service for a non-hourly employee are the following:
- You may use actual hours worked if such records exist, plus hours from part 2 above.
- Days-worked equivalency method: Credit the employee with 8 hours for each day the employee works for at least one hour.
- Weeks-worked equivalency method: Credit 40 hours of service to an employee for working at least one hour during a given week.
You may use different methods for different employee classifications, as long as the classifications are reasonably and consistently applied. You may also change methods on a yearly basis for these non-hourly employees. However, you are not permitted to use the days- and weeks- worked equivalency methods to underestimate an employee’s hours and classify the employee as part-time instead of full-time.
What do I do about employees outside the United States?
In general, you must only take into account the work performed in the United States. You will only be subjected to the Employer Shared Responsibility provision for work performed in the United States.
Am I rewarded for providing healthcare when I am not an applicable large employer?
Yes. The IRS grants you tax credits to help pay for health insurance if you have 25 or fewer employees and a workforce with an average wage of no more than $50,000. The credit is calculated on Form 8941 – Credit for Small Employer Health Insurance Premiums.
When is the deadline?
On July 2, 2013, via the White House Blog and the Treasury Blog, the Administration announced that the Affordable Care Act’s (ACA’s) mandatory employer and insurer reporting requirements will be postponed for one year to January 1, 2015. Great news!
This gives you time to document your employee counts correctly. The IRS highly recommends that you record hours as if payments would be assessed for 2014 to ease the transition in 2015.
Questions? Contact your Keiter representative or John Murray firstname.lastname@example.org | 804.418.6278
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.