Understanding the ACA “Large Employer” Threshold. Who is subject to the penalty, er tax.

Does the ACA affect your company? Understanding the 50 employee threshold and who is a considered a Large Employer

Understanding the ACA “Large Employer” Threshold. Who is subject to the penalty, er tax.

Update for July 2, 2013. An announcement by the US Treasury Department has stated that the implementation of the “Employer Mandate” will be delayed one year until 1/1/2015. Originally the mandate was to be in force on 1/1/2014.

The ACA mandate for employers to provide health insurance only affects employers with over 50 employees. Some businesses owners may think that they will be under that 50 employee threshold when in reality they may not. The considerations for part time employees and the business aggregation rules may surprise many business owners who thought they were not affected. Per the ACA employees who work over 30 hours per week (130 hours per month) are considered full time employees. To determine whether you will be considered a large employer you need to add together 2 groups:

  • The number of current full time employees
  • Plus: The number of FTE (full time equivalent) employees


Determining the FTE Full Time Equivalent Numbers

The rational for calculating an FTE is to ensure that part time employees are included in the determination of the status as a “large employer”. Part time employees are included in the calculation on the basis of how much time they actually worked (or were paid). This means that even companies with a small full time staff and a large part time staff may very well be considered a large employer under PPACA. Restaurants and other hospitality based business with a large part time staff can expect to be impacted.

To determine the number of FTEs, add together the total number of hours in the month worked by all the non full time employees (up to a maximum of 120 hours per part time employee). Next divide this number by 120 (monthly rate of 30 hours times four weeks). Do this calculation for each month of the prior year and then compute the annual average by adding the numbers for all the prior 12 months and then divide by 12. The resulting number is the value for the full time equivalent employee count.

Click here for an example FTE calculation.

It is important to note that leased employees are included in the FTE calculation. If your company is currently using a PEO, your company still must include those leased employees in the FTE calculation. In addition, seasonal employees working less than 120 days during the prior year are excluded from the FTE calculation.

Changes in Calculating Full Time Equivalent Employee Count

In 2010 the IRS released guidelines that indicated the FTE calculation was done on the entire group (not just the part time staff) when determining the FTE count. This was documented here:
for use in calculating the FTE for the Small Business Health Care Tax Credit
. It now appears the full time staff is not included in the FTE calculation but is added to the FTE count to determine the company’s total employee count. Per the IRS guidelines
here,
the statement is made that “an employer not in existence during an entire preceding calendar year will be an applicable large employer for the current calendar year if it is reasonably expected to employ an average of at least 50 full-time employees (taking into account FTEs) on business days during the current calendar year.” Per the IRS guidance, the number of 1) full time and 2) FTE employees should be calculated each month and then averaged for the 12 months of the year. The “large employer” calculation and determination will be made once for each calendar or tax year.

Over 50 Employees? Now what?

For those employers who exceed the 50 employee count and are deemed to be a “large employer”, the rules for determining who is full time and who is part time (and thus entitled to health insurance coverage or the business must pay the penalty) are wholly different. Determining if your company is subject to the employer mandate of ACA is the first step. If it is, then new rules apply. For those businesses deemed a “large employer”, the IRS has rules used to make a full-time or part time status determination for each employee. The IRS regs now call for each part time employee to be tested to determine if they are actually a full time employee. Now the IRS is calling it being a “variable hour employee”. According to the IRS regs for Determining Full-Time Employees for Purposes of Shared Responsibility for Employers Regarding Health Coverage ( 4980H), “to determine whether new variable hour employees or seasonal employees are full-time employees, without being subject to a payment under  4980H for this period with respect to those employees. An employee is a variable hour employee if, based on the facts and circumstances at the date the employee begins providing services to the employer (the start date), it cannot be determined that the employee is reasonably expected to work on average at least 30 hours per week.” Under these rules, for an employer to simply declare that an employee is “part time” will not cut it. Now the employer must prove the employee is in fact a part time employee by meeting the requirements set for in the
IRS regulation for determining employee status
. Once you have read the entire document you can either shoot yourself or call a PEO to help you ensure regulatory compliance.

Skirting ACA by establishing multiple smaller companies

Some business owners have opined that they would simply establish multiple smaller companies, each with less than 50 employees, and viola! No large employer status! This sounds great and some business owners may think they can pull this one off and stay under the 50 employee threshold. Despite what some people may think, the IRS is not stupid. They anticipated that one from a long way away. For many years the IRS has established the rules surrounding “control groups” and “affiliated service groups”. Essentially these are businesses under common ownership. There are complicated arrangements in partnerships and fractional ownership arrangements where the IRS has some detailed rules. Here are the basic types of control groups subject to the employer mandate under ACA.

  • A. Parent-Subsidiary Group: When one or more businesses are connected through stock ownership with a common parent corporation (such as a chain); and 80% of the stock of each corporation (except the common parent) is owned by one or more corporations in the group, and Parent Corporation must own 80% of at least one other corporation.
  • B. Brother-Sister Group: A group of two or more corporations, where five or fewer common owners own directly or indirectly a “controlling interest” of each group and have “effective control”. A common owner must be an individual, a trust, or an estate. Controlling interest: Generally means 80% or more of the stock of each corporation (but only if such common owner own stock in each corporation); and Effective control: Generally more than 50% of the stock of each corporation, but only to the extent such stock ownership is identical with respect to such corporation.
  • C. Combined Group: A group consisting of three or more organizations that are organized as follows: Each organization is a member of either a parent-subsidiary or brother-sister group, and at least one corporation is the common parent of a parent-subsidiary, and is also a member of a brother-sister group.
  • If you want to try it, see this link. Once you read it this option should be banished from your mind. For most businesses the complication and expense of establishing separate ownership arrangements to avoid the 50 employee rule will not be worth the trouble.