Beginning in 2014, the Affordable Care Act provides new incentives to small businesses through tax credits and options to purchase health coverage for their employees, but larger businesses face greater regulations that subject them to an Employer Shared Responsibility payment if proper health insurance coverage is not paid to 95% of its employees. The Act is drafted so favorably for the employees that a single employee receiving a premium tax credit to purchase health insurance may still result in the employer owing a Shared Responsibility payment.
Small Business Incentives
Under the Affordable Care Act, small business owners (defined as 25 or fewer employees) may qualify for a tax credit of up to thirty-five percent of the premium cost. To be eligible for this credit, small business owners must pay their employees annual wages that average below $50,000 and contribute fifty percent or more toward employee health insurance premiums. Starting in 2014, small business owners will receive an even greater incentive to contribute to their employee’s health insurance. The tax credit available to these small business owners will increase from thirty-five percent to fifty percent.
Also, starting in 2014, businesses with fifty or fewer employees will have access to participate in the Small Business Health Options Program (SHOP) Exchanges. SHOP is intended to offer a competitive marketplace for small business employers to purchase health coverage from a select group of providers. The intent of SHOP is to offer small businesses increased purchasing power regarding health insurance.
Thus, the legislative intent of the Affordable Care Act was to incentivize small businesses to provide coverage to their employees. In contrast to this inducement for small business owners, larger businesses are not enticed by the legislation to provide health care insurance but are subject to strict regulations that require such insurance coverage.
Regulation of Larger Businesses
A business with fifty or more full-time employees that does not offer affordable health insurance that provides a minimum level of coverage to substantially all of their full-time employees will be subject to an employer shared responsibility payment. Even if the employer provides affordable health insurance, the employer will still be subject to an employer shared responsibility payment if a full-time employee receives a premium tax credit to purchase coverage in an insurance marketplace.
Stated in a different way, an employer is subject to the Employer Shared Responsibility in two circumstances:
- The Employer does not offer health coverage or offers coverage to less than 95% of its full-time employees, and at least one of the full-time employees receives a premium tax credit to help pay for coverage on an Exchange; or
- The employers offer health coverage to at least 95% of its full-time employees, but at least one full-time employee receives a premium tax credit to help pay for coverage on an Exchange, which may occur because the employer did not offer coverage to that employee or because the coverage the employee offered was either unaffordable or did not provide minimum value.
Definition of “Unaffordable”
For purposes of these regulations, coverage is defined as “unaffordable” when it would cost the employee more than 9.5% of that employee’s annual household income. Because an employer often will not know the employee’s household income, there is an affordability safe harbor. An employer can avoid a Shared Responsibility payment if the cost of the coverage to the employee would not exceed 9.5% of the wages the employer pays the employee that year. Alternatively, an employer can provide a minimum value based on a calculator provided by the IRS and DHH. To date, unfortunately, this calculator is not available, which may prohibit a business’s ability to plan properly for the healthcare costs in 2014.Based on the severity of these regulations, the safe harbor provisions are the only protection provided to the employers, and the only guarantee that the employer will not ultimately owe a Shared Responsibility payment.
Effect of Violation
If a company is found to be in violation of this section by not offering coverage to at least 95% of its full-time employees, the employer will owe a Shared Responsibility Payment equal to the number of full-time employees the employer employed for the year multiplied by $2000. Even if an employer offers coverage to at least 95% of its full-time employees, it will still be subject to a Shared Responsibility Payment if one or more full-time employees receives a premium tax credit. In this circumstance, the amount of the Shared Responsibility payment for the month equals the number of full-time employees who receive a premium tax credit for that month multiplied by 1/12 of $3000. The amount of the payment is capped per month at the number of the employer’s full-time employees for the month multiplied by 1/12 of $2000.Ultimately, if a company owes a Shared Responsibility Payment, it will be contacted by the IRS, and the IRS notice will instruct the employer on how to make the payment.
Who Qualifies as a Full-Time Employee
Based on the different incentives and penalty payments, it is crucial to know when an employee is considered full-time. The number of employees of the business is based on the company’s reporting to the IRS for other tax and employee benefit purposes in 2013; although, the legislation does provide a mechanism for taking into account a change in the number of employees from the prior year. A full time employee is considered to work an average of thirty or more hours and such work is performed in the United States. Thus, U.S. employees working abroad would not be taken into account for determining the number of employers. To determine whether an individual employee is full-time, the employer will utilize a look-back method. The regulations provide a means to measure the employers’ hours of service credited in the previous period.
Definition of Employers for Purposes of Identifying Small/Large Business
It is important to note that companies having a common owner or are otherwise related generally are combined together for purposes of determining whether or not they employ at least 50 full-time employees. If the combined total meets the threshold, then each separate company is subject to the Employer Shared Responsibility provisions, even those companies that individually do not employ enough employees to meet the threshold.
Having assessed some of the changes taking effect in 2014, an employer’s failure to comply with the provisions of the Affordable Care Act could be costly. Thus, employers should take the necessary precautions for their business during 2013 to determine: 1) how many full time employees they have; 2) whether they will likely be subject to incentives or restrictions; and 3) the best financial plan for their individual business to take advantage of these incentives or properly abide by the restrictions to avoid the costly Shared Responsibility payments in the future. Therefore, with proper planning, the increased health care costs sustained by the business can be managed accordingly.
Allen & Gooch is providing this legal update for informational purposes only. This article should not be construed as legal advice or a legal opinion as to any specific facts or circumstances. You should consult your own attorney concerning your particular situation and any specific legal questions you may have.