By Barbara Fritsche
By now, most Americans have heard of the Affordable Care Act (“ACA”), colloquially known as Obamacare. However, when people refer to the ACA, most are actually referring to general changes to health care brought about by two separate but linked laws: The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act.
These federal laws, passed in 2010, have make sweeping changes to the health care industry in general and to health insurance in particular. Perhaps the best way to analyze ACA is to first determine the “lens” you will use to look at the law. Looking through the lens of “employer,” ACA has many requirements, and associated deadlines scattered among 2013, 2014, and 2015. It is critical that an employer familiarize itself with the responsibilities it has under ACA:
1. Determine Employer Size: Determining employer size (i.e., how many employees you have) for the purposes of ACA is the absolute first step that any employer should take. Although many of the requirements of ACA apply only to large employers, certain parts apply to all employers and certain benefits apply only to small employers.
Generally speaking, there are two categories of employers: large and small. A large employer is one who employs 50 or more full-time and full-time equivalent (“FTE”) employees. A small employer is one who employs fewer than 50 full-time and FTE employees. So how is an employer to determine how many full-time or FTE employees it has?
First, the employer calculates its full-time employees. A full-time employee is one that is employed, on average, for at least 30 hours of service per week with respect to any month within that calendar year. For the purposes of this calculation, 130 hours of service in a calendar month will be treated as the monthly equivalent of 30 hours of service per week (52 weeks x 30 hours per week ÷ 12 months = 130 hours). “Hours of service” includes not only hours for which an employee performs a job duty (i.e., when the employee is “on the clock”) but also hours for which the employee performs no duties but is still entitled to payment (i.e., use of vacation, holiday, personal or sick days, if applicable). The employer starts by making a monthly calculation based on the preceding year.
Once an employer has calculated the full-time employee figure, it must then factor in the number of FTE employees. All non full-time employees (including seasonal employees) from the above calculation are included in the employer’s FTE calculation for that month. The number of FTEs for each calendar month in the preceding calendar year is determined using the following steps:
(1) Calculate the aggregate number of hours of service for all employees who were not full-time employees for that month.
(2) Divide this total by 120.
(3) If the quotient is a fraction, round the fraction down to the next whole number.
The final step is straightforward: take the total number of full-time employees, add in the number of FTEs, and you have your number of full-time employees for the purposes of the ACA. If you are under 50, you are a small employer. If you are 50 or over, you are a large employer. Seasonal employees may play a role in this final calculation.
One caveat to keep in mind is the “aggregation rule.” The aggregation rule only applies in certain “controlled group” relationships. Generally speaking, when one entity owns a significant part of two or more businesses, a controlled group relationship exists. So, for example, if Company A owns 90 percent of Company B, a controlled group relationship will exist between the two; Company A, obviously, owns a significant part of itself, and it also owns a significant part (90 percent) of Company B. In qualifying controlled group relationships, the aggregation rule requires the employees of both entities to be aggregated for the purposes of ACA.
Thus, to return to our example, if Company B employed 10 full-time employees and Company A employed 100 full-time employees, the companies would be required to aggregate their employees, arriving at a total of 110 employees. In other words, under the aggregation rule, Company B would be considered to be a large employer even though it would otherwise be considered a small employer under the ACA if it stood alone. The aggregation rule prevents large employers from spinning off into several smaller companies in order to avoid the 50-full-time-employee threshold at which they would be required to offer their full-time employees health care (see #3 below). There are three common types of settings for which the aggregation rule applies: Parent/Subsidy Group; Brother/Sister Group; and Affiliated Service Groups. It is critical that you seek counsel on what rules are applicable.
2. Provide Written Notice: Perhaps the most controversial component of ACA is the requirement that most Americans purchase health insurance that conforms to the standard of “minimum essential coverage.” This is known as the “individual mandate.” To give the individual mandate teeth, ACA will impose a tax on those who are required to purchase health insurance but do not do so by Jan. 1, 2014.
In anticipation of this deadline, ACA requires that, effective Oct. 1, 2013, all employers, from large to small, must provide written notice to all their employees regarding the existence of an exchange (a centralized marketplace) that will offer choices of affordable, high-quality health insurance plans. This notice must also include the services provided by such an exchange and the manner in which the employee may contact the exchange. Employees may choose to forego the health insurance plan offered by their employer and, instead, purchase insurance on the exchange.
3. Large Employers: Provide Minimum Essential Coverage to Full-Time Employees: One of the most talked-about changes brought on by ACA is the requirement that a large employer must offer minimum essential coverage to all of its full-time employees lest the employer pay a penalty.
This is known as the “shared responsibility” provision. Initially, the ACA required that employers start offering this coverage starting Jan. 1, 2014. However, on July 2, 2013, the U.S. Department of the Treasury announced that this deadline would be pushed back one year to Jan. 1, 2015.
In addition to the employee, employers must offer (but are not required to contribute to the cost of) health insurance to all children of employees up to age 26. There are no longer any additional requirements in order for the child to be offered this insurance; the child does not need to be a full-time student, nor is there a residency or financial dependency requirement. Merely being 26 years of age will do.
Spouses of the employees, however, need not be offered coverage. Although there are several components to “minimum essential coverage,” perhaps the most crucial is that the coverage must be “affordable,” meaning that the cost of the insurance to the employee must not exceed 9.5 percent of the employee’s household income.
4. Small Employers: Determine Tax Credit Eligibility: Under ACA, small employers are not required to offer health insurance to their employees. ACA does, however, incentivize certain small employers (those with fewer than 25 employees) to offer insurance to their employees through the creation of a tax credit. To qualify, a small employer must have fewer than 25 full-time employees. If these small employers contribute at least 50 percent to employee-only coverage and pay their full-time employees, on average, less than $50,000 per year, they may be eligible for a maximum tax credit of 35 percent (for for-profit businesses) and 25 percent (for not-for-profit businesses). That credit will increase to a maximum of 50 percent and 35 percent for for-profits and not-for-profits, respectively, starting Jan. 1, 2014.
In closing, gaining a full understanding of ACA does not happen overnight. It has proved frustrating for even the most experienced of attorneys, tax professionals, and employers. With this basic knowledge, however, employers can begin to understand and explore some of the responsibilities and benefits of this new law.
Barbara Fritsche is an attorney from Jacksonville.