Affordable Care Act Small Employer Requirements
Posted on December 12th, 2016
AFFORDABLE CARE ACT
The idea behind the Affordable Care Act is that everyone deserves and should have affordable health care. If a person is employed, the burden is generally placed on his employer to provide him with a source for that health care, and to pay for enough of the cost through a fringe benefit to the employee to bring the cost to the individual down to an affordable level.
What kind of Health Care are we talking about? The level of health care employers are required to make available is called the “Bronze” level of health care available from health insurers. Employers are required to make Bronze level benefits available and affordable to the worker and available for the worker’s dependents (not including one’s spouse). In general, the Bronze level of health care is designed to cover 60% of the covered employee’s health care costs. “Affordable” means the worker’s coverage should not cost more than 9.5% of the worker’s income.
The employers who must make affordable health care available to their employees are “Applicable Large Employers” or ALEs. ALEs are employers with 50 or more Full Time Employees and Full Time Equivalent Employees. ALEs are required to make insurance available to at least 95% of their Full Time Employees. (Phase-In rules for 2015 exempted employers up to 100 employees, and made the coverage requirement 70% for that year.)
Insurance Not Provided:
If insurance is not made available to 95% of Full Time Employees, the employer will be subject to a penalty called the Employer Shared Responsibility Payment (ESRP). The ESRP is $2,080 times the (total number of Full Time Employees (FTEEs) less 30). Note that all of the Full Time Employees (less 30) are multiplied by the penalty, not just those not covered or those whose coverage is unaffordable.
Example: For 100 employees the ESRP would be $2,080 times (100 less 30),
or $2,080 times 70, which equals $145,600.
Insurance Provided but Not Bronze or Not Affordable:
If insurance is offered to 95% of Full Time Employees (FTEEs), but the insurance is not Bronze level or is not affordable, the employer is also subject to the Employer Shared Responsibility Payment (ESRP). In this case, the maximum ESRP is $2,080 times the (total number of Full Time Employees (FTEEs) less 30). If less, the penalty is $3,120 times the number of Full Time Employees (FTEEs) claiming a subsidy on Health Care Insurance that they obtain from a government marketplace.
Example: For 100 employees the maximum ESRP would be $2,080 times (100 less 30), or $2,080 times 70, which equals $145,600, or, if less, the number of FTEEs claiming the health care subsidy less 30, times $3,120, which could be as high as ((100-30) x $3,120) or $218,400.
Neither of these penalties is assessed unless one or more Full Time Employees (FTEEs) has claimed a subsidy toward the payment of his health insurance on a government marketplace. Whether the FTEE is entitled to claim a subsidy is determined based on figures on the employee’s income tax return. Therefore the employer’s penalty cannot be determined until after the filing of all income tax returns by employees for the relevant year. Penalties will be assessed by Internal Revenue Service about 10 to 12 months after the end of the year.
These penalties can be substantial and will require many employers of around 50 employees to examine their operations.
AVOIDING EMPLOYER PENALTIES UNDER THE AFFORDABLE CARE ACT
Facts to understand about the Affordable Care Act are:
1. The ACA applies to Applicable Large Employers (ALEs). For 2017 and thereafter, ALEs are employers who have 50 or more Full Time Employees (FTEEs) plus Full Time Equivalents (FTEs) in the year prior to the current year. For the year 2016, employers were not subject to providing health insurance unless they had more than 100 Full Time Employees (FTEEs) plus Full Time Equivalents (FTEs) in 2015.
2. Full Time Employees (FTEEs) are employees working 30 hours per week or more. Full Time Equivalents (FTEs) are calculated by adding the hours worked by all part-timers and dividing by 120 hours per month.
3. Companies that had fewer than 100 Full Time Employees and Full Time Equivalents in 2015 were NOT subject to the ACA for 2016.
4. Companies that had 50 or more Full Time Employees and Full Time Equivalents in 2016 will be subject to the Affordable Care Act for 2017.
5. Once the Employer is subject to the ACA, it is required to offer affordable health care, meeting minimum requirements, to at least 95% of its Full Time Employees (FTEEs), or the company faces penalties. Neither of the penalties applies unless at least one employee claims the tax credit on an insurance exchange because he was not offered coverage, or because the coverage was not adequate, or because the coverage was not affordable. (But there are big penalties for discouraging an eligible employee from claiming the credit.)
6. One of two penalties applies:
a. If the employer does not offer insurance at all to at least 95% of Full Time Employees, the employer faces a “Sledgehammer Penalty”:
$2,080 times (Number of All Full Time Employees (FTEEs) less 30).
b. If the employer offers insurance to 95% of Full Time Employees, but the insurance is not of high enough quality, or is not “affordable”, the employer faces a “Tackhammer Penalty”:
$3,120 times (Number of Full Time Employees (FTEEs) claiming a tax subsidy on an insurance exchange less 30).
c. The penalties will be computed and billed by IRS after all tax returns are filed for the year, about October of the year following the year to which they apply.
7. Both penalties apply only to the number of Full Time Employees (FTEEs) less 30. Part timers, regardless of how many are employed, or how many Full Time Equivalents they amount to, do not count toward the penalties.
8. Employer penalties are calculated on a monthly basis. The employer may be subject to a penalty some months and not others, if the employer has more than 30 employees some months, and fewer in other months.
9. If an employer can manage its business to avoid exceeding 30 Full Time Employees in any month in 2017, it will avoid ACA penalties.
10. If the employer exceeds 30 Full Time Employees in any month its penalty will be the (number of Full Time Employees (FTEEs) exceeding 30) times ($3,120/12). If an Applicable Large Employer had 32 FTEEs for a month, for instance, its penalty would be: (32 -30) x $260, or $520 for that month.