CPA & Business Advisory Blog

What You Must know About the Patient Protection and Affordable Care Act

As we approach 2014 many business owners are becoming increasingly concerned with what action they must take, if any, under the Patient Protection and Affordable Care Act (PPACA).  This article will break down the requirements of PPACA and help you understand whether your business is required to comply with PPACA and, if so, what compliance is required.  The focus of this article will be on the two major parts of the code which can subject a business to penalties through an excise tax.  The first penalty occurring when a large employer fails to offer healthcare and the second penalty occurring when the offered healthcare is either unaffordable or does not provide essential minimum coverage.

Before we get started deciphering the two major parts of PPACA, there are two issues that I want to clarify. First, an employer subject to PPACA is only required to provide its full-time employees with the opportunity to enroll in a healthcare program – part-time employees, although counted when determining large employer status (see below) are not required to be provided with healthcare.  Second, the non-compliance penalties in both part one and two are levied upon a business only if a full-time employee receives subsidized healthcare through the exchange.  Subsidized healthcare is available to individuals who make less than 4x the federal poverty line.  In 2013 the federal poverty line is $45,960 for an individual.  Theoretically, if an employer pays an employee more than 4x the federal poverty line, the employee will not be eligible for subsidized health care through the exchange and the employer will not be subjected to a penalty.  Keep these two points in mind when navigating through the remainder of the article.     

Let's Get Started

PPACA requires that all large employers provide its employees, and their dependents, the opportunity to enroll a healthcare plan.  Here, the focus is on whether a business is considered a large employer and, if so, is health insurance provided.  To be considered a large employer, a business must employ, at a minimum, 50 full-time equivalent employees.  This includes counting all employees in a control group.  Just because a company has a separate FEIN number, and files a separate tax return, does not mean it has a separate employee count.  When counting employees it is important to remember that a full-time employee is one who works 30 or more hours a week or 130 hours a month.  After all the full-time employees have been counted, a business must then determine how many full-time equivalents exist.  A business determines its full-time equivalents by taking the total amount of hours of worked by part-time employees and dividing that number by 120. This number is then rounded down to the nearest whole number.  Businesses that employ a large number of seasonal employees have an exception that they may use.  If an employer's workforce exceeds 50 full-time employees, including equivalents, for 120 days or less during the calendar year, and the employees causing the employer to crossover to large employer status during that 120 day period are seasonal employees, the employer will not be considered a large employer.  Keep in mind that seasonal employees include workers who perform services such as a landscaping or a retail work for a retail company during the holiday season.

For an example of how to calculate full-time equivalents consider the following:

A business has 25 employees who work 80 hours a month and 30 employees who work full-time. 

First, an employer must calculate the total amount of part-time hours on a monthly basis (25 X 80 = 2,000)

Then the employer must divide by 120 to get the amount of full-time equivalents   

(2,000/120 = 16.67 = 16 Full-Time Equivalents)

+ 30 Full-Time Employees

= 46 Total Full-Time Employees and Full-Time Equivalents.

Although there are a total of 55 employees on the payroll, this business is not considered a large employer under PPACA for the following year.  Remember, however, that an employer needs to test this on an annual basis with the prior year's results guiding the following year's applicability.  

Penalty for Failing to Offer Healthcare

Now that a business has been deemed to be a large employer, what happens if it fails to provide health insurance?  If a large employer fails to provide employees the opportunity to enroll in a health insurance plan, the employer will be liable for a $2,000, non-deductible, penalty for all full-time employees less the first 30.  So, if a business has 70 full-time employees and one employee receives a subsidy through the exchange, the business will be liable for an $80,000 penalty (70 – 30 = 40 x $2,000 = $80,000). 

Is the Healthcare Affordable? Does it Provide Essential Minimum Coverage?

If a business is considered a large employer based on the analysis above, they must provide full-time employees the opportunity to enroll in healthcare that is both affordable and provides essential minimum coverage. If this seems like a loaded sentence, it is.  Affordability and essential minimum coverage both have certain requirements. 

In order for healthcare to be considered affordable, the cost of single coverage to the employee cannot exceed 9.5% of the household's adjusted gross income for the taxable year.  Keep in mind that the coverage is based on the affordability of single coverage.  Although large employers may be required to provide coverage to dependents, the coverage provided to these individuals need not meet the 9.5% affordability requirement.

A major concern for large employers is knowing the adjusted gross income for the employee's household.  Often time the employer won't know this information.  The household's adjusted gross income not only includes the employee and the significant other but will include dependents that are required to file a tax return too.  There are, however, three safe harbors that large employers can rely on when determining affordable coverage.  The first of these safe harbors is known as the W-2 safe harbor.  Here, the large employer will be deemed to have provided affordable coverage if the cost of the coverage does not exceed 9.5% of box 1 of the employee's W-2.  Large employers must be careful when relying on this safe harbor. Why?  There are many factors that play into the amount reported on box 1 of an employee's W-2.  For example, if an employee contributes to a traditional 401K plan, box 1 of the W-2 will report an amount less than the large employer may have considered when determining affordability.  The second safe harbor is known as the rate of pay safer harbor.  Here, the large employer will be deemed to have provided affordable coverage if, as of the first date of the coverage period, the employee's out-of-pocket cost doesn't exceed 9.5% of the employee's monthly income.  For salaried employees this is a simple equation.  For hourly employees, a large employer must take the employee's hourly rate and multiply it by 130 to project the employee's monthly income.  Once this is calculated, the large employer can then calculate affordability.  Under this safe harbor a large employer can determine affordable coverage as of day one of the plan.  The third safe harbor is the federal poverty line safe harbor.  Here, a large employer uses the federal poverty line for a single individual in determining what is affordable.  In 2013 the federal poverty line is $11,490 meaning that a large employer, relying on this safe harbor, cannot charge full-time employees more than $1,092 annually for single coverage.  This safe harbor, like the rate of pay safe harbor, allows large employers to determine affordability as of day one of the plan.  

Next, essential minimum coverage requires that the plan cover 60% of the essential health benefits, which is also known as 'bronze level status'.  The essential minimum benefits includes things such as emergency services, ambulatory services, hospitalization, lab services, prescription drug coverage and maternity and newborn care, among others.  What's not included is vision, dental, disability and long term care.  Large employers do not need to worry too much about meeting this requirement, the word on the street is that insurance companies will tailor a plan that meets bronze level status so it can be offered along with any other plans an employer already offers.

Penalty for Not Providing Affordable or Essential Minimum Coverage

What happens if a large employer fails to comply with part two? The large employer will be liable for a $3,000, non-deductible, penalty for only the employees that receive a subsidy through the exchange. 

A major distinction between the penalties is that the part one penalty applies to the entire full-time workforce (less the first 30) even if only person receives subsidized healthcare through the exchange.  Alternatively, the penalty for part two applies to only the employees who receive a subsidy through the exchange.  Employers who fail to comply with both sections will not get hit with both penalties – just the greater of the two. 

In Closing

It is important for businesses on the verge of large employer status to monitor the hours of part-time employees.  It is better to be proactive in determining the proper course of action instead of relying on hastily made decisions in response to a penalty assessed for failing to comply.  Large employers who provide health insurance must make sure that the insurance they provide is both affordable and provides essential minimum coverage.  There are many different strategies an employer can implement in achieving the desired result and each employer may require different strategies based on its specified goals.

For more information the PPACA, please contact one of our Tax Planning & Preparation Services or Ted Ginsburg by leaving a message below or by calling 440-449-6800.

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