How Many Employees Do You Have, and Why Is That Important?

By Robert S. Sheen

Robert Sheen

Robert Sheen

Robert Sheen is Founder and President of First Capitol Consulting, Inc., which advises employers nationwide on issues related to the Affordable Care Act. He is also Editor-in-Chief of The ACA Times.

You have a pretty good idea of the number of people you employ, right? So what’s all the fuss about the Affordable Care Act’s requirement that you keep track of how many full-time and “full-time-equivalent” workers are on your payroll?

There are good reasons for you to maintain precise records on your employee headcount, and to understand what those numbers may mean in terms of your obligations under the ACA. That’s because if you have enough workers to be classified as an “Applicable Large Employer,” you have specific responsibilities about offering health care coverage to your employees, and you have to comply with reporting obligations that companies with fewer employees don’t have.

The ACA requires Applicable Large Employer, or ALE, to offer healthcare coverage to its full-time employees as detailed in federal regulations on “Shared Responsibility for Employers Regarding Health Coverage.” That coverage must meet the standards outlined in the health care law. If your company fails to do so, it will face significant financial penalties – which are not deductible for tax purposes.

In addition, the law includes requirements for your company to submit certain reports to the IRS, and for you to provide specific information to each of your employees about the insurance plans you are making available to them.

So knowing whether you are an Applicable Large Employer, or ALE, is important. And that’s not always as obvious as it might seem.

In general, an ALE is an employer who employed an average of at least 50 “full time” employees on business days during the preceding year. In other words, to be deemed an ALE for 2015, the employer had an average of 50 or more “full time” employees on business days in 2014.

The determination of whether you are an ALE requires understanding of certain “employer aggregation rules” as well as what “full time” means for ALE purposes.

First, IRS rules on “employer aggregation” can determine whether an employer is a member of an ALE.  Two or more employers that have parent-subsidiary or brother-sister relationships may be considered as a “controlled group” for purposes of determining whether each employer is member of an ALE.

Moreover, even companies that are not a “controlled group” may need to be grouped together as “affiliated service groups” by virtue of being part of a “service organization” or part of a “management group.” [1]

So it is critical to identify all of the ALE members in order to perform an accurate ALE analysis.

Second, you must also understand the definition of “full time” for ALE purposes. An ALE is determined by the number of “full time” and “full time equivalent” Employees. A “full time” (“FT”) employee for ALE purposes means someone who is employed on average at least 30 hours of service per week.

You must also consider what the IRS calls your company’s “full time equivalent,” or FTE employees. A company’s number of FTE employee is determined in any given month by totaling the number of hours worked by part-time employees (those who work less than 30 hours per week) and dividing by that total by 120.[2]

Another important consideration in determining the ALE status is whether you are correctly classifying workers as independent contractors (1099 recipients rather than W-2 employees). The ACA requirements pertains to employees – not to independent contractors.

For a company to be compliant with the ACA, therefore, 1099 workers must be correctly classified as independent contractors. If it is determined that you have misclassified an employee as an independent contractor, this may impact your company’s status as an ALE. It can also affect the number of employees for whom you must satisfy the employer shared responsibility and reporting obligations.

Once an employer has identified all of the other entities which may make it subject to the employer aggregation rules, and has calculated the number of FTs and FTEs for purposes of the ALE analysis, the employer can then assess the extent of its employer shared responsibility and reporting obligations. (If it is part of a group of companies, this assessment can also be made about the group’s other ALE members.)

The employer “shared responsibility” requirement obliges an ALE to offer “minimum essential coverage” that is “affordable” and that provides “minimum value” to at least 70% of employees this year, and 95% of employees in 2016.

The ACA specifies what constitutes the “minimum essential coverage” a health insurance plan must offer, meaning the health services covered by the plan, while “minimum value” refers to the portion of health care expenses the plan covers. Whether a plan is “affordable” depends on the employee’s income.

“Minimum value” means the healthcare plan’s share of the total allowed costs of benefits provided under the plan is at least actuarily 60% of the costs.

“Affordability” means the cost of the plan borne by the employee is no more than 9.56%[3] of the employee’s household income.

If an ALE offers health insurance that meets all three criteria, the employer is compliant with the ACA. Failure to meet these criteria can result in penalties.

There are two types of penalties under the employer shared responsibility obligations. The first, commonly called the “A” penalty, is for failing to offer healthcare coverage to the employer’s FT employees and their dependents. This “A” penalty is calculated based on the total number of FT employees at an annualized rate of $2,080[4] per employee if at least one such employee obtains a subsidy through a Healthcare Exchange. This penalty excludes the first 30[5] FT employees. To avoid this penalty, the ALE will need to offer healthcare coverage to 70% of the FT workforce in 2015 and 95% in 2016.

The second penalty, the “B” penalty, is for failing to offer coverage that satisfies “minimum value” and/or is not “affordable.” The “B” penalty is calculated as $3,120[6] for each FT employee who is not offered coverage that satisfies minimum value and affordability requirements and who obtains a subsidy through a Healthcare Exchange.

Once an employer determines that it is an ALE (or a member of an ALE), and determines the number of full time employees to which coverage must be offered, the employer can calculate the cost for offering such coverage and compare that with the cost (in penalties) of failing to do so. This analysis is commonly referred to as the “pay or play” analysis.

An employer who chooses to “play,” or offer insurance, must carefully document the offers of coverage it makes to employees. The IRS has not issued formal guidance on how to adequately document the offers of coverage. In the absence of formal guidance, the employer should consider what would be reasonable under the circumstances.

If the employer has a Section 125 or “cafeteria” plan in place, which would be necessary if pre-tax dollars are used to pay for employee’s share of the healthcare premiums, the employer should coordinate its documentation efforts of its offers of coverage with the benefits elections/declination processes under its Section 125 plan.

Next month: What You Have to Measure, Track and Record


[1] The determination of whether an employer is part of an “affiliated service group” can be complex. Further details on this analysis is found in our prior article in this series.

[2] For ALE purposes, in determining whether an employee is an FTE is based on 120 hours per month. This stands in contrast to the determination of whether an employee is “full time” for a given month for purposes of determining whether an offer of coverage must be made, which is generally based on 130 hours per month. See 26 C.F.R. § 54.4980H–1(a)(21).

[3] The percentage in the statute is identified at 9.5%. See 26 U.S.C. Section 36B(c)(2)(C)(i)(II). However, this percentage is adjusted. See id. 36B(c)(2)(C)(iv). The adjustment is to 9.56%. See IRS Revenue Procedure 2014-37 (26 CFR 601.105: Examination of returns and claims for refund, credit, or abatement; determination of correct tax liability).

[4] The penalty in the statute is identified at $2,000. However, the penalty changes based on the premium adjustment percentage (3.9% for 2015), rounded to next lowest multiple of $10. See Section 4980H(a)(C)(5)(a) and (b); Department of Health and Human Services (HHS), “Final HHS Notice of Benefit and Payment Parameters for 2016,” (Feb. 20, 2015), http://www.cms.gov/Newsroom/MediaReleaseDatabase/Fact-sheets/2015-Fact-sheets-items/2015-02-20.html.

[5] The IRS provided transition relief such that this excluded number is 80 employees for 2015 only (or for the plan year starting in 2015 for certain eligible plans). See Employer Shared Responsibility Regulations, at Section XV.D.7.b.

[6] The penalty in the statute is identified at $3,000. See footnote 4 above.

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