After a sharp fall in 2023, M&A activity is expected to rise in 2024. But ensuring ACA compliance during mergers can slip down the priority list of both target and acquiring companies.
Here’s what your organization needs to know to maintain healthcare compliance in mergers.
Understanding ACA Implications in M&A
ACA compliance remains the obligation of the legal entity that is the employer. But without careful scrutiny, both target and acquiring companies can overlook ACA implications, and expose themselves to financial risk.
As HR Dive highlights, ACA liabilities can arise for both target and acquiring companies. Compliance is the responsibility of the target company if the answer is yes to either of the following questions:
- Is the target company an Applicable Large Employer (ALE), or an ALE group member, in the year before the transaction? IRS defines an ALE as a company with at least 50 full-time employees. ALEs are also subject to the employer shared responsibility provisions (ESRP) and employer information reporting provisions.
- Has the acquiring company acquired at least 80% equity interest in an ALE or ALE group member? Target companies are responsible for all employee benefits for the entire year of the acquisition. But the acquiring company doesn’t escape responsibility. It must still ensure its new group member meets ACA reporting requirements during that year.
ACA Implications in M&A
Ensuring employee benefits during acquisitions is ultimately the responsibility of the acquiring company. However, it is still a complex issue, for instance:
- If only the assets of a target company are acquired, the acquired employees in the transaction are treated as new employees of the acquiring company. That company is therefore responsible for ACA reporting for those employees from the date of acquisition. However, the target company remains responsible for reporting prior to the date of employee transfer.
- When the equity of an ALE or ALE group member is acquired, the target company’s full-time employees will be considered ongoing full-time employees. ACA coverage must therefore be offered from the date of acquisition. Employers should also note that only one Form 1095-C per employer identification number may be issued for the calendar-year reporting period.
- The acquiring company is indirectly responsible for the target company’s ACA obligations for previous years. These include timely and accurate reporting, in addition to ESRPs incurred prior to the transaction.
- When the equity of a company is acquired, using cash, stock, or a combination, questions may arise regarding employee benefits during acquisition. For instance, did the target company offer coverage to part-time employees, and did any of those employees enroll? How did the target company determine if its employees were full-time (look-back, or monthly measurement?)
Considering Health Insurance Merger Risks
Reporting penalties and ESRPs are the responsibility of the actual employing legal entity. Assessments following acquisition are therefore due while the target company is an asset of the acquiring company. But if ESRPs or penalties are assessed, these remain the obligation of the target company, and will reduce its value.
Employers should also note there is no statute of limitations for evaluating ESRPs. Further, IRS penalties have increased in 2024 to the following:
- 4980H (a) penalty (failure to offer coverage to at least 95% of full-time employees) is $2,970.
- 4980H(b) penalty (failure to offer affordable coverage that meets the minimum value standard) is $4,460.
Healthcare Compliance in Mergers
Finally, employers should also consider the following ACA implications in M&A:
- Enrollment under the Affordable Care Act is at record breaking levels for the third consecutive year. Twenty million Americans signed up for affordable health insurance in 2024, according to the Centers for Medicare & Medicare Services (CMS).
- ALEs must offer affordable health coverage that meets minimum value requirements to full-time employees or face potential penalties. The 2024 affordability threshold has dropped to a record low. Employers providing health coverage to their full-time ACA employees must ensure that employee contributions do not exceed 8.39% of their total household income.
- Employers must also navigate complex ACA state filing deadlines in 2024.
- Companies adopting a “wait and see” approach during an election year should take note. For the first time in more than a decade, Republican frontrunners are not campaigning to eliminate the ACA.
ACA compliance during mergers is complex and carries an increasing risk of financial penalties for missed reporting. Prior to making an acquisition, we recommend that ALEs create an ACA compliance strategy to avoid IRS penalties.
Further, if an acquiring company only becomes an ALE after a transaction is completed, ACA compliance becomes a new and vital factor for that employer.
