Robert S. Sheen, Founder & President, First Capitol Consulting, Inc.
Few pieces of legislation have triggered as much controversy as the Affordable Care Act, or “Obamacare.” Some disdain it as a governmental intrusion into private decisions about healthcare, while others admire it as a much-needed reform of the nation’s healthcare system. Regardless of your view, it is now a necessary element in every CEO’s business planning.
Does your company have fewer than 50 employees? You are exempt from the ACA’s “employer responsibility” requirements, and don’t have to provide your workers with health insurance. You have a lot of company, by the way; 96% of all firms in the USA, or 5.8 million out of the 6 million employers in the nation, are exempt.
These smaller companies, which together employ about 34 million Americans, may be eligible for tax credits if they voluntarily choose to provide health insurance for their employees. In fact, even before the ACA went into effect, 57% of businesses with 50 or fewer workers offered health insurance benefits. Federal tax credits can cover up to half of the company’s share of that insurance, and some states offer additional credits as well.
Larger companies, with more than 50 employees (including “full-time equivalents, which we’ll discuss later), are subject to the ACA “employer responsibility” rules. Here too the reality is likely to be less burdensome than some alarmists might suggest.
A core requirement of the ACA is that employers must provide good-quality health insurance at an affordable price. Many large companies, especially those who are competing to attract and retain talented and productive employees, already offer health insurance benefits. Prior to the ACA’s enactment, 97% of firms with over 100 workers offered health coverage, as did an impressive 92% of companies with just 51 to 100 workers. In most cases the plans these companies currently offer meet the ACA’s standards. For these companies, compliance with ACA rules will mostly be a matter of recordkeeping, making sure employees are given the required information, and filing some additional forms with the IRS.
However, about 10,000 companies across the nation do have to make some serious changes. They face significant additional costs for healthcare benefits that they didn’t previously offer, as well as administrative costs associated with complying with the law or face serious penalties that are not tax-deductible.
Here are some key issues they, and CEOs of any growing company, now must consider.
Who Is An Employee?
You may think the answer to the question “who does our company employ” is obvious. But a review of the Internal Revenue Service regulations suggests otherwise.
The ACA categorizes employees as “full-time,” meaning they work an average of at least 30 hours per week during the year; “part-time,” meaning they work less than 30 hours per week, and “full-time equivalent,” which is a bit more complicated. A full-time equivalent is a combination of employees, each of whom individually does not work an average of at least 30 hours per week, but who, in combination, are counted as the equivalent of a full-time employee. For example, two employees who each work 15 hours per week are the equivalent of one full-time (30-hour) employee.
This means your Human Resources and Payroll departments have to track the hours worked each week by any part-time workers you employ. You don’t have to report this information to the IRS until 2016, but that report will have to cover all of 2015 – and in a monthly snapshot format. So if you have not started gathering that information, don’t wait any longer. Pulling those reports together a year after the hours were worked will be a difficult, time-consuming task. You may want to talk with your information processing people about teaming with HR and Payroll to collect the data every pay period.
Another issue under the “who is an employee” umbrella is the distinction of independent contractors. Here too the IRS is taking a close look at company practices, and the impact on your company can be significant if they classify contractors as employees. First, of course, that would mean you’d be responsible for withholding taxes, Social Security and other employment-related expenses. In addition, let’s say you have 45 full-time workers and five independent contractors; if the IRS categorizes the five as employees, your company has 50 workers and is no longer exempt from the ACA. Recognizing that this would be a serious problem for affected companies, the IRS may cut you some slack this year, but it is still something you need to watch carefully.
Finally, there is the “common control” rule. If two or more companies have owners in common, the IRS may treat them as a single entity. So if two firms each have 25 workers, and each would seemingly be exempt from the ACA, their common ownership would mean the “controlled group” has 50 employees, and together the two companies are subject to the law’s requirements.
While companies that hire highly skilled, well-paid employees routinely provide health insurance, the ACA is forcing many companies in the food service, hospitality, retail, janitorial services and other low-wage sectors to offer health benefits for the first time. The costs of the company’s share of this coverage for all workers can seriously impact the bottom line.
However, many if not most of these low-wage employees will actually be better off enrolling in Medicaid or another government health insurance program rather than signing up for the company-sponsored coverage.
Educating employees about these options, and understanding the totality of their family situations, can involve sensitive discussions that some HR departments are reluctant to undertake, which is why they often outsource this task to firms that specialize in this cost minimization activity.
Here’s why Medicaid and similar programs may be preferable for both the employee and the company. The company must offer a plan that provides at least “minimum value” in ACA jargon; that means it covers at least 60% of the actuarial cost of benefits. It also must be “affordable,” which often in practical terms means the employee’s share of the premium must not exceed an amount that is based either on his or her rate of pay or, as a “safe harbor,” 9.5% of the federal poverty line for a single individual.
If a low-wage employee’s share of the premium for coverage under the company plan would be more than the “affordable” level, he or she may be able to enroll in Medicaid (or Medicare, VA insurance, Tricare, etc.) without causing the employer to be subject to penalties under the ACA. The employer, meanwhile, saves by not having to pay its share of the employee’s coverage under the company plan.
About the Author
Robert Sheen, Esq., is Founder and President of First Capitol Consulting, Inc., Los Angeles, which advises companies on implementation and cost minimization of Affordable Care Act–compliant employee health insurance programs.