October 18, 2012
By David L. Walker, Jr.
Unless it is repealed, The Affordable Care Act (“Obamacare”) will be fully implemented by January 1, 2014. That date is coming very soon. Regardless of your political persuasion, for a host of reasons including those cited below, if you own a small business you cannot afford to simply wait and hope that the law will change. Casting one’s faith in “Hope and Change” is not a business plan – and business owners must act now to protect themselves.
1. Obamacare’s Applicability to Small Businesses
The first question a business owner must address when analyzing how it may be affected by the “Affordable Care Act” is whether it is a “large employer” – as that term is defined under the Act – and thus subject to the Obamacare employer mandates.
Most media outlets have reported that under Obamacare employers who employ less than fifty (50) “full time” employees are not subject to the mandates of the law; however, that is an inaccurate and misleading characterization of the law. Under the law, “full time” does not mean a forty (40) hour workweek, but rather, under IRC § 4980H(c)(4)(A) , “the term ‘full-time employee’ means, with respect to any month, an employee who is employed an average of at least 30 hours of service per week.”
Accordingly, using a 4 week period for rounding purposes, if a business has an employee who works 27 hours per week for 3 weeks of that period, and 40 hours during the 4th week, he or she would average 30.25 hours per week for the 4 week period and thus be deemed a “full time” employee under the Act. A business that has fifty (50) or more employees meeting these qualifications would be deemed a “large employer” and thus subject to Obamacare’s mandates.
A business that has less than fifty (50) “full time” employees – as defined by the Act – may still be subject to the law if it also employs additional part-time employees. IRC § 4980H(c)(2)(E) creates a new classification of employees defined as “Full-time equivalents.” It provides that, “in addition to the number of full-time employees for any month otherwise determined, [employers must] include for such month a number of full-time employees determined by dividing the aggregate number of hours of service of employees who are not full-time employees for the month by 120.”
Again, using a 4 week period, an employer who has 20 employees, each of whom works 20 hours per week (80 hours per month per employee), would be deemed to have 13 “Full-time equivalent” employees. Such “Full-time equivalent” employees would be counted in addition to the businesses’ other “Full-time employees” towards the threshold limit of 50 “full time employees” under the Act.
Mainstream media reports have pretty much ignored this provision of the law; however, it exists and inevitably it will trap some unwary employers. Using the statutory formula, it is easy to see how a business that does not employ a single employee who works more than thirty (30) hours per week could be deemed a “large employer” under the Act.
2. Additional Threats to Employers in the Construction Industry
An employer engaged in the construction industry faces a separate and perhaps greater peril under the Obamacare Act. Specifically, the law provides that its mandates shall apply to “any employer the substantial receipts of which are attributable to the construction industry [and who] employed an average of at least 5 full-time employees on business days during the preceding calendar year and whose annual payroll expenses exceeded $250,000 for such preceding calendar year.”
Accordingly, a general contractor who employs five (5) full time employees and pays each such employee $50,000.00 or more in annual salary is deemed “a large employer” under Obamacare. This provision casts a broad net, likely to ensnare a host of unwary construction business owners who never considered the possibility that they could be subject to Obamacare’s scope because they employed significantly less than 50 “full-time” employees.
3. Obamacare’s Penalty Provisions and Administrative Requirements
Effective January 1, 2014, a business that is deemed a “large employer” is subject to significant penalties if it fails to provide “minimum essential coverage” to all of its full time employees. The term “minimum essential coverage” is defined at IRC § 5000A(f)(2). Several factors are contemplated by that statute in determining whether a health plan meets the “minimum essential coverage” requirements.
Succinctly stated, an employer can be subject to a pre-tax penalty of “1/12 of $2,000.00 per month” (i.e., $2,000.00 per year) per full-time employee if it fails to provide the requisite health coverage.
These provisions will create significant administrative burdens for employers, because the Act requires that an employer must calculate its number of “full time” employees on a monthly basis. As such, an employer who does not qualify as a large employer in one month may find itself subject to the Act in the next month if it hires additional employees, or if its existing employees work varying hours from month to month.
A separate mandate of the Affordable Healthcare Act mandates that if an employer provides a health insurance plan that meets the definition of minimum essential coverage, but either: (a) any employee is required to contribute more than 9.5% of that employee’s household income to the cost of the plan, or (b) the plan pays for less than 60% of the covered expenses for any employee, then for each such employee the employer will be subject to a $3,000.00 annual pre-tax penalty. Employers should be mindful that nothing in the statute limits Congress’ ability to increase the annual penalties in future years.
4. Obamacare’s Reporting Requirements for Employers
Beginning in the 2012 tax year, employers will be required to report the value of employee healthcare benefits provided to employees on their employees’ W-2 Forms. Although the current version of the Act does not require employees to pay taxes on the value of such benefits, this provision obviously opens the door to opportunities for future tax increases upon workers who receive healthcare benefits from their employers.
The Act also requires Employers to provide written notices to employees about the employer and/or government sponsored medical coverage, which may be available to employees, and information about the employee’s potential eligibility for government subsidies or benefits.
A Large Employer will also be required to file new returns with the IRS, disclosing (1) its name, address, and employer identification number; (2) a certification as to whether the employer offers its full-time employees (and dependents) the opportunity to enroll in a qualified medical coverage plan; (3) the length of any waiting period of its employees to enroll; (4) the months of the year in which coverage was available to each such employee; (5) the monthly costs of the lowest-cost option of coverage it provides; (6) the employer plan’s share of covered healthcare expenses; (7) the number of full-time employees it employs; and (8) the name, tax identification number, and address of each full-time employee.
This article only addresses a few of the substantial number of new regulations and obligations cast upon employers by the Affordable Care Act; however, it operates to highlight some of the expenses Employers must expect to incur as a consequence of the new statutory regime. With the Act’s penalty provisions set to take effect on January 1, 2014, employers who fail to educate themselves about its provisions and applicability to their businesses will likely suffer significant if not devastating economic injuries. Accordingly, the wary and prudent business owner must act now to ensure it is braced to absorb the impact of this coming storm.
David L. Walker, Jr. is a partner in the law firm of Flint, Connolly & Walker, LLP where he represents businesses and individuals in various legal matters.