The Patient Protection and Affordable Care Act (PPACA) requires each “large employer” offering health care programs in 2014 to either offer at least 95% of its "full-time" employees health coverage or pay a monthly penalty if at least one full-time employee who is not offered coverage receives a federal subsidy to help pay for coverage in an insurance exchange. The amount of the monthly penalty varies.
- An employer not offering coverage pays a monthly penalty of $166.67 multiplied by the number of its full-time employees for that month (less the first 30).
- An employer offering coverage which is deemed not affordable or not providing minimum value, pays a $250 monthly penalty for each full-time employee who receives the federal subsidy for that month; the penalty is capped at the number of the employer's full-time employees for that month less the first 30 multiplied by $166.67. In 2015, this penalty also applies if an employer offers affordable, minimum value coverage to at least 95 percent (but not 100 percent) of its full-time employees and their dependents and at least one of its full-time employees who is not offered coverage receives the federal subsidy.
If an employer is not a “large employer”, it will not be subject to PPACA. This blog post will briefly explain how an employer can tell if it is “large;” there are other technical requirements and this is merely an overview of the determination method.
Who is a Large Employer?
A “large employer” must employ at least 50 "full-time employees" or "full-time employee equivalents" (FTEs). To make this determination, an employer must follow the following general steps.
- Aggregate all trades or businesses that are treated as a single employer under Internal Revenue Code Sections 414(b), 414(c), 414(m) and 414(o).
- Determine the number of full-time employees and FTEs for each calendar month in the preceding calendar year, divide that total by 12, and round up to the next whole number. If the employer is a large employer based on prior year data, that determination applies for the entire subsequent year. For 2014 only, an employer can base this calculation using a six consecutive months in 2013, and dividing the total by six.
- Large employer status does not occur if the sum of full-time employees and FTEs exceeds 50 for less than 121 days during the preceding year, and the employees in excess of 50 who were employed during that period are seasonal workers.
How do you determine a full time employee and FTE?
- A full-time employee means a common law employee (for tax purposes) who averaged 30 or more hours of service per week or, if the employer elects, had 130 or more hours of service per month. For hourly employees, hours of service will be based on records of hours worked and hours for which payment is made. For non-hourly employees, an employer may either use the above method or credit this type of employee with 8 hours of daily or 40 hours of weekly service. Non-employee directors, sole proprietors, partners, 2-percent or more shareholders in an S corporation, and leased employees are not treated as employees.
- The number of FTEs is determined by calculating the aggregate number of monthly hours of service of all employees who worked less than full-time (but not more than 120 hours for any employee) and dividing that number by 120.
There are many other rules that go into this determination; for example, special rules exist for seasonal employees, new employees, employees on leaves of absence and terminated employees. Plans for future growth must also be considered, as must the likelihood that those individuals who are treated as independent contractors might be reclassified as employees.
What should an employer be doing at this time?
For those employers who believe that they may not be classified as large employers, it will be important to determine whether or not they are subject to PPACA, even if the employer offers health benefits; exclusion from PPACA’s provisions will eliminate the need for determining whether currently provided health benefits are “affordable” or provide “minimum value”, and considering whether to change the offered level of benefits in the future to satisfy PPACA. Obtaining the payroll data to make the determination of the number of full-time employees and FTEs can be more difficult than it appears.
We would be pleased to assist you in determining whether you will be treated as a “large employer” for PPACA purposes. For more information on this topic, post a comment below or contact our Compensation & Benefits Advisory Services Group at 440-449-6800.