How to Calculate Employer Health Care Responsibilities

In compliance with new health care employer responsibility regulations, two halves indeed equal a whole for employers when they determine their number of full-time employees.

To determine whether a business is subject to the employer mandate penalty under the Patient Protection and Affordable Care Act (PPACA), P.L. 111-148, the business must determine the number of its full-time employees, which includes its full-time equivalent employees (FTEs). An employer’s FTEs are based on the hours worked by its part-time workers. The number of an employer’s FTEs for a month is the total part-time employee hours for the month divided by 120.

In 2015, to avoid paying the employer mandate penalty, employers with 100 or more full-time employees are required to offer health care coverage to employees that provides minimum value and is affordable. Employers with 50 to 99 full-time employees can certify to the IRS their employer size and certain other items to delay application of the rule until 2016.

CPAs who serve in finance, compliance, and business advisory roles can help organizations understand how the complex regulations apply to them. Here are some things about the PPACA’s shared-responsibility penalty to keep in mind, based on comments made during a recent AICPA webcast, which will be rebroadcast May 1:

Two part-time workers combined can equal a full-time employee. A full-time employee is someone who works 30 hours per week or 130 hours per month. But two part-time workers who each log 15 hours a week would equal one FTE under the rules.

“If you had, say, 49 full-time employees and two people who each worked 15 hours a week during the relevant measurement period where you’re figuring out your size, those two people would each be counted as a half, you’d add them up, and they’d be your 50th employee,” said J. Mark Iwry, senior adviser to the secretary of the Treasury.

No part-time coverage required. Although part-time workers count toward the FTE calculation, the law requires organizations to offer coverage only to full-time workers. So in the example above, only the 49 full-time employees need to be offered coverage that is affordable and provides minimum value.

Measurement period. For the 2015 calendar year, an employer may determine if it had 50 or more full-time employees (including FTEs) by reference to a period of at least six consecutive calendar months, as chosen by the employer, during the 2014 calendar year (rather than the entire 2014 calendar year). Thus, an employer may determine whether it employed an average of at least 50 full-time employees (including FTEs) on business days during any consecutive six-month period in 2014.

“It’s an annual determination,” said Alan Tawshunsky, special counsel in the Office of the Benefits Tax Counsel at Treasury. “You do it month by month, but then it’s averaged over the year.”

How to calculate. The number of employees for purposes of determining application of the employer mandate is calculated by adding the number of full-time employees and FTEs (including seasonal workers) for each calendar month in the measurement period, and dividing the total by the number of months in the measurement period.

Seasonal worker exclusion. If the average number of employees equals or exceeds the threshold for no more than 120 days, and the employees in excess of the threshold are seasonal workers, the employer is not considered to employ more than the threshold number of full-time employees and FTEs. The threshold number is 50 full-time employees and FTEs, with special rules delaying the effective date and requiring certification applying to employers with 50 to 99 full-time employees and FTEs in 2015.

“[The seasonal worker exclusion] could be of great help to an employer that has a harvest season,” Tawshunsky said.

Smallest businesses exempt. The health care penalties do not apply to businesses with fewer than 50 full-time employees and FTEs. Remember, a business includes an entity and other businesses related to the entity under the controlled group and shareholder attribution rules.

Two penalties. Employers with more than 50 full-time employees and FTEs (100 in 2015, assuming others have satisfied the certification and other rules) can be subject to one of two annual penalties if they do not offer coverage that is affordable and provides minimum value. They would pay $2,000 times the number of full-time employees, minus 30 (minus 80 in 2015) if they do not offer minimum essential coverage to full-time employees and dependents—and at least one employee receives subsidized insurance on an exchange.

If they offer minimum essential coverage but that coverage is not affordable or does not provide minimum value, employers would pay $3,000 for each full-time employee who purchases insurance from the exchange that is subsidized, up to a maximum of $2,000 times the number of full-time employees minus 30 (minus 80 in 2015).

Threshold is 70% for 2015. For 2015, employers with 100 or more full-time employees and FTEs that offer coverage to at least 70% of full-time employees and dependents will not be subject to a $2,000 penalty for not offering coverage. In 2016 and later years, the required coverage percentage increases to 95%.

“You don’t want to cut it too close to the 70%,” said Deborah Walker, CPA, national director, compensation and benefits at Cherry Bekaert LLP. “I think of the 95% as really being 100%. You want to provide coverage to everybody, so that if somebody falls through the cracks, you don’t have a penalty. Don’t look at the 70% and think, ‘I’m going right down to 70%,’ because if you fall through the cracks, bad things happen.”

Divide and conquer prohibited. Employer size is based on a controlled group basis. Large businesses cannot carve themselves into multiple pieces under common control to skirt the regulations.