Your 2014 Obamacare To-Do List, Part I
When it comes to Obamacare, as an employer, you don’t really need pundit opinions and horror stories. All you actually need is practical knowledge of how to implement an Obamacare strategy that makes the most sense for your business. In this three-part series, we will give the steps to make your own road map for the rest of 2014 in anticipation of the changes you may expect in 2015.
Assess Your Labor Like the ACA Will
Are you a large or small employer? What will the IRS, the government entity responsible for enforcing Obamacare, say?
To calculate your large- or small-employer status, you will need to account for both your full-time (FT) and part-time (PT) workforce. Even though large employers are only required to offer healthcare to their full-time employees, the combined hours worked by all of your hourly employees is the factor to consider when determining whether you are a large employer, and therefore required to offer healthcare coverage to all of your full-time employees.
So, how do you make these calculations?
To determine your large- or small-employer status, you will need to make some very simple calculations. These labor figures, based on your labor status right now, will determine how you will need to approach Obamacare in your business. Here’s how:
How many full-time employees do you have?
A full-time employee is defined by the ACA as one who works an average of 30 hours or more per week. However, the weekly average may be difficult to determine. That is because the exact definition of what constitutes a week has not been expressly explained. Since we don’t know if the IRS, the government entity responsible for assessing the penalties to business for not offering appropriate coverage, intends to assess the number of hours your employees work each week according to a calendar week or a pay week, which obviously varies between businesses, it may be rather difficult to tell whether your employees actually count as full-time. To clarify this, the IRS has proposed a secondary means of determining full-time status. Employers may also base their full-time calculation on hours worked by hourly employees in a month. If an employee works 130 or more hours in a month, they should be considered full-time. It is likely that this will be the basis on which the IRS will assess full-time qualification and thereby determine small- or larger-employer status and assign relevant penalties. For this reason, I recommend that you do your calculations using this method. To find out how many full-time employees you have, average the monthly hours worked by each employee for the last twelve months. Those who have an average of 130 hours or more are full-time employees.
What about part-time employees and full-time equivalent (FTE)?
Your number of full-time employees determined by the previously explained calculation will be added to another calculation; your full-time equivalent. In order to determine your large- or small-employer status, you will need to take both your part-time and full-time workforce into account. This number can be found by adding together the number of hours worked by each of your part-time employees in a month and then dividing that by 130. The number, rounded down, is your FTE for the month. When determining your large or small-employer status, you will need to add the number of full-time employees and the FTE together for each month of the last year. Then, find the average of the FT and FTE for the year.
Now what?
Generally, suppose you employ an average of 50 or more full-time employees and FTE. In that case, you are considered a large employer and thereby are required to offer healthcare coverage to your full-time employees. Employers with more than 25 full-time employees and FTE, but less than 50 are not considered “small employers”, but rather, they are simply not large employers. If you have less than 50 full-time employees and FTE, you may consider healthcare options anyway. Offering healthcare to your full-time employees may decrease turnover and increase employee morale. This is because, under Obamacare, your employees will be required to have healthcare coverage, regardless of whether their employer is required to offer it them.
Also, large employers may opt not to offer healthcare to their full-time employees and risk penalties from the IRS. Often, these penalties will be less than the cost of providing coverage that meets the standards of affordability and value stipulated by Obamacare. There are a variety of options for both small- and large employers that we will cover in future installments.
Who is eligible for healthcare?
The Employer-Shared Responsibility portion of the Affordable Care Act will take effect in 2015. As a large employer, your responsibility in 2015 will be determined by your current 2014 workforce! In order to avoid surprises in January, you need to monitor your labor closely throughout 2014 to make the right choice for your business.
Determining whether you “pay” (opt not to offer healthcare to your full-time employees) or “play” (provide healthcare coverage to eligible employees that meets ACA standards of affordability and value) will depend heavily on knowing exactly how many employees you will be required to buy coverage for.
Although a “full-time employee” has commonly been considered any who works at least 40 hours a week, it is a bit more difficult to determine who is classified as a full-time employee (and thereby is eligible for healthcare) according to Obamacare. Salary and variable-hour employees are even more difficult to classify.
Below is an explanation of the accepted methods for determining full-time status and healthcare eligibility.
Guess and Check Method
This method requires employers to make a judgment regarding the number of hours he/she expects an employee to work in a month, and then verify at month’s end. To employ this method, you will review your employees’ healthcare coverage eligibility on a month-to-month basis. You may proactively offer healthcare to all employees you think will be eligible, or review the previous month’s employee hours and offer healthcare the next month to those who are eligible according to the hours worked during the previous month. There is more risk associated with this method, as you may be penalized for not offering healthcare when an employee unexpectedly works more than 130 hours in a month. If using the Guess and Check Method, you will need to monitor employee hours very closely to ensure they do not exceed your expectations.
Lookback Measurement Method
This method was proposed by the IRS as a way to minimize risks faced by employers whose workforce is difficult to classify. The process for determining full-time status consists of three periods. At any time, the entire company is considered to be in one or more of these overlapping periods. After all of the periods have been completed, the cycle begins again.
- Measurement period: The purpose of the measurement period is to measure the number of hours your employees are working in order to proactively avoid risks. It may last between 3 and 12 months and begin each year at any time that you choose.
- Administrative period: After you have collected the necessary data regarding the hours your employees have worked during the measurement period, you may enter the optional administrative period. The purpose of this period is to assess who within your workforce is eligible for healthcare coverage. This period gives your human resource personnel time to complete the healthcare enrollment process.
- Stability period: The stability period establishes the employee’s status as full- or part-time. During the stability period, an employee’s status does not change, even if the employee’s average weekly hours vary.
The three periods (measurement, administrative, and stability) are continuous and overlap each other. Therefore, a measurement period always occurs during the stability period. This assures that employees in a stability period will always be offered healthcare, if eligible.
After you have an understanding of your labor, you can assess your options according to Obamacare in your business. Part 2 (below) will cover these options in detail and help you determine whether you will “pay” or “play”. Since you need to begin these calculations immediately, you should visit with a tax professional soon for the latest ACA information and how to create a strategy in your state, specifically.
Your 2014 Obamacare To-Do List, Part 2
2014 will be the critical year that determines how Obamacare will affect your business. So far, we have discussed how to assess your labor the way that the IRS will.
Now that you know whether you are a small or large employer, you need to consider your options and develop the best strategy for approaching the Affordable Care Act in your business.
Small Employers and Obamacare
(Employers with a full-time employee + FTE number that is less than 25)
Small employers and employers with fewer than 50 total full-time employees and FTE may choose to offer healthcare coverage to their employees. Since employees have to carry health insurance whether or not an employer offers it, small business owners who do not offer healthcare coverage to full-time employees may experience an increase in employee turnover.
So, while preparing for the shared responsibility portion of Obamacare next year, you may want to consider healthcare as a means to entice employee retention in the age of Obamacare. If healthcare is out of the question, raises could be considered as a means to alleviate the burden of healthcare.
Additionally, small employers may qualify for the Small Employer federal tax credit. Here’s how to see if you qualify for a small-employer tax credit:
- For each of your employees, find the total number of hours worked in the past year. Cap each employee at 2080 hours, which would account for 40 hours a week. If any employee worked more than 2080 in the year, simply record 2080 for him/her.
- Find the total number of hours worked collectively by all of your employees.
- Divide this cumulative total by 2080. If the result is not a whole number, round down.
- If the result is less than 25, you may qualify for a tax credit if the average salary of your employees is less than $50,000.
- Add up the annual salary for each employee. You may exclude owners, family members, and seasonal employees who work less than 120 days in a year. Now, divide by the number of employees you have calculated salaries for. If this average is less than $50,000, you qualify for a small employer tax credit under Obamacare.
In order to receive the tax credit, you must follow the stipulations set by the Affordable Care act and:
- select health insurance that meets the standards of affordability
- select health insurance that is of minimum value
- pay for at least 50% of the premiums for your employees.
Determining the Amount of Credit Received
If the requirements listed above are met, here is how to determine the amount of credit you can expect to receive for offering healthcare coverage to your employees as a small employer.
- Determine how much you will be expected to pay in premiums for each employee.
- To demonstrate, we will use an even figure like $5,000/employee for easy calculation. A business with 15 employees may expect to spend $75,000 a year on healthcare based on the premium costs we are using for this example.
- The tax credit rate is determined for each year. It may change from year-to-year, but in 2013 it was expected to be 35%. Therefore, multiply the combined cost you will spend on premiums for each employee by the current year’s Small Business Tax Credit Rate.
- The result, $26,500, is the initial credit amount, but you will need to determine exactly how much of a credit you are eligible to receive. However, it’s important to know that you are only eligible to receive the full 35% credit if you have ten or fewer employees. Since our example involves a business with 15 employees, we must subtract 10 from 15 (the number of people actually employed).
- Divide the resulting 5 by the number of people actually employed, 15. The result is close to .333.
- Now, multiply the full credit amount ($26,500) by .333. The result is $8,741.25. This will be deducted from the full credit amount.
- Subtract the number found in step 5 from the full credit amount. The result is $17,508.75. This is the amount that the small business in our example can expect to receive to help pay for healthcare coverage for its employees.
Beware Affordable Care Act Additional Fees
In addition to the cost of premiums, which may be slightly offset by the comparatively small tax credits, employers need to be aware of other fees associated with Obamacare. For example, the Small Business PCORI fee will be assessed to small businesses. This fee may vary from year-to-year, but in 2013 the fee was established at the rate of $1.00/per employee who participates in the healthcare plan that you provide.
As a small business owner, you will need to keep up-to-date with the latest ACA news and work closely with your tax and insurance professionals to be sure that you are aware of all relevant facets of Obamacare- or you may pay later!
Large Employers and Obamacare
(Employers with 50 or more FTE and full-time employees)
In order to make the best decision for their business, large employers may need to understand the full-extent of the penalties they face under Obamacare in the event that they do not offer healthcare coverage to their full-time employees. The penalties are generally not triggered by the mere failure to comply, but rather by the issuing of a premium tax credit by the federal government to an employee whose employer is required to provide healthcare and is not. That means, when you consider your cost-risks associated with Obamacare, you may choose to weigh your options according the “most-expensive” scenario possible under each option. First, let’s examine the two primary types of penalties that will be assessed to employers under the Affordable Care Act.
Penalty A
Penalty A is triggered when one of your employees receives a premium tax credit. As a large employer, you are required to offer healthcare coverage to all of your full-time workforce. If one of your employees receives a premium tax credit in order to pay for his or her federally-mandated individual healthcare coverage, you will receive Penalty A. This penalty is assessed at:
- $2,000 x (# of full-time employees – 30)
This means that if you have 100 full-time employees, and you are required to pay Penalty A, you will owe the IRS $140,000 for Penalty A, alone! This is a steep penalty, but the IRS has accounted for the possibility of errors by allowing a 5% or 5 person (whichever is greater) buffer for employers. So, if you accidentally overlook either 5 employees or up to 5% of your workforce, and one of these employees receives a premium tax credit, you will not be penalized. Still, it is important to thoroughly assess each employee’s eligibility for health insurance to avoid unexpected penalties.
Penalty B
Penalty B is triggered when insurance that is offered does not meet the Affordable Care Act standards of affordability and minimum value. We will discuss these criteria in detail in another part of this series. Similarly to Penalty A, Penalty B is triggered by an employee receiving a premium tax credit. Unlike Penalty A, it will only be applied according to the number of employees without the appropriate insurance, rather than according to your entire workforce. Therefore, if in error you neglect to offer healthcare coverage to 10% of your workforce, exceeding the 5% buffer, you will only be penalized under Penalty B for the 10%, and not the remaining 90%. Penalty B is assessed at:
- $3,000 x (# of employees who receive a premium tax credit)
Therefore, if you have 100 full-time employees, and offer healthcare coverage to all but ten of them, the most you can expect to pay according to Penalty B is $30,000. Also, if you are subject to both Penalty A and Penalty B, you will not be required to pay more to Penalty B than you do to Penalty A, as Penalty A serves as the maximum penalty cap for Penalty B.
Next, we discuss your options for large employers, in particular, when facing these fees. Pay the penalty or play nicely with Obamacare? It’s up to you, and we’ll show you how to estimate the costs of both!
Your 2014 Obamacare To-Do List, Part 3
We have discussed how to assess your small or large employer status and which employees you are responsible for offering healthcare coverage to.
Now what?
With these calculations made, you are now ready to formulate the strategy for approaching Obamacare that works for your business. There are a variety of options whether you “pay” (elect not to offer healthcare coverage to your full-time staff) or “play” (offer healthcare coverage that meets ACA standards of affordability and value). Let’s think about what options you have.
If you don’t offer healthcare coverage
If you choose not to offer healthcare coverage to your full-time workforce, you already know that you will face a variety of penalties leveraged for each employee you neglect to offer coverage, but calculating exactly how much this may add up to be is critical in making any decisions regarding healthcare in your business. Let’s discuss two approaches for the employer who resolves not to offer healthcare to his employees.
Approach A
Head down, full-steam ahead! For the employer who is not concerned enough with Obamacare to either offer healthcare or reassess his/her staff, some hefty fines may await. Let’s see what an employer with 100 full-time employees may expect to pay.
Penalty A
Penalty A is assessed according to the entire full-time workforce as soon as even one employee receives a premium tax credit. It will cost $2,000 for each employee who is not offered healthcare, excluding thirty. See below as we calculate it for our example employer:
- $2,000 x (FT – 30) =
- $2,000 x (100 – 30) =
- $2,000 x (70) = $140,000
$140,000 is the amount this employer can expect to pay under Penalty A. Now let’s take a look at Penalty B.
Penalty B
Remember, Penalty B is assessed for each employee who receives a premium tax credit. However, even if you don’t offer insurance to any of your full-time employees, and each of them receives the premium tax credit, Penalty B still cannot exceed Penalty A.
Therefore, it is exacted on employers at $3,000 per employee who receives a premium tax credit, up to the amount the employer will be paying according to Penalty A.
Let’s calculate it for our example employer, according the most-expensive possible outcome. Since Penalty B is applied only for employees who actually receive the tax credit, the most-expensive outcome is the one in which all employees receive the credit:
- $3,000 x (# receiving premium tax credit) =
- $3,000 x 100 = $300,000
$300,000 is the amount the employer owes according to Penalty B. However, because Penalty B cannot exceed Penalty A, this employer will actually only owe $140,000 to both Penalty A and B.
Therefore, the projected most-expensive outcome for the “head down” approach is to pay both Penalty A and B for a combined sum of $280,000.
Now let’s look at Approach B.
Approach B
More part-time? Because both Penalty A and B are assessed based on an employer’s full-time workforce, increasing your number of part-time employees in order to reduce the number of full-time employers for whom you may be penalized could save you a lot in penalties.
This method is controversial, but if your budget simply will not allow you to maintain your current full-time workforce, this reconfiguration may help you stay afloat. Let’s see how much the employer in our example could save if he reduced his full-time workforce to 50 and increased his part-time workforce to 100.
Penalty A
Penalty A will again be assessed using the above formula for each full-time employee.
- $2,000 x (FT – 30) =
- $2,000 x (50 – 30) = $40,000
$40,000 is the amount the employer owes according to Penalty A. Now, let’s look at Penalty B.
Penalty B
Again, Penalty B is only assessed according to the number of employees who actually receive a premium tax credit to afford insurance. It’s unlikely that all fifty of the employees would receive it, but let’s see the most-expensive case scenario the employer could expect if they did.
- $3,000 x (# receiving premium tax credit)
- $3,000 x 50 = $150,000
$150,000 is the amount the employer owes according to Penalty B, but since Penalty B cannot exceed Penalty A, the employer will actually only owe $40,000 to both Penalties.
Therefore, the projected most-costly scenario would involve the employer owing $80,000 if he/she reduces the full-time workforce.
If you do offer healthcare coverage
You may select from a variety of options if you opt to offer healthcare coverage to your employees. Some of these options will absolve you from liability for any penalties. Others will reduce your chances of being penalized and the cost of penalties that may be assessed.
ACA-compliant coverage options
When selecting coverage for your employees, if you want to avoid penalties, you must find insurance that meets the ACA standards of affordability and is of minimum value. To be considered affordable, the coverage must cost the employee no more than 9.5% of his/her total annual household income. To be of minimum value, the plan must cover at least 60% of the employee’s medical costs. That is, employees should contribute no more than 40% to the cost of medical claims.
Metallic Value in insurance coverage
Among plans that are ACA-compliant, there are number of options. In an effort to standardize coverage offered so that shoppers could more easily compare plans, the Metallic Value system of assessing healthcare will be implemented this year. This way, while shopping for healthcare for your employees, you can be confident that plans that share the same Metallic Value (Bronze, Silver, Gold, and Platinum) are more or less the same.
Skinny Plans
A “Skinny Plan” does not meet the ACA standards of affordability and minimum value. It is generally much less expensive than ACA-compliant coverage. Offering this type of plan ensures that you will not receive Penalty A. However, employees may reject the insurance because it is not ACA-compliant, and you may receive Penalty B for each employee who receives a premium tax credit to purchase ACA-compliant coverage.
Good luck and stay well!
As you navigate the ever-changing landscape of Obamacare, it will be best to secure a trusted adviser to remain ahead of the curve. For a more complete explanation of how to strategize for Obamacare, visit www.EmployersAndObamacare.com where you can purchase our complete guide, Obamacare: A Handbook for Employers.
