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Is Your Customer a “Large” Employer or a “Small” Employer?

February 25, 2013

By Scott Lyon, Senior Vice President

Up until recently, as a business owner, your customers got to make that decision for themselves and it would be based on any number of factors.  Unfortunately, the Affordable Care Act takes that determination away from them.  Correctly answering this question is one of the most important steps your customer will need to take as they examine how the Affordable care Act impacts their business. 

Let’s start with why I made that last statement.  Under the Affordable Care Act, companies with 50 or more full-time equivalent employees are subject to the “Play or Pay” rules.  Meaning that if your customer does not offer health insurance coverage or if the coverage offered is not “affordable ” they may be subject to a penalty. Companies with 49 or fewer FTE are not subject to the penalty.

What is the Penalty?
For a company with more than 50 employees the penalty comes in two variations:

1. No Coverage Offered – Employers with more than 50 full-time equivalent employees that do not offer coverage and have at least one full-time employee who receives a premium tax credit from the health exchange will face a penalty of $2,000 per full-time employee, excluding the first 30 employees from the assessment.

2. Coverage Offered – Employers with more than 50 employees that offer coverage but have at least one full-time employee receiving a premium tax credit (because coverage is not affordable), will pay the lesser of $3,000 for each employee receiving a premium credit or $2,000 for each full-time employee, excluding the first 30 employees

What is an Employee?
An employee is defined using the common law standard. An employer-employee relationship exists when the person for whom the services are performed has the right to control and direct the individual who performs the services. That said, sole proprietors, partners in a partnership, members (owners) of an LLC taxed as a partnership, 2% S-corp. shareholders and leased employees are not considered employees.

The Affordable Care Act defines full-time employee as a person who worked an average of 30 hours per week.  When your customers are making their calculation they should keep in mind that hours of service not only include hours worked, but also include all hours for which employees are paid or entitled to payment. In other words, they need to remember to count employees who are on vacation, paid holidays, illness, disability, laid off, on jury duty, serving our country on military duty, or leave of absence. 

To determine if your customer is an applicable large employer you can suggest that  they visit our calculator by clicking here or they can complete the following steps:

1. Determine the number of full-time employees, including seasonal workers (defined below) who work an average of 30 hours of service per week. 

2. Determine the number of FTEs, including seasonal workers (see below) for all employees working fewer than 30 hours per week for that month and divide by 120. 

3. Add 1 and 2 together to determine total full-time employees (including FTEs) for the month.
Do the above math for each month in the preceding calendar year, then add all of the FTEs for the entire year and divide by 12.  If this number is 51 or more, your customer is a large employer and will be responsible for complying with the “Play or Pay” mandate.  Here is a template that you can use:

How do I account for Seasonal Workers?
Seasonal Worker – Seasonal worker is classified as a worker who performs labor or services on a seasonal basis, fewer than 120 days, as defined by the Department of Labor including certain agricultural workers and retail workers employed exclusively during the holidays. An employer will not be treated as having 50 full time employees if: 

1. The employer’s workforce exceeds 50 full-time employees for 120 days or less during the calendar year, and

2. The employees in excess of 50 employed during that period were seasonal workers.  

Seasonal Worker Exception 
If your customer’s workforce has 50 or fewer employees for 120 days or less during the preceding calendar year, and the employees in excess of 50 who were employed during that period of no more than 120 days were seasonal workers, they are not an consider a  large employer.  

Seasonal workers are defined in the regulations as workers who perform labor or services on a seasonal basis and retail workers employed exclusively during the holiday seasons.  The regulations also state that for purposes of this particular exception, four calendar months may be treated as the equivalent of 120 days, and that the four calendar months and 120 days are not required to be consecutive.

Can a business be broken up into smaller entities?
Probably not, because controlled groups count together.  When making the calculation it is important to know that all employees of a controlled group or affiliated service group are taken into account in determining whether the group together will be considered a large employer.  Generally Control Groups come in three variations:

1. Parent/Subsidiary .  A parent-subsidiary controlled group exists wherever a parent organization owns 80% or more of the equity in a subsidiary organization. (For corporations, the 80% + test is based on attaining that level of voting power or total value based on all classes of stock; for partnerships, the 80% + test is based on attaining that level of profits interest or capital interest; for trusts and estates, actuarial interests are used.)

2. Brother-Sister – Common control group exists wherever the same five or fewer persons (counting individuals, estates and trusts as “persons”) (i) collectively own 80 percent or more of the equity in two separate trades or businesses, and (ii) taking into account the level of ownership each of those five persons holds in each of the two organizations (using a lowest common denominator approach) collectively own more than 50 percent of the equity in both of the trades or businesses.

3. Affiliated Service Group – exists wherever several organizations regularly collaborate in the services they provide to the public (typically, integrated services), and the several organizations are linked by a material level of cross-ownership.

When should the calculations be made?
Please remember that the identification of full-time employees for purposes of determining your customer’s status as a large employer or small employer is performed on a look-back basis using data from the prior year, taking into account the actual hours of service of all employees employed in the prior year. This means to determine if your customer is an applicable large employer on January 1, 2014, their counting period started in January of 2013.

What if the business is new?
An employer not in existence during an entire preceding calendar year is an applicable large employer for the current calendar year if it is reasonably expected to employ an average of at least 50 full-time employees (taking into account FTEs) and does employ least 50 full-time employees on business days during the current calendar year.

In summary, make sure your customer understands the controlled group rules and take employees of controlled groups into account when determining if they are an applicable large employer under the Affordable Care Act.  If your customer’s organization employs close to 50 employees now and they want to avoid being an applicable large employer for purposes of the employer shared responsibility mandate, they should keep a careful eye on their full-time hiring and the number of hours their non-full-time employees work throughout 2013.

What is Affordable Coverage?
To avoid the Play or Pay penalty, employers with 51 or more employees must offer insurance that covers at least 60% of the actuarial value of the cost of benefits (insurance carriers will let you know). The coverage also must be affordable to employees, meaning an individual employee’s premium for single coverage cannot exceed 9.5% of their W-2 Box 1 income. If the coverage offered does not meet the affordability standard, employees may receive tax credits to purchase insurance on their own through the health exchange. 

As you can see, there is a whole lot that goes into this! SBAM is committed to keeping you informed so that you can assist your customers in making the right decisions for their company.  Check our website at often for the most up to date information. 

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