Am I a Large Employer Under the Affordable Care Act?

Questions about how the Affordable Care Act will be implemented could fill this blog for weeks, but the most common question I have received thus far from clients is how to determine whether their business qualifies as a “large employer” for purposes of the Act. Most of the regulations issued on this topic are still in the “proposed” stage, but this blog post is intended to provide an overview of what we know so far regarding the answer to this question. This question is of particular significance because beginning 2014, “large employers” are required to offer health care coverage that is “affordable” and of “minimum value” to their “full time employees” and “dependents” or pay a “tax.” (Of course each of the words in quotations above is a defined term in the Act, and each defined term is worthy of its own blog post in the weeks to come.) But, as I have advised many clients already, the best approach to understanding and implementing this Act, is to take one issue at a time. So we will begin with the threshold question – does it even apply to my business?

This question is important now in 2013 even though we do not have final regulations. The proposed regulations suggest a year look back period to determine large-employer status. That means since the requirement begins 2014, this year, 2013, will very likely be your look back period to determine if you have to start providing the required coverage next year. The short answer is that a “large employer” for purposes of the Act is one that employs at least 50 full-time employees or full-time equivalents on business days during the preceding calendar year. In general, a full-time employee is one who works an average of 30 hours per week. If the answer were that simple, however, most employers who don’t currently offer coverage would just adjust their employees’ hours so that none met the full-time definition and we could all move on. In recognition of this work around and because we have at least three different departments (the IRS, Treasury and Labor) all involved in regulating this legislative beast, the answer is far from that simple.

To determine whether you employ 50 full-time employees, you don’t just count the number of full-time employees on your payroll. Thus, just scheduling all of your employees for less than 30 hours a week will not change your large employer status. Instead, the proposed regulations determine large-employer status based on the actual hours of service employees worked in the prior calendar year. To compute your total number of full-time employees, the IRS proposes that you add your full-time employees to your “full-time equivalents.”

To determine your “full-time equivalents” you calculate for each month of the prior calendar year, the aggregate number of “hours of service” (not exceeding 120 hours for any one employee, 120 hours making an employee full-time) worked by all non-full-time employees and divide by 120. Note that hours of service includes not only actual hours worked, but any time for which an employee is entitled to payment even though no work is performed (i.e., holidays, vacation, sick time, leave of absence, etc.). Presumably nonpaid leaves would not be considered.

A couple of examples are helpful to understand the math and the concepts.

Example Number 1: Suppose you are an employer with 40 employees who work 30 or more hours per week all year and you have 15 part-time employees. Of the 15 part-time employees, the first 10 work 25 hours per week year round. The last five work 10 hours per week. For each month, you would assume 10 employees working 100 hours per month plus five employees working 40 hours per month. To calculate the full time equivalents, you would add (10X100) + (5×40) = 1200 to get total hours and then divide the total hours by 120 (1200/120) = 10 full time equivalents. So, you have 40 full-time employees and 10 full time equivalents or 50 employees. Because you employ at least 50 full-time employees, you are a large employer.

Example Number 2: Now suppose you are a retail shop with a busy season of November 1 through December 31 (61 days). Year round you employ 30 employees who work 30 or more hours per week. However, for the busy season, you employ an additional 30 employees who work 25 hours per week. For ten months of the year, you employ only 30 full time employees. For November and December, you calculate your full time equivalents as follows: 30 employees who work 100 hours per month = 3000/120 = 25 full time equivalents. So for November and December, you employ 30 + 25 or 55 full-time employees. However, you are not a large employer. If an employer employs 50 employees for 120 days or less and the employees in excess of 50 during those 120 days were seasonal workers, you are not a large employer.

An even more difficult concept for many small businesses is the concept of “shared responsibility.” Recognizing that another option for employers looking to avoid providing costly coverage would be simply to split their workforce among several different entities, the regulations rely on the “control group” tests in the Internal Revenue Code to determine whether related entities are really a “single employer” for purposes for the Act. If related entities are determined to be a “single employer” then those entities would be required to provide coverage if in aggregate they employ 50 or more employees. I suppose the silver lining (if one is to be found here) is that the portion of the Internal Revenue Code referenced is final and provides some concrete guidance on this issue. Specifically, it provides the following:

Businesses are under common control of a parent corporation if the parent corporation owns any of the following of each business:

  • At least 80% of the total outstanding voting power of all classes of stocks of a corporation;
  • At least 80% of the total value of shares of all classes of stock of a corporation;
  • At least 80% of the profits interest in a partnership;
  • At least 80% of the capital interest in a partnership; or,
  • Ownership of a sole proprietorship.

Brother/sister businesses are under common control if the same 5 or fewer persons (individuals, estates, or trusts) own on any of the following of each business:

  • More than 50% of the total combined voting power of all classes of stock of a corporation;
  • More than 50% of the total value of shares of all classes of stock of a corporation;
  • Aggregate of more than 50% of the profit interest in a partnership;
  • Aggregate of more than 50% of the capital interest in a partnership; or,
  • One of the 5 or fewer owns a sole proprietorship.

A combined group of trades or businesses are under common control if any group of 3 or more organizations:

  • Are a member of either a parent-subsidiary or brother-sister group; and
  • At least 1 organization is the common parent organization and is also a member of the brother-sister group.

Perhaps the best take away for a small business which may be in a common control group or is considering expansion through a separate entity is to consult legal counsel regarding the risk of single employer status and possible options to avoid it.

I will be addressing the other pieces of this legislation in weeks to come as well as some non-health reform related topics. Starling Underwood, another member of the MWB Employment & Labor Team, contributed to this post and will be providing additional contributions in the future regarding the Affordable Care Act. You can check out his bio at https://www.mwblawyers.com/attorneys.php?id=28#details.

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