By NORMAN G. GRILL Jr., CPA
The “play or pay” provision of the Patient Protection and Affordable Care Act could levy substantial financial penalties on affected companies that don”™t offer full-time employees affordable coverage of at least minimum value.
This provision was initially scheduled to take effect Jan. 1, 2014. But the IRS delayed the provision”™s effective date until Jan. 1, 2015. (Employers may voluntarily comply with the original deadline.) This “transition relief” doesn”™t change any other aspect of the health care act, though more IRS guidance is expected.
Loaded terms
The health care act”™s play-or-pay penalties are predicated on several terms.
An “affected companies” is: One that, in the preceding calendar year, employed 50 or more full-time employees or a combination of full- and part-time employees that”™s equivalent to at least 50 full-timers. Standard full-time employees are those who worked 30 or more hours a week. To determine your total number of full-time equivalent employees (FTEs), you”™ll need to add up your part-timers”™ hours of service for a given calendar month, divide the result by 120 and add that number to your full-time employee count.
“Affordable coverage” is: An insurance plan that includes a premium not exceeding 9.5 percent of a participant”™s annual household income. The “affordability test” applies to the least expensive coverage option available to employees that provides “minimum value.” (Some employers may meet the test under one of three safe harbors; ask your financial or benefits advisor for details.)
A plan of “minimum value” is: One that covers at least 60 percentof the total allowed costs of benefits provided. More specifically, the minimum value percentage is the ratio of the share of total costs paid by the plan to the total costs of covered services.
Additional FTE points
Because the “large employer” distinction is the gateway to whether your business may incur penalties, let”™s look at a few more points regarding the FTE calculation.
Do you employ hourly part-time staff members? If so, you”™ll have to factor them into your calculation based on hours worked and hours compensated (or due to be compensated) for time off attributable to vacation and sick time, disability leaves and other applicable circumstances.
For salaried part-time employees, you have three ways to ascertain their hours for FTE purposes:
Ӣ Use the hourly staff method described above.
Ӣ Apply a days-worked equivalency method by which you credit each employee with an eight-hour workday, or
Ӣ Take a weeks-worked equivalency approach by which you credit employees with 40-hour workweeks.
The right choice may depend on which method provides the most efficient means to calculate and document your FTEs.
Another tricky issue that some businesses have to contend with is how to determine their FTEs when they share a common owner with or are otherwise related to other companies. Generally, in these cases, if the combined total of all of the businesses meets the 50 FTE threshold, each separate entity will be subject to the large-employer requirements””even those that don”™t individually employ 50 or more FTEs.
On the bright side, if your business is defined as a large employer under these circumstances, it won”™t be penalized because another employer in the group doesn”™t offer affordable coverage of at least minimum value.
Costly consequences
Speaking of penalties, whether you”™ll incur one first depends on if you: 1) don”™t provide health insurance or 2) provide coverage that isn”™t affordable or of at least minimum value.
In either circumstance, you”™ll suffer a penalty if just one of your full-time employees receives a premium tax credit when buying insurance from the newly established, government-run Health Insurance Marketplace. The health care act mandated the creation of the Marketplace so that individuals who aren”™t covered by an employer”™s health care plan ”“ or are covered by one that doesn”™t meet the affordability or minimum value standards ”“ can buy insurance. Small businesses can also use the Marketplace to buy a health care plan if they can”™t afford to do so on the private market.
Critical decision
This has been a general discussion of a complex subject and is not intended as advice. Always consult qualified professionals before making tax and major business decisions.
Norm Grill, CPA, (N.Grill@GRILL1.com) is managing partner of Grill & Partners L.L.C., (www.GRILL1.com) certified public accountants and advisers to closely held companies and high-net-worth individuals, with offices in Fairfield and Darien, (203) 254-3880.
