Every year AccuPay reviews our client base to determine which of our clients “measure” as “applicable large employers” (ALE) for the first time. We do this proactively so that we can educate our clients about their status per the Affordable Care Act and so they can learn and make wise decisions about how to comply with the ACA law. Below is a summary of what “applicable large employers” are required to do to be in compliance.
WHAT IS THE PURPOSE OF THE AFFORDABLE CARE ACT AS IT PERTAINS TO “LARGE EMPLOYERS”?
The Affordable Care Act (often referred to as Obamacare) has been the “law of the land” for many years now. One of the express purposes of the ACA statute is to determine “who” should pay for health/medical insurance in the USA. The law defines those “responsible parties” as being of 3 types—the federal government, “ALE’s,” and individuals. The ACA indicates that those 3 parties “share” in the responsibility to fund/finance healthcare (NOTE—-The “individual mandate” is now set at a zero penalty, so individuals who do not purchase personal healthcare are no longer penalized). The federal government shares in funding our nation’s healthcare via Medicare, Medicaid, etc. The ACA statute requires that “large employers” offer group health insurance coverage to their “full-time employees ” OR be subject to an IRS penalty called an “employer shared responsibility payment” or ESRP, which is paid to the US Treasury to help fund our nation’s healthcare. The penalties help subsidize personal health insurance coverage which many individuals can obtain from an ACA “marketplace/exchange.” The ALE decision to offer group health insurance or pay the ESRP to the Treasury has often been referred to as the “pay or play” decision—-pay the IRS penalty or “play” by offering employee group health insurance to full-time employees.
WHO ARE LARGE EMPLOYERS WHICH ARE SUBJECT TO THE AFFORDABLE CARE ACT?
Applicable large employers (ALE’s), as defined by the ACA statute, are employers who have 50 or more “full-time equivalent” employees (FTE’s) on average per month, during a calendar year. An “FTE” is comprised of two types of employees—-full-time employees (those who normally work 30 or more hours per week, but not owners/relatives of owners) and part-time employees, whose total hours are added up and “converted” into “full-time equivalents.” FTE’s are calculated by dividing total monthly part-time hours by 120 (30 hours per week X 4 weeks). For ACA purposes, businesses with common ownership are generally treated as a single employer. (See the IRS website for more information.)
It is common for employers to think they are not “ALE’s” if they have fewer than 50 full-time employees. However, employers need to “count” their FTE’s, including part-time employees, to determine IF they are a large employer subject to the Affordable Care Act’s provisions.
SO THE STARTING POINT FOR EVERY EMPLOYER—to include non-profits, churches, government entities, farmers, etc – is to count full-time equivalent employees (FTE’s). Once the number of FTE’s exceeds 50, the employer MUST pay attention to Affordable Care Act Requirements imposed on them!
WHAT ARE THE TWO PRIMARY REQUIREMENTS OF APPLICABLE LARGE EMPLOYERS PER THE ACA STATUTE?
The Affordable Care Act imposes two primary requirements on all “applicable large employers” (ALE’s). Separate penalities may be imposed by statue for ALE’s not meeting these requirements. The two ACA requirements are as follows:
- ACA REPORTING TO FULL-TIME EMPLOYEES AND THE IRS
- The ACA law requires that an ALE provide annual IRS 1095-C forms to all “full-time” employees (NOT any part-timers) by March 2nd of the year following the compliance year (March 2, 2024 for calendar year 2023). The 1095-C form details which months the employee was full-time, what their offer of insurance was (if any), whether the insurance offer was “affordable” and met “minimum value” standards, whether the insurance offer met “minimum essential coverage” (MEC) requirements, etc. The 1095-C form was intended to identify whether the employee had insurance coverage for the individual mandate provision, which is no longer penalized at the individual level. Sadly, though the 1095-C form is still required, it is of limited value to the employee now since it is no longer needed for the personal Form 1040 (no individual mandate penalty anymore.)
- The ACA law requires that an ALE file an annual IRS 1094-C form with the IRS by March 31st of each year. The 1094-C form includes copies of all employee 1095-C forms and also indicates information such as how many “full-time employees” the employer paid each month during the calendar year. The 1094-C form also indicates IF the employer “offered” “minimum essential coverage” (MEC) group insurance to at least 95% of all its full-time employees during each month of the year. THE 1094-C FORM PROVIDES INFORMATION TO THE IRS ABOUT WHETHER THE EMPLOYER MET THE REQUIREMENTS TO OFFER ACA STANDARDS OF HEALTH INSURANCE to its employees OR whether the employer is subject to IRS “ESRP” penalties.
- The ACA law requires that an ALE provide annual IRS 1095-C forms to all “full-time” employees (NOT any part-timers) by March 2nd of the year following the compliance year (March 2, 2024 for calendar year 2023). The 1095-C form details which months the employee was full-time, what their offer of insurance was (if any), whether the insurance offer was “affordable” and met “minimum value” standards, whether the insurance offer met “minimum essential coverage” (MEC) requirements, etc. The 1095-C form was intended to identify whether the employee had insurance coverage for the individual mandate provision, which is no longer penalized at the individual level. Sadly, though the 1095-C form is still required, it is of limited value to the employee now since it is no longer needed for the personal Form 1040 (no individual mandate penalty anymore.)
- INSURANCE OFFER WITH AT LEAST MINIMUM ESSENTAL (MEC) COVERAGE
- ALE’s must “offer” ACA compliant insurance to all their “full-time employees” (different than FTE’s) OR be exposed to significant IRS penalties. The insurance offered must meet “minimum essential coverage” requirements (so called MEC insurance). MEC only insurance is typically not overly expensive nor overly robust. To be fully compliant, the coverage should also be affordable to the employee (no more than 9.12% of income for 2023) and provide “minimum value” (pay at least 60% of covered benefits). As you will see below, the penalties for failing to comply with any of these requirements are substantial.
PENALTIES FOR NON-COMPLIANCE WITH THE ACA AS TO REPORTING AND GROUP INSURANCE OFFERS
The ACA imposes a $580 “per 1095-C” penalty for every 1095-C not provided to “full-time” employees or sent to the IRS with the 1094-C annual form ($290 for each offense). As such, an ALE who fails to provide and file the 1094-C and the 1095-C forms of their 30 full-time employees will incur an IRS penalty of $580 X 30 FT employees= $17,400 total penalty. This penalty is larger if the non-filing was intentional. The typical cost to file all ACA forms annually by AccuPay or other ACA filers is significantly less than these penalties. Therefore, we recommend that all ALE’s comply with ACA reporting to avoid non-filing penalties – even if they do not offer qualifying insurance.
The ACA also has a rather complex structure of IRS penalties for large employers who do not comply with the requirement to offer qualifying insurance to their full-time employees. These are often referred to as the “A” and “B” penalties since they are defined in Tax Code section 4980H (a) and 4980H (b). The “A” penalty can be assessed to an ALE who does not offer “at least MEC coverage” to at least 95% of its full-time employees, and is calculated at $2,880 per FT employee LESS THE FIRST 30 FULL-TIME EMPLOYEES (the first 30 penalty free is important to employers who are “large” but have many part-time employees). The “B” penalty is calculated at $4,320 per each FT employee who is offered MEC coverage that is not-affordable or does not meet “minimum value” quality standards. The “B” penalty is higher per employee BUT is only imposed on FT employees who obtained a subsidized personal health insurance policy from the ACA Marketplace—-the “A” penalty is imposed on ALL full-time employees IF only one FT employee obtains subsidized personal health insurance from an ACA exchange.
WHO IS A FULL-TIME EMPLOYEE AND WHY IS THE DEFINITION IMPORTANT?
A full-time employee is an employee who is hired to work at least 30 hours per week OR is an employee who initially is offered “variable work hours per week” and after 52 weeks has worked at least 1,560 hours. ACA does not require any offer of insurance to part-time employees – they are only relevant to ACA for calcultating FTE’s. Insurance requirements for variable hour employees (those hired as part-time with variable work schedules) are determined after a “lookback period” of generally 12 months. If the employee has worked an average of 30+ hours per week during the lookback period, insurance must be offered at the end of the measurement period. Employers with many variable hour employees would be wise to employ an “hour tracking system” (ACA software) to identify full-time employees and track MEC insurance offers after the “initial measurement period.”
WORKING WITH BENEFITS BROKERS/CONSULTANTS TO MANAGE ACA COMPLIANCE
All employers should determine IF they are “applicable large employers” as defined in the ACA statute. Once an employer identifies it is an ALE (generally with the help of ACA consultants, to include AccuPay), they need to determine their ACA strategy – whether to “pay or play.” Potential penalties for both ACA reporting and failure to offer insurance, verses projected costs of offering at least MEC insurance should all be considered. IT IS VERY IMPORTANT THAT THE ALE WORK WITH A BENEFITS CONSULTANT WHO UNDERSTANDS HOW ACA WORKS AND HOW TO ANALYZE THE PROJECTED COSTS OF INSURANCE COVERAGES AND IRS PENALTIES. AccuPay works with several brokers who understand the ACA law, and who can also identify the objectives of the employer.
HOW CAN ACCUPAY HELP YOU UNDERSTAND IF YOU ARE A LARGE EMPLOYER AND WHAT YOUR ACA REQUIREMENTS ARE?
AccuPay’s team of experts can certainly help you calculate your monthly average “FTE’s,” which is the needed calculation to determine IF you are an ALE. We offer ACA hour tracking services and annual ACA reporting services to 100+ “large employers,” and have been doing so for many years now. Finally, we can help ALE’s work with their benefits consultants to develop a plan to either offer insurance to minimize IRS penalties, or to simply not offer any insurance based on having below 30 full-time employees. We have an ACA “team” of subject matter experts who help clients with all aspects of ACA compliance, always in collaboration with your benefits broker/advisor.
THE WORST THING IS TO BURY YOUR HEAD/DO NOTHING
The IRS has databases to find “applicable large employers” and send out letters asking why they have not filed. The IRS also reviews ACA annual filings and sends out 226-J letters which propose penalties, oftentimes not correct, with some approaching a million dollars! AccuPay’s objective is to educate our clients about how ACA works so each employer can make wise decisions on how they choose to manage their ACA requirements as a large employer. We do believe that the IRS will become increasingly active as to ACA compliance now that the pandemic is over, ERC tax credits are winding down, and, in general, the IRS will have more time to devote to ACA compliance—the IRS has indicated so themselves!
Feel free to reach out to your dedicated payroll specialist or to me directly – Larry Shaub at larry@accupay.com. You may also wish to review other articles regarding ACA on our blog.
This PayDay is for educational purposes only and does not constitute tax and/or legal advice. Any links to external resources are for educational purposes only. AccuPay is not affiliated with nor receives any renumeration from any outside sources. Please consult with your tax and/or legal advisor before applying any suggestions made here or through external links.