January 16, 2013
The ramifications of health care reform for business owners are coming into focus as regulators float new rules to govern employer-sponsored coverage.
- Lost in the political fervor over the fiscal cliff, the Internal Revenue Service recently proposed new regulations to govern what has been dubbed the “employer mandate” section of the Affordable Care Act. The provision, which takes effect next year, requires companies with 50 or more employees to either provide adequate and affordable coverage to their workers or pay tax penalties.
But just how are those 50 to be counted?
Business owners have been waiting to find out how part-time and seasonal employees will count toward staff totals, how owners of more than one business are supposed to tally their workers, and of course, exactly how steep the penalties will be for failing to provide coverage.
The IRS addresses several of those issues with its newly proposed regulations. Here’s a look at what we now know about the employer health care requirements, as well as three key questions that remain unanswered.
Included in the proposed rules
A formula for calculating full-time equivalents: The health care law set the threshold for large-employer penalties at 50 full-time employees and full-time equivalents, but left the definition of those terms up to the IRS.
- The agency has proposed counting all employees who work an average of 30 hours per week as full-time workers and calculating full-time equivalents by adding up the total number of hours worked by part-time employees each month and dividing by 120. Thus, a company with 45 full-time employees and eight part-timers who each work 85 hours per month (about 20 hours each per week) would be subject the large-employer coverage mandate (5.66 full-time equivalents + 45 full-time employees = 50.66 employees).
A slim margin-of-error for no-coverage penalty: The law states that a no-coverage penalty shall apply to any eligible large company that “fails to offer [coverage] to its full-time employees,” and the penalty has been pegged at $166.67 per month multiplied by the number of full-time employees, excluding the first 30. By that formula, a firm with 51 full-timers that doesn’t provide coverage would generally pay $3,500 per month (21 X $166.67).
But while that language granted regulators permission to penalize large firms that do not immediately provide benefits to each and every full-time employee, the IRS has granted some leniency. The new regulations would only enforce the non-coverage penalty for employers who fail to offer coverage to more than 5 percent of their employees (or five workers, whichever is larger).
- The inclusion of paid-leave hours: But what about paid vacation, holidays or extended leaves—do those hours count toward monthly totals for each employee?
This was a pressing question for many business owners, and most of them won’t like the answer. Regulators have suggested that hours used to determine full-time status will include hours worked and hours for which employees are entitled to compensation even if no work is performed. That means time spent away for paid vacation, illness, maternity leave and even jury duty can push workers over the threshold for full-time benefits.
- A transition rule for determining employer-size status: Business owners must make their own large- or small-employer determination on an annual basis by counting the number of full-time employees and equivalents they had during each month of the past calendar year.
But for the first year, to ease the transition, regulators have included a provision that allows them to count their employees for any six-month period in 2013 to determine their size status for 2014. The rules also delay the penalty for failing to provide coverage to employees’ dependents until 2015 so long as large employers that don’t yet offer those benefits take steps toward implementing them by 2015.
- A delayed start for non-calendar year plans: The law states that the employer mandate provisions will take effect on January 1, 2014, which left business owners with fiscal-year (rather than calendar-year) health care plans wondering whether they would be held to that start date (which may fall right in the middle of their current plan) or permitted to wait until the start of their 2014 fiscal year. The proposed regulations grant them that break, noting that large businesses will not be subject to penalties until the start of their plan year for 2014.
Still up in the air
What constitutes a controlling interest in a business? The language in these latest proposals remains vague for owners of multiple businesses and part-owners of a single business. For example, if a pair of business partners share ownership of two companies, each taking a two-thirds majority stake in one firm and one-third ownership of the other, the regulations do not specify whether they will each be forced to count only one entity’s employees toward their respective totals or whether they will both count all workers.
What constitutes a seasonal employee?
The regulations leave the term “seasonal employee” open to interpretation when calculating their contribution to a company’s size status and their eligibility for health benefits. In one case, the regulations refer to definitions of “seasonal employee” set by the Labor Department, but later, regulators state that through at least the end of 2014, employers will be responsible for using a “reasonable good faith interpretation” of the term to determine which of their workers should be considered seasonal.
What constitutes adequate and affordable care? While the IRS has started to clarify the tax penalty side of the health reform equation, plenty of large employers are still waiting for the Department of Health and Human Services to define the law’s essential health benefits package — in other words, they haven’t yet been told what type of medical and health-related expenses their plans must cover for full-time employees. Until then, projecting future health costs for many businesses remains difficult.
*Modified from a Washington Post article