The Agenda
How small-business issues are shaping politics and policy.
Today’s post, another in our series attempting to answer lingering questions about the Affordable Care Act’s impact on small businesses, goes to one of the fundamental issues the law raises for employers: the responsibility to offer health insurance to workers or face a penalty. The employer mandate, as it’s known, applies to companies with at least 50 employees. Originally, it was supposed to take effect at the beginning of this year.
Last year, however, the administration put off enforcing the mandate until 2015. By last spring, the mandate, staunchly opposed by most Republicans, had lost the support of some Democrats as well. And in April, a former Obama administration spokesman predicted that the employer mandate “will be one of the first things to go.”
So the first question for employers is, Will the mandate actually take effect next year? And the answer is: Not for companies with fewer than 100 employees.
When the administration announced the mandate’s final regulations in February, it pushed back enforcement for businesses with fewer than 100 employees until 2016, so long as those companies meet certain requirements. But there’s been no word of further delays for companies with 100 or more workers, and with just two and a half months to go until 2015, these businesses probably should not count on one.
And even businesses with 50 to 99 employees will have to undertake extensive reporting on mandate compliance with the Internal Revenue Service for 2015, according to Seth T. Perretta, a health and tax lawyer with the Groom Law Group in Washington — even if those companies will not face a penalty for failing to offer insurance.
Thus, the next question: Assuming the law eventually takes effect as written, how will a business determine whether it is subject to the mandate?
As noted, a business is subject to the law — meaning it is an “applicable large employer,” in the words of the statute — when it has the equivalent of 50 full-time employees. Under the terms of the law, for the purposes of determining whether a business is an applicable large employer, full-time means at least 30 hours a week, or 120 hours a month. (The regulations, and the statute itself, seem to suggest that the weekly number is the controlling definition, but an I.R.S. official indicated in an obscure question-and-answer session that a full-time employee is one who works 120 hours a month. That figure, the official said, “is similar but not the same” as 30 hours a week.)
The I.R.S. is treating companies that share “common control” as a single business for the purposes of the employer mandate. Common control exists when the same five or fewer people own at least 80 percent of each affiliated business. Spouses and children are generally considered one owner. In other words, if three businesses under common control together have 50 full-time employees, each of the companies is obligated to offer insurance, even if none of the companies alone has 50 employees.
In any given year, a company will be subject to the mandate if it averages at least 50 full-time employees or the equivalent in each month of the previous year. A company that might be subject to the mandate in 2015, then, will have to track its employees for 2014. And once a company’s mandate status is determined, the company keeps it for the entire year, regardless of what happens to its headcount in that time.
When determining whether it is an applicable large employer, a company must count both full-time and part-time employees, who are aggregated as full-time equivalents. (A company does not have to offer insurance to part-time employees, however). Owners and leased employees do not count.
For each month, the business tallies its full-time employees. Then it adds up the hours worked by everyone else, to a maximum of 120 hours per employee, and then divides by 120 to get the full-time equivalency. Then it combines the full-time and full-time-equivalent employees to get the monthly total, adds up the 12 months, divides by 12 — and then rounds down to the nearest whole number. For 2015 — and only 2015 — a business can choose six consecutive months in 2014 to calculate an average headcount.
But wait — does the company have a seasonal workforce? If so, it may be able to take advantage of a convoluted exception. A company that reaches the large employer threshold on no more than 120 days, or four months, and then only reaches that threshold because of seasonal employees does not have to count them. I.R.S. guidance indicates that a company should look at discounting its seasonal employees only after it has crossed the 50-employee threshold (or the 100-employee threshold in 2015). But figuring out whether it has exceeded the threshold for 120 days or less is likely to be an entirely separate exercise from calculating the monthly average.
New companies do not get a pass on the mandate, even though they have no previous experience to determine their status. Rather, according to the I.R.S. regulations, a new business is an applicable large employer in its first calendar year “if the employer is reasonably expected to employ an average of at least 50 full-time employees” during that first year “and it actually employs an average of at least 50 full-time employees” on “business days during the calendar year.”
In other words, both a company’s initial expectations and actual experience matter in its first year, and the rule appears to allow for a determination after the fact. The rule “is incredibly ambiguous,” said Leigh Riley, a benefits lawyer at Foley & Lardner in Milwaukee. “But because it’s incredibly ambiguous, the I.R.S. will have a hard time enforcing a close case. So that employer who thought they needed 40 people and ended up with 65, the I.R.S. is not going to spend its resources going after that company.”
To determine its status in its second calendar year, a new company will average its full-time and equivalent employees in those months that it was operating in its first year.
The Affordable Care Act specifically contemplates that a company might change hands or reorganize. The I.R.S. has yet to write rules dealing with that situation, but Ms. Riley said, “you’re not going to get out of these rules by trying to reorganize — or it’s not going to be that easy.”
Got questions about how the Affordable Care Act will affect you? Post a comment below, or email them to robb.mandelbaum@nytimes.com.