Employers have heard a lot about the Affordable Care Act (ACA) over the past several years. It’s easy to get lost in all the media coverage and details, but don’t ignore a huge potential tax under the ACA. If you don’t understand the tax, you may be surprised when you get a tax bill from the IRS.
Starting in 2016, a nondeductible excise tax will be assessed on employers that have 50 or more full-time and full-time equivalent employees and don’t offer health care coverage to at least 95% of their full-time employees (i.e., employees who work an average of 30 or more hours per week). An employer that slips below the 95% threshold will be assessed the full tax, even if the organization offers coverage to the vast majority of full-time employees. The tax is significant, amounting to $2,000 per year per full-time employee, so you need to understand how it works and how your company could become subject to it.
What you need to know
Many employers think they offer coverage to all of their full-time employees, so this tax couldn’t possibly apply to them. Unfortunately, they could be wrong.
The IRS has said that in calculating the 95% threshold, you must count not only individuals you treat as employees, but also individuals who should be treated as employees under IRS rules. This means that you must count independent contractors as employees if they work on a full-time basis for you and IRS rules require them to be treated as your employees. If that isn’t scary enough, workers you secure through staffing agencies may also be your employees under IRS rules. Many employers use a significant number of independent contractors and staffing agency employees, and don’t offer them health care coverage. The excise tax exposure for these employers is significant, as the following list illustrates. Keep in mind that the amounts reflect the fact that the tax isn’t assessed for the first 30 employees.
For 100 full-time employees, the nondeductible excise tax per year is $140,000.
For 250 full-time employees, the nondeductible excise tax per year is $440,000.
For 500 full-time employees, the nondeductible excise tax per year is $940,000.
For 1,000 full-time employees, the nondeductible excise tax per year is $1.94 million.
For 5,000 full-time employees, the nondeductible excise tax per year is $9.94 million.
For 10,000 full-time employees, the nondeductible excise tax per year is $19.94 million.
Even if you get past the independent contractor and staffing agency worker hurdles, you could still unwittingly become subject to the tax. Employers must identify full-time employees in a way that aligns with the complex approach in the IRS’s regulations. It takes only a few employees, relative to the total number of employees, to cause an employer to slip below the 95% threshold and trigger the tax, as the following list illustrates:
For a total of 100 full-time employees, the 5% threshold equals five employees.
For a total of 250 full-time employees, the 5% threshold equals 12 employees.
For a total of 500 full-time employees, the 5% threshold equals 25 employees.
For a total of 1,000 full-time employees, the 5% threshold equals 50 employees.
For a total of 5,000 full-time employees, the 5% threshold equals 250 employees.
For a total of 10,000 employees, the 5% threshold equals 500 employees.
If you don’t properly apply the IRS’s rules for determining full-time employees, you could fail to identify some employees as full-time and therefore not offer them coverage. There could be enough of these employees to put you outside the range of the 5% threshold and trigger the tax.
You may qualify for an exemption but don’t count on it. The exemption applies if two conditions are satisfied:
No full-time employees decide to purchase health insurance through a state or federal exchange.
Among those employees, no employee’s household income is low enough to qualify for a premium tax credit.
Regardless of an employer’s size, if just one employee purchases insurance through an exchange and qualifies for the premium tax credit or cost subsidy, the exemption does not apply. Unless an employer pays employees such high wages that he or she is convinced that no employee will ever qualify for a premium tax credit, the employer should assume that the exemption won’t apply.
There’s too much at stake for you not to understand the IRS’s rules on independent contractors and staffing agency workers, how to accurately identify your full-time employees and how to determine whether new hires and rehires are full-time.
The risks associated with falling below the 95% threshold are too great to take chances. For 2015, employers get a break, because the threshold is only 70%. But starting in 2016 – just a few months away – the 95% requirement kicks in. The risks warrant your devoting the time to thoroughly understand the rules. A few details may make all the difference in reaching or falling below the 95% threshold. The time to get started is now.
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