Also Known as The “50 Employee Threshold”
After speaking with lots of small businesses who are just about to reach 50 employees, the main topic on their mind is the “Employer Mandate” under the Affordable Care Act (ACA) of 2010. If you are subject to these provisions, the IRS labels you as an Applicable Large Employer (ALE) and you may be subject to something called “employer shared responsibility provisions.” We did a little research, and tried to distill it down for you. Here are some things to know about approaching that business milestone, and please make any business decisions in conjunction with your CPA and licensed health insurance broker.
1. The 50 Full-Time Employee Rule
For businesses about to reach 50 employees, remember that the ACA applies to companies with 50 full time employees. If you employe knowledge workers, then almost everybody will be full time. If your workforce is distributed, diverse, and deskless you might have highly variable work hours per employee. Some might work 5 hours one week and 20 hours the next week. Others will consistently work 20-25 hours per week, and a typically smaller percentage will be considered full-time which is 30 hours per week or more.
The measuring stick for the IRS is the prior calendar year, so if you are growing rapidly during the current calendar year it’s not a worry until the end of the current year approaches.
Because of the wide variability of hours, and the large part-time nature of the deskless workforce, you’ll need to consider full-time equivalent employees, or FTE’s. Here’s how to calculate your headcount when you have part-time workers.
First separate your full-time employees (130 hours per month average) from your part-time employees (below 130 hours per month average). Let’s use an example where the company averaged 10 full-time employees last year. Next total all the hours for your part-time employees last calendar year. Let’s say it was 46,800 hours worked by 126 different employees.
Divide that 46,800 hours for the whole year by 12 months to get the average hours for each month. The result is 3,900 hours on average per month worked by all the part-time employees (in this example).
Next divide that 3,900 by 130 (the number of hours the ACA says is a full-time equivalent) and you get 30 full-time equivalent employees.
10 full time employees + 30 full time equivalents = 40 employees last calendar year
Even though you had 136 unique employees on the payroll throughout the previous calendar year, for the purposes of the ACA calculation you had 40 FTEs and wouldn’t be considered an Applicable Larger Employer (ALE), and therefore not subject to MEC. What if my number for the last calendar year was above 50?
2. Minimum Essential Coverage (MEC)
If you did cross the 50 FTE threshold last calendar year, then you’re subject to employer shared responsibility provisions this calendar year. This means you must provide Minimum Essential Coverage (MEC) or pay a penalty. So what is MEC? It’s a health insurance policy that provides at least one of the Essential Health Benefits as detailed by the Affordable Care Act (ACA). The word “minimum” is key here because this type of health insurance coverage is inexpensive, and truly is minimal in terms of the benefits it provides. You can acquire a health insurance policy that meets the MEC requirement from a licensed broker in your area.
The calculation for penalties is too much detail to include here, but is roughly between $215 and $315 per FTE per month. The cost of MEC is generally lower than that, plus not all of your employees will elect coverage. In general this means it should be less expensive to work with a broker and offer MEC than pay the penalties.
4. Can I Share the Cost of MEC with my Employees?
Our reading of the IRS regulations says yes, but the amount is small. The calculation is complex but only around 10% of the cost of the insurance premium can be shared with the employee.
5. Are Independent Contractors Included?
No. These mandates only apply to employees, not independent contractors. Could you make all your employees independent contractors (like Uber drivers) and avoid MEC? Well, yes it’s possible but there are additional tests the IRS uses to determine if someone that you think is an independent contractor is actually an employee. Think about an independent contractor like someone you are going to hire to paint a wall. You’re hiring them for a specific task, they use their own tools and equipment, and generally decide how and when to get the job done. If you think your deskless workforce might qualify as independent contractors, find an expert to help you understand the intricacies.
6. Just Because You Offer, Doesn’t Mean They Accept
Keep in mind the regulations, in general, say that if you have over 50 employees then you are an ALE and subject to the employer mandate and must offer at least MEC. But that doesn’t mean that everyone will enroll, and you only pay premiums for those that enroll. Making it even more less expensive than paying the penalty.
People have a wide variety of reasons for not wanting to enroll in your plan. Perhaps they are covered by a spouses plan, don’t trust the government with their information, participate in federal or state programs like Medicaid, have a family member who is a physician, or just plain can’t afford the insurance premiums or deductibles. We’ve seen a wide variety of reasons why people don’t elect to participate in insurance plans.
Many people start to worry about crossing the line here, but remember the test is for the prior calendar year. Even in a year of rapid growth, you still have the current calendar year to figure it out for the next calendar year. Also people with distributed, diverse, and deskless workforces will most likely need to use the FTE method to determine their employee count.