We have begun the first year in which the play-or-pay penalty of IRS Code §4980H(a) is based on an offer of coverage to 95 percent of full-time employees. In 2015, the requirement was relaxed to 70 percent as transition relief. The sledgehammer penalty for missing this critical threshold is an annual fine of $2,000 for every full-time employee (the first 30 being excluded), even those who were in fact offered coverage. As an example, if an employer has 250 FT employees and is found to offer to 94 percent, it accrues a monthly non-deductible excise tax penalty of $36,666.66 (250 – 30 = 220 x $2,000 = $440,000 ÷12). This also is the first tax year that the play-or-pay mandate is applicable to mid-size employers (between 50 and 99 full-time EEs and full-time equivalents). We offer an outline on §4980H, and also there is an excellent reference center on the IRS web site at https://www.irs.gov/Affordable-Care-Act/Employers/Employer-Shared-Responsibility-Provisions.
Query: What will be the most common cause of employers running afoul of this draconian assessment?
Answer: Improper employee classification
There are four types of common law employees addressed in the §4980H regulations:
- Full-time employees
- Part-time employees
- Variable-hour employees
- Seasonal employees
The key to avoiding the play-or-pay penalty is proper classification of one’s employees. As we are seeing many employers sticking by their historic internal definitions of eligibility in conflict with §4980H(a), we offer a brief summary of who is and who is not a “full-time employee” for PPACA penalty purposes.
Full-Time Employees
Simply stated, a full-time employee is one who works at least 30 hours a week; or 130 hours a month as the underlying regulation puts it. Thus employees hired to work full-time hours are to be offered coverage based on the plan’s waiting period. To avoid penalty assessment, FT employees must be offered enrollment no later than the last day of the third full month following date of hire (this to accommodate plans with a 90-day wait and the instructions for Form 1095-C that state one should not report an offer of coverage unless such offer is good for every day of the month.) If an employee is hired to work part-time – less than 30 hours a week – such employees are not taken into account in calculating the potential penalty tax. All hours for which a person is paid are counted (inclusive of vacation time, sick time, paid holidays, etc.)
Example: Widget Manufacturing offers coverage to all full-time employees on the first day of the first full month following date of hire. Widget has two shifts: an eight hour a day shift, five days a week (40 hours a week) and a part-time shift of four hours a day (20 hours a week). Widget is in compliance with §4980H(a) because it offers coverage to 100 percent of its employees who work at least 30 hours a week.
Short-Term or Contract Employees
Some businesses hire people to perform services for a project that will only last a few months or at most a year or two. They have historically referred to these employees as “temporary,” “contract” or “short-term” internally and they were excluded from eligibility. However, if an IT firm for example hires 25 engineers to work on a new project for a client that will end in six months, those people are full-time employees and are counted in the 95 percent number; irrespective of what label the employer has assigned them. IRS explained in their preamble to the final §4980H regulations that a number of practitioners, commenting on the proposed regulations, had asked the Service to incorporate an allowance for short-term employees in the final regulations, but IRS elected not to do so; stating it saw too much room for abuse. Be careful about this!
Variable-Hour Employees
As a preface, the IRS is adamant in the preamble to the regulations that if you hire anyone with the expectation they will work full-time hours, they expect you to offer coverage and not play games with the variable-hour safe harbor. With that said, employers are allowed two ways to track full-time employment. The monthly method is used in the normal sense, whereby an employer measures eligibility month-to-month. In the example above, Widget Manufacturing would be using the monthly method. J. Smith Lanier uses the monthly method. But take the case of Cluckin’ Chickin restaurants. They have hourly wait staff, bartenders, and bus personnel and have absolutely no clue about how many shifts they will be able to give them during the year. In this circumstance the regulations offer big-time relief – the look-back method. The employer can track actual hours worked by variable-hour staff for up to 12 months to determine full-time status. While employees are in this measuring period, they do not count in assessing the play-or-pay penalty. But, watch out! We are seeing all manner of misconception and even abuse; such things as classifying all hourly employees as variable-hour because there is 100 percent turnover in that class every six months. Don’t lose sight of what IRS said: If you hire someone with the expectation they will work full-time hours, regardless of expected tenure, then the are full-time employees.
Seasonal Employees
Six Flags may hire thousands of full-time employees just to handle their summer months. Khol’s likewise may hire thousands of full-time employees just for the Christmas season. The IRS recognized that these are not intended to be permanent employees and employers should therefore not be required to offer coverage to them. Resultantly, they provide that seasonal employees can be treated just like variable-hour employees using the 12-month look-back method – even though they are hired with the expectation that they will be working full-time hours. As such, all will be in a non-assessment period while on the payroll. “Seasonal” is defined as one hired for six months or less during a calendar term that is generally accepted as a “season” within the applicable industry. But some caution here: If you have more than one season in the year and bring back the same people for each season, there must be a 13-week break in service in order that they be considered a new hire for the next season; otherwise you pick up their measurement period where it left off.
Leased Employees and Temps
The general rule of thumb is that for §4980H purposes, employees you procure through staffing agencies are not deemed full-time employees. Yet the waters can be murky. It can depend on who is the common law employer. In the vast majority of situations, the staffing company considers the leased employee to be its common law employee because it has hire-and-fire authority. Our staffing company clients all do so. As such the staffing company is responsible for ACA and you do not have to report these individuals as full-time employees.
Thus, a portion of the fee you pay to the staffing firm is for health insurance costs. Check with your staffing company to verify that they accept ACA responsibility. If this is in question, our retained ERISA law firm suggests that you go ahead and offer coverage just to be on the safe side (or maybe find another staffing company?).
Expatriates
Another rule of thumb: Only service hours rendered within the United States are counted towards full-time employment. Therefore, people you have working overseas are not counted as full-time employees. Parenthetically – and amazingly – while you do not have to offer coverage, there is no exemption in the individual mandate code §5000A for these folks if they are filing a U.S. tax return. To be on the safe side, verify with your CPA that these workers meet the tax code expatriate requirements as service performed “without the United States.”
In Conclusion: We and others have been warning of this zombie apocalypse for five years now, and it has finally arrived. While a small minority of employers will prefer to pay the $2,000 fine as opposed to offering coverage, the vast majority intend to comply with the 95 percent rule. In fact, most of our clients are actually offering to 100 percent of their full-time employees. Where employers will stub their toes will be due to failure to properly classify employees and thus miss some people who should be treated as full-timers. Two areas in particular we are seeing as potential problem areas are variable-hour employees and short-term hires. If there are any questions, or if you realize you may have already incurred penalties for January, consult your CPA and ERISA attorney post haste. (It may not have been an issue last year while we had the 70 percent threshold, but for 2016 you may not get by the 95 percent level.) IRS has indicated a willingness to work with employers who have made a good faith effort, so likely the best counsel you’ll receive from tax advisors is to go ahead and fix the problem in hopes that IRS will forgive any inadvertent mistakes.
Not everyone is an expert on health care reform. But the folks at J. Smith Lanier, one of our endorsed services providers, are. For this reason they created a publication called the Health Care Reform Alert. J. Smith Lanier has been providing these to its clients since 2010 when the bill was passed and now offers it to the members of ABA. It is J. Smith Lanier’s intention in the alerts to take the many pages generated by the Centers for Medicare and Medicaid Services, U.S. Department of Labor or Treasury and filter them down into terms that all can understand. For more information on how J. Smith Lanier can help your bank, contact Tom Younger at (256) 890-9027.
