Advising the Small Employer on Coverage and Credits
By Don A. Hernandez and Jennifer Tsao,1 Hernandez Schaedel & Associates, LLP, Pasadena, CA
The recently-enacted Patient Protection and Affordable Care Act (“PPACA”) contains a wide variety of reform provisions intended to make it more affordable for small businesses to offer healthcare coverage to their employees.2 For example, the legislation provides for the creation of Small Business Health Options Programs (“SHOP”) exchanges, which will be state-run purchasing pools where small employers can band together and utilize their greater purchasing power to buy health insurance at a lower cost. However, small businesses attempting to understand the legislation face a formidable challenge in that each section of the PPACA has its own definition of “small employer.” This one phrase variously refers to entities with anywhere between 1 to 100 employees. But the meaning is critical: whether a business will benefit from tax credits, be penalized for insufficient healthcare coverage, or be able to obtain coverage for its employees in the SHOP exchanges, all depends upon whether it falls into this group.
Tax Credit Eligibility (less than 25 employees). Effective immediately, small businesses are eligible to receive up to 35 percent of their contributions toward their employees’ health insurance premiums if they contribute at least 50 percent of the total premium cost3 or 50 percent of a benchmark premium determined by the Secretary of Health and Human Services for the small group market.4 In 2014 and beyond, eligible employers can receive a tax credit of up to 50 percent of their contribution for two years when they purchase coverage through the SHOP exchanges.5
Which entities are eligible for these credits? Small businesses with 10 full-time employees (FTEs) or less who earn an average annual wages of less than $25,000 are eligible for the full 35 percent credit.6 Small businesses of fewer than 25 FTEs and an average annual wage of less than $50,000 are eligible for tax credits on a sliding scale.7 The employer’s tax credit will be phased down as the employees get closer to 25 and the average wages near $50,000.8
A small employer is eligible for the tax credit if it has between 10 and 24 “full-time equivalent employees” with respect to any taxable year.9 This means that a small employer could receive the tax credit even if it has well over 25 employees. Regardless of whether the employees are full-time or part-time, the number of employees will be counted by dividing the total number of hours of service during the taxable year up to 2,080 hours per employee by 2,080 hours, then rounding down to a whole number.10 For example, four part-time employees who each worked 520 hours during the year only constitute one full-time equivalent employee.
On May 20, 2010, the Internal Revenue Service (IRS) issued new guidelines to clarify employee counting for the healthcare tax credit. IRS Notice 2010-44 specified that seasonal workers only count when if they work for an employer for more than 120 days during the tax year, and that sole proprietors, partners in a partnership, shareholders owning more that 2 percent of an S corporation, owners with more than 5 percent of other businesses, family members of these partners and owners do not count at all.11
Employer “Mandate” Exemption (less than 50 employees). Although small employers may qualify for tax credits if they provide insurance coverage for their employees, they are not actually required by the legislation to do so.12 Effective 2014, employers with at least 50 full-time equivalent employees, considered “large employers” for the purposes of PPACA section 1513, must ensure that its employees obtain minimum essential healthcare coverage or else pay a penalty.13 Small businesses with less than 50 FTEs will be exempt from the employer coverage “mandate”.14
How will the 50 FTEs threshold be counted? Unlike counting FTEs for tax credits benefits, which is based on the taxable year, counting FTEs for determining employer coverage exemption is calculated on a monthly basis. The term “full-time employee” under this section means an employee who works on average at least 30 hours of service per week or 120 hours per month. 15 Also unlike counting FTEs for tax credits, PPACA section 1513 does not expressly provide for partial counting of part-time employees; however, the definition of large employer has been amended to include both full- and part-time workers.16 Accordingly, multiple part-time workers will be counted as FTEs on a pro-rated basis over 120 hours per month. The number of FTEs, however, will not include seasonal workers unless the seasonal worker works for more than 120 days during the tax year.17
It is also worth noting that there has been no express treatment of temporary employees or employees of parent and/or subsidiary companies in determining a business’s employee count. Unlike other employment benefits such as family medical leave which may be triggered under joint employer and integrated employer theories, PPACA section 1513 merely states that all persons treated as a “single employer” under subsection (b), (c), (m), or (o) of section 414 of the Internal Revenue Code of 1986 shall be treated as one employer.
SHOP Exchanges (100 employees or less). Although a business may not be “small” enough to receive tax credits or “small” enough to be exempt under the employer responsibility policy, it may be “small” enough to participate in SHOP exchanges. B y 2014, states will be required to set up SHOP exchanges18 where small businesses will be able to pool together to buy insurance plans at a presumably lower cost.19
To qualify as a “small employer” for the small group market, a business must have between 1 and 100 employees in both a calendar year and a plan year.20 For the two years between January 1, 2014 and January 1, 2016, however, individual states may redefine the “small employer” as having 50 employees or less.21 Companies that outgrow the size limit will be grandfathered in.22 However, it is not clear whether part-time employees will be counted pro-rata, as with tax credits and coverage requirements, or as individual employees.
Conclusion. Small to mid-size clients seem to be more wary than enthusiastic about the healthcare reforms despite Congress’s intended benefits for small businesses. Dissecting when a small business is “small” under the various reform provisions may be a daunting task for many businesses whose workforce fluctuates on a constant basis. However, walking clients through the various scenarios will allow them to better project their future costs and encourage them to make informed healthcare purchasing decisions.23
|1||Hernandez Schaedel & Associates, LLP is a Southern California law firm based in Pasadena. Further information about the topic, the article’s authors and their law firm can be found at www.hernlaw.com.|
|2||Congressional Budget Office (CBO) and the staff of the Joint Committee, “ An Analysis of Health Insurance Premiums Under the Patient Protection and Affordable Care Act”, Nov 30, 2009, http://www.cbo.gov/ftpdocs/107xx/doc10781/11-30-Premiums.pdf.|
|3||PPACA § 1421 (as amended by HCEARA § 10105). Small tax-exempt employers are eligible to receive up to 25 percent of their premium contribution from 2010 to 2013. Id.|
|4||The Secretary of Health and Human Services has already determined the average premium for the small group market in each State for the 2010 taxable year. It is available on the IRS website at http://www.irs.gov/pub/irs-drop/rr-10-13.pdf.|
|5||PPACA § 1421 (as amended by The Health Care and Education Affordability Reconciliation Act of 2010 (HCEARA) § 10105). Small tax-exempt employers are eligible to receive up to 35 percent of their premium contribution from 2014 and beyond. Id.|
|8||The Small Business Majority provides a tax credit calculator on their website at http://www.smallbusinessmajority.org/tax-credit-calculator.|
|9||PPACA § 1421.|
|11||IRS Notice 2010-44.|
|12||PPACA § 1513, as amended by HCEARA § 10108.|
|13||Id. “Minimum essential coverage” has yet to be defined through the regulatory process. An employer with more than 50 full-time employees that does not offer coverage and has at least one full-time employee receiving a premium assistance tax credit will be required to make a penalty payment of $2,000 per full-time employee beyond the first 30 full-time employees. If the employer does offer coverage, but has at least one employee receiving a premium assistance tax credit (e.g. if the employer’s plan fails to provide minimum essential coverage), the employer will be required to make a penalty payment of $3,000 per employee receiving a credit or $2000 for each full-time employee beyond the first 30, whichever is less. Id.|
|15||PPACA § 1513.|
|16||PPACA § 1513; amended by HCEARA § 10106 and renumbered PPACA § 1003.|
|17||PPACA § 1513.|
|18||PPACA § 1311(b).|
|19||See CBO and the staff of the Joint Committee, “ An Analysis of Health Insurance Premiums Under the Patient Protection and Affordable Care Act”, Nov 30, 2009, http://www.cbo.gov/ftpdocs/107xx/doc10781/11-30-Premiums.pdf (forecasting that the exchanges will bring down premiums by as much as 4 percent for small employers).|
|20||PPACA § 1304(b).|
|23||Good forecasting may also help client plan their employment needs and discourage clients hovering above the 25- and 50-employee thresholds from unlawfully discharging the “extra” employees. PPACA § 1558 amends the Fair Labor Standards Act to ensure that no employer discharges or in any manner discriminates against an employee with respect to his or her compensation, terms, conditions or other privileges of employment because the employee has received a premium tax credit, has provided or caused to be provided information relating to the violation of Title I, has testified or is about to testify about such violation, has assisted or is about to assist in such a proceeding, or has objected to or refused to participate in an activity the employee reasonably believes to be in violation of Title I.|