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Patient Protection and Affordable Care Act: Do you know how to count your employees?

December 3, 2013

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Although the IRS is encouraging large employers to start complying with information-reporting requirements for the Patient Protection and Affordable Care Act’s shared responsibility provisions in 2014, compliance is strictly voluntary. The information reporting requirements and penalty assessment for not providing sufficient health care coverage will be in full effect beginning Jan. 1, 2015. Counting full-time employees correctly is something all plan sponsors need to understand.

What PPACA requires

Under the health care act’s shared responsibility provisions, large employers (generally those that have 50 or more full-time employees) must offer affordable minimum essential health care coverage to at least 95% of their full-time employees and their dependents or potentially face a penalty. Coverage that costs an employee more than 9.5% of his or her gross household income generally isn’t considered affordable.

Also, the plan must pay at least 60% of covered expenses or it isn’t considered to be of “minimum value” and thus doesn’t provide minimum essential coverage.

Determining large employer status

A large employer is one with at least 50 full-time employees, or a combination of full-time and part-time employees that’s “equivalent” to at least 50 full-time employees. Large employer status is determined by calculating full-time equivalent employees (FTEs) and adding that number to the total number of actual full-time employees.

The health care act defines a full-time employee as an employee who works an average of at least 30 hours per week. Under the law, employers must credit paid time off to the employee as hours of service, and can’t use FMLA leave and other specific types of leaves of absence to reduce an employee’s average hours of service.

So how do you calculate FTEs? First, for each month total the monthly hours worked by all employees who worked less than 30 hours per week (excluding seasonal employees who work less than 120 days per year). Next, divide that number by 120. Add this result to the number of full-time employees. Then add the total from each month together and divided by 12. If the total is 50 or more, the shared responsibility provisions apply. The IRS provides safe harbor methods that employers can use to determine which employees are full-time employees. IRS Notice 2012-58 contains the details.

Educational organizations must calculate their average hours worked regardless of any summer break. Also, the IRS won’t count hours of service related to employment outside the United States.

Seasonal and part-time employees

In some situations, employers don’t know if an employee will work at least 30 hours per week. For example, it’s difficult to determine the number of hours newly hired seasonal or variable-hour employees will work in a given week.

IRS Notice 2012-58 clarifies how to handle these types of employees. Basically, an employer may use an initial measurement period of three to 12 months to determine if a newly hired seasonal or variable-hour employee has worked at least 30 hours per week. The standard measurement uses the same concept; however, it’s used for ongoing seasonal and variable-hour employees.

If an employee does in fact work at least 30 hours per week during the initial or standard measurement period, the employer must offer the employee and his or her dependents affordable minimum health care coverage for the duration of a “stability period.” The stability period cannot be less than the initial or standard measurement periods and cannot be less than six months.

Make it count

It’s crucial for employers to understand the new law, how it will affect their organizations and employees, and what the associated penalties are for failure to be in compliance. (See the sidebar “Shared responsibility penalties.”) To avoid these penalties, make sure you’re accurately counting your full-time employees by Jan. 1, 2015.

Shared responsibility penalties

The Patient Protection and Affordable Care Act will impose penalties — known as shared responsibility penalties — on certain large employers that fail to offer their full-time employees health care coverage or who offer health care coverage that doesn’t meet the minimum value and affordability standards. The IRS will enforce the penalties by reviewing the information reporting provided by large employers and determining whether any full-time employees received a premium tax credit or a cost-sharing reduction associated with purchasing health care coverage on a health care exchange.

If just one full-time employee received a tax credit or cost-sharing reduction, the IRS will assess a penalty for each month the large employer fails to provide coverage that satisfies the health care act’s employer shared responsibility standards.
For more information please contact QPAC at [email protected]

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

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