Affordable Care Act Requirements for Small Businesses (What you Need to Know)
You had a dream to run your own business. After months or years of hemming and hawing, you became your own boss and founded a company. Now you’re starting to make a profit and hire some employees.
But there are rules to running a business. Local, state, and federal laws regulate how you run your company and treat your employees. There are wages to pay and taxes to file.
Owning a business isn’t just about selling a great product or providing a necessary service. No, there’s a “dark side” to running a company: minimum wage, 40-hour workweeks, safe environments, liabilities, and taxes.
“Whatever happened to, ‘Hey I have some apples, would you like to buy them?’ ‘Yes. Thank you’. That’s as complicated as it should be to open a business in this country.”Ron Swanson, performed by Nick Offerman in Parks and Recreation
Hiring, payroll, taxes, and benefits are foundational to any successful business, but they take time and energy away from doing the thing you started your small business to do.
We know the headaches and the hassles. And we also know that a solid business foundation will allow your business to grow and succeed. Whirks has provided top-notch back-office support to small businesses for nearly two decades. That’s why we wrote this article to walk you through the basics of an important piece of the puzzle – the Affordable Care Act.
In this article, we will explain the Affordable Care Act’s requirements for businesses with 50-plus full-time employees, how to determine if you have the minimum number of employees to require benefits, and any penalties you might incur for failing to meet these requirements.
What is the Affordable Care Act?
Congress approved the Patient Protection and Affordable Care Act (ACA) in 2010. The healthcare reform law intended to increase the accessibility of affordable healthcare. In addition to creating a Health Insurance Marketplace and removing pre-existing conditions as a reason to deny insurance, the law also mandated Americans obtain health insurance, and certain employers provide it.
Employers that MUST offer health insurance
The ACA mandates that employers with 50 or more full-time employees or full-time equivalent employees offer “minimum essential coverage” that provides “minimum value” to your employees and offer coverage to the full-time employees’ dependents. And yes, I will explain what the ACA means by minimum essential coverage below.
Under the ACA, a business with 50 or more full-time equivalent employees is an Applicable Large Employer. Applicable Large Employers (ALEs) are required to provide healthcare coverage to their employees.
What are full-time and full-time equivalent employees?
The IRS and the federal government will never win any awards for clarity or precision.
The ACA defines a full-time employee as someone working at least 30 hours per week or 130 hours per month. Easy enough!
Now it’s going to get a bit more complicated. Full-time equivalent employees (FTE) are a bundle of part-time employees. To determine your company’s number of full-time equivalent employees, you must add all the hours that part-time workers worked during one month, and then divide by 120.
The result is your FTE amount for the month, and this number must be added to your total of full-time employees to determine if you meet the 50 or more full-time employee threshold under the ACA. The 50-employee threshold covers a calendar year, so you’d need to do the math for each month and then determine your average monthly FTE to add to the number of full-time employees.
Here’s an example:
Patty’s Pizza Palace employs 25 full-time employees.
It also employs 45 part-time employees who worked a collective 4,000 in July.
4,000 divided by 120 = 33.3
So for July, Patty’s Pizza Palace had 58.3 FTEs.
If the company averages 50 or more FTEs per month, it must provide health insurance to its employees. Seasonal employees may or may not factor into your FTE count. If seasonal workers work less than 120 days for your business, you will not need to include them in your ACA FTE calculations.
Are there ACA requirements for businesses with less than 50 employees?
Employers with less than 50 full-time equivalent employees are not required to offer health insurance. But they are required to withhold and report an additional 0.9 percent on employee wages or compensation that exceeds $200,000, according to the IRS.
If these smaller employers provide self-insured health coverage to their employees, they could qualify for a tax credit if they meet IRS-specified conditions found here.
I have more than 50 employees. What type of benefits do I have to offer?
As mentioned above, employers with at least 50 full-time employees, also known as ALEs, must offer healthcare insurance that meets minimum essential coverage. Minimum essential coverage includes:
- Government-sponsored programs
- Eligible employer-sponsored plans
- Individual major medical plans
- Most Medicaid plans
For an employer-sponsored plan to provide “minimum value” to employees, it must cover at least 60 percent of the total allowed cost of benefits expected to be incurred under the plan. Need more details? The IRS explains in detail here.
Are there penalties for not providing health insurance?
The simple answer is Yes. And that is the only simple thing about employers who do not offer minimum essential coverage that is of minimum value to employees.
The ACA created the Employer Shared Responsibility Payment, which is essentially a penalty for failing to provide (at least once a year) at least 95 percent of your employees’ healthcare coverage that they can afford.
In the simplest terms, employers who fail to offer appropriate health insurance options could be fined up to $2,000 per employee per year. The IRS has made calculating this penalty more difficult than determining the speed of the Hogwarts Express. If you are a glutton for punishment, confusing, wordy IRS explanations can be found here.
Don’t be tempted to avoid penalties by reducing hours so you fall under the threshold of 50 full-time employees. If you decrease staff hours for any reason other than a legitimate one, you may be denied tax benefits and be subject to a 40 percent penalty for violations! (If you plan to reduce staff hours for justifiable, business reasons, like an economic downturn, it may be worth seeking professional guidance to make sure you’re compliant.)
Give the People What They Want
Whether you prefer The Kinks or The O’Jays, you should follow their wise advice of “Give the People What They Want.”
Having read and re-read the legislation, IRS guidance, and the Official Healthcare.gov guides, either make sure you have less than 50 full-time equivalent employees or offer healthcare insurance. The other options are bleak and convoluted.
You know how hard it is to run a small business. Countless healthcare coverage requirements will not make your life easier. Even though Whirks is chock-full of accountants and IRS whizzes, the Affordable Care Act and its many regulations are daunting. But it’s a mountain we have conquered, and one we would like to help you climb one step better every day.
Learn more about human capital management systems that help streamline ACA compliance and benefits administration.
When you are ready to push insurance premiums, IRS regulations, and payroll deductions off your plate, contact us to see how we can help.