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Over 100 Full-Time Employees -- Count Again

On February 10, 2014, the IRS released final regulations on the Affordable Care Act's (ACA) employer "shared responsibility" provisions, also known as the "pay-or-play" mandate.  The final regulations provide significant transition relief to smaller applicable large employers i.e., those with 50-99 full-time employees, including full-time equivalents (FTEs). テモ Prior to the final regulations release, employers that employed between 50 and 99 full-time equivalents were required to begin complying with the pay-or-play mandate in 2015, just like all other major employers. テモ In the final regulations the IRS granted a brief but welcome reprieve to employers employing 50 to 99 FTEs. These small employers will not be subject to the pay-or-play rules until 2016.

In the final regulations, the Internal Revenue Service (IRS) delayed until 2016 the application of the pay-or-play mandate for those employers with 99 or fewer FTEs.テモ  Employers in the 50-99 FTE range will need to certify eligibility for this transition relief and must meet other requirements, including not reducing the employer's workforce to qualify for transition relief and maintaining previously-offered coverage.

But what of those with just over 100 FTEs? Many of themテモ assume that they will have to offer insurance in 2015 or be subject to the pay-or-play penalty.Is there any relief for them?テモ  The answer is:テモ  maybe, especially if a significant portion of their workforce consists of part-time employees (i.e., < 30 hours per week).

Before an employer that is within shouting distance of 100 FTEs decides it must offer insurance in 2015 to avoid the pay-or-play penalties, it should do some math, particularly if it employs a significant number of part-time employees.テモ  Because of the permitted reduction in the number of full-time employees counted for purposes of the "no insurance offered" penalty, the employer might find that, even if it doesn't offer insurance, it might just avoid pay-or-play penalties in 2015 nevertheless.

Consider this example: 

Sara's Coffee House employs, on average, 133 FTEs every month during 2014.テモ  Sara's correctly assumes that because they had, on average, 100 or more FTEs in 2014, they are subject to the ACA for 2015.テモ  Sara's also assumes that in order to avoid potential penalties in 2015 they will have to offer insurance to all of their employees.テモ  A closer review of their numbers, however, reveals that even if Sara's fails to offer insurance to 70% of its full-time employees, it can still avoid any pay-or-play penalties in 2015. テモ Employers with just over 100 FTEs that do not offer insurance broadly to their employees may still be subject to the pay-or-play mandate in 2015, but may escape the penalty because of another important (but little reported) transition relief rule included in the final regulations.テモ  As those familiar with the "no insurance offered" penalty know, those employers that fail to offer any insurance to at least 95% of their full-time employees (and their children) will potentially be subject to an annual penalty equal to $2,000 multiplied by all of the employer's full time employees, reduced by the first 3. In the final regulations, the IRS increased this "reduction factor" in the calculation from 30 to 80 for 2015. The increased reduction factor will mean that employers with over 100 FTEs with a significant number of part-time employees may well join those with under 100 FTE in avoiding any pay-or-play penalty in 2015.

Seventy-nine of Sara's employees are actual full-time employees.テモ  They work 40 hours a week every week.テモ  The remaining 54 FTEs are part time employees because they do not work an average of 30 hours per week or 130 hours per month.テモ  (They number 54 FTEs when their part-time hours are added together and divided by 120 each month, as the ACA requires.)

If Sara's fails to offer insurance and one of its full-time employees receives subsidized coverage on the exchange, however, the penalty that will be assessed against Sara's is ZERO.テモ  Why? Because the reduction factor (80 for 2015) exceeds Sara's total number of full-time employees (79).  As long as Sara's continues to employ less than 80 full-time employees, they will not be subject to any pay-or-play penalties in 2015.

Employers with different locations operating under different EIN's should remember that the reduction factor is prorated across the employer's "controlled group," so care should be taken in doing the math at each location.テモ 

For example, assume Sara's operates five coffee houses, each of which files its own tax returns using a separate EIN.テモ  Sara's flagship store, Store #1, is also a bakery and so it employs the greatest number of full-time employees.テモ  The 79 full-time employees are allocated across the stores as follows:

Store #

Full-Time Employees

1

42

2

10

3

10

4

9

5

8

Total:

79

Note:テモ  The 80 full-time employee reduction factor is prorated across the controlled group, with each store being allocated a reduction based on the percentage its full-time employees bears to all of Sara's full-time employees.テモ  For example, in the above example 42 is 53% of 79, so a reduction factor of 43 (53% of 80, rounded up to the nearest whole number) is allocated to Store 1.

Employers within shouting distance of 99 FTEs in 2014 should do the math and factor in the higher reduction factor of 80 before deciding they have to offer insurance in 2015.



[1] 70% for 2015.

Posted March 26, 2014

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