Two years of campaigning and an estimated $3 to $6 billion dollars in spending later, the makeup of the federal government is essentially the same as before the election, and there is little doubt the Affordable Care Act (ACA), also known as Obamacare, will survive. Small business owners and large employers alike need to start planning now for the upcoming health insurance provisions.
“For Dunkin’ Donuts franchise owners who have not been subject to state mandatory health laws before, it is crucial to understand the costs associated with the Affordable Care Act and to begin planning now,” said Daniel S. Field, a partner with Morgan, Brown & Joy, LLP, a Boston law firm specializing in representing employers in employment and labor law matters. “If you haven’t done so already, it is essential to begin shopping for health insurance options and to work closely with a tax professional to weigh plan costs and potential tax benefits, and to plan for the provisions of the ACA that become effective in 2013 and beyond.”
With numerous rules and potentially substantial penalties, the ACA presents a variety of challenges for employers. Two initial critical steps must be taken: The first entails examining the size and composition of an employer’s workforce. The second requires analyzing circumstances under which commonly-owned or commonly-controlled organizations must be considered a single “employer” for regulatory purposes. And throughout, it is vital to understand the terminology used in the law itself. (See page 22 for a Glossary of Terms.)
The automatic enrollment provision requires an employer with more than 200 full-time equivalent (FTE) employees to automatically enroll new full-time employees in one of the employer’s health benefits plans and to continue the enrollment of current employees. The rule also requires adequate notice and the opportunity for an employee to opt out.
The Department of Labor has delayed implementation of the automatic enrollment provision until further guidance and related regulations are issued, likely sometime in 2013 or later. While not yet in effect, however, it appears to be just a matter of time.
The Employer Mandate
Under the ACA, large employers must offer to full-time employees a health benefits plan that is both affordable and of minimum value, or pay tax penalties if at least one full-time employee obtains coverage from a Health Insurance Exchange (HIX) and receives a federal premium tax credit. Like the well-publicized individual mandate, under which nearly all Americans will be required to maintain health insurance or pay a tax penalty, the employer mandate goes into effect January 1, 2014.
Employers must offer the option for employees to cover their dependents, but the employer is not required to contribute to the cost for dependent coverage. The mandate applies to “large employers,” that is, those with 50 or more FTE employees.
How HIXs work
Each state must establish a fully certified and operational HIX by January 1, 2014. These exchanges are state-managed “marketplaces” where individuals and small businesses can shop for and purchase private health insurance. Federal premium tax credits and subsidies on HIX coverage will be available to individuals for whom employer-sponsored insurance does not meet the affordability standard.
The affordability standard requires that, for an employee whose household income falls between 100 percent and 400 percent of the federal poverty line, his/her contribution to the self-only premium (i.e., not the premium for family members/ dependents) must not exceed more than 9.5 percent of his/her household income. Since employers do not have the right to demand disclosure of actual household income, the government is providing a “safe harbor” exception: Employers who use employee W-2 income to calculate affordability will not be subject to fines for violating the standard. The minimum value standard means that a plan must cover at least 60 percent of allowable medical expenses.
“Health Insurance Exchanges will be the lynchpin of the employer mandate and will have a significant role in screening and identifying insurance carriers that meet the affordability standard,” Field said. “As we have already seen in Massachusetts, these exchanges will be a significant clearinghouse and informational resource for identifying compliant, credible coverage.”
Determining Automatic Enrollment or Large Employer Status
To help determine whether or not a franchise owner is an applicable large employer, the U.S. Department of the Treasury provides the following guidance for calculating FTE employees.
For each calendar month of the preceding calendar year, employers must:
1. Count the number of full-time employees, defined as those who work on average 30 hours per week per month.
2. Calculate the number of FTEs by aggregating the number of hours worked by part-time employees per month and dividing by 120. (For example, an employer with 20 part-time employees who each work an average of 96 hours per month yields 16 additional FTEs, i.e., [(20 x 96) ÷ 120].)
3. Add the number of full-time employees and calculated FTEs for each of the 12 months in the preceding calendar year.
4. Add the monthly totals and divide by 12. If the resulting number is 200 or more, the employer must follow the automatic enrollment rules. If the result is 50 or more, the employer is considered an applicable large employer under the employer mandate.
“As is clear from the regulatory guidance, the ‘large employer’ provisions of the ACA sweep up many smaller businesses that most of us would hardly think of as large employers,” said Field.
Calculating the Large Employer Penalty
Applicable large employers can be penalized for not offering coverage to full-time employees and their dependents at all, or for offering coverage that doesn’t meet the affordability or minimum value standards.
• Applicable large employers who do not offer coverage to full-time employees and their dependents will be subject to an annual tax of $2,000 times the total number of full-time employees* if at least one full-time employee receives a federal premium tax credit for HIX coverage. The ACA permits employers to subtract the first 30 employees when calculating the tax penalty for not offering coverage at all.
• Applicable large employers who offer coverage to full-time employees and their dependents that doesn’t meet the affordability or minimum value standards will be subject to an annual tax of $3,000 times the number of full-time employees* eligible for and receiving tax credits for HIX coverage. These taxes (or penalties) are capped at the employer’s potential taxes for not offering any coverage as described above.
*Refers to true full-time employees (those working on average 30 hours per week in any month), not FTEs
The Role of Common Ownership or Common Control
For employers with some level of common ownership or shared corporate control over multiple business entities, an essential piece of this puzzle is the determination whether or not some or all enterprises are considered a single employer under the ACA. An employer that is part of a group of businesses under the common control of small group of individuals, as defined by IRS tax code, may be treated as a single employer.
In a recent webinar, the Coalition of Franchisee Associations (CFA) advised, “The common control test said that if two or more businesses have the same five or fewer owners collectively owning at least 80% of the shares or interest, they shall be considered run by a single employer.” The CFA emphasized not taking this at face value, but consulting with one’s accountant and/or legal counsel for specific guidance.
“The common ownership rules that will control the determination of whether related business entities will be aggregated are particularly concerning for small, family businesses as they may trigger the ACA’s large employer obligations,” Field said.
Next Questions to Ask & Steps to Consider
“As we move into 2013, DDIFO leadership is looking to host several regional meetings throughout the year that will address the Affordable Care Act. We will advise members as soon as specific meeting dates and locations are confirmed,” said DDIFO Executive Director Ed Shanahan. “Our goal is to ensure our members are as informed as they can be with regard to the Act and its impact on our franchise community.”
In the meantime, here are some of the questions and steps Field suggests exploring sooner rather than later. Some of these include elements of the ACA not detailed in this article but still important to any employer’s business. Field recommends an employer bring such issues to his/her benefit broker or health care provider, accountant, attorney and/ or other professional advisors or associations.
Regarding provisions already in effect:
• Can your business take advantage of the small business tax credit?
• Is your business eligible for a Medical Loss Ratio (MLR) rebate from your insurance provider?
• Is your business large enough to be subject to the W-2 reporting requirement?
Regarding impending provisions:
• Is your business an applicable large employer?
• Should you consider any changes to hiring plans or work schedules?
• Does your business offer health insurance coverage?
If no, do you need to start doing so?
If yes, does it meet the affordable and minimum value standards?
If not, what should you do?
As evidenced by changes since the ACA first passed in 2010, it is by no means a static piece of legislation. There are many moving parts including additional rules, regulations and guidance still to be issued as the provisions are implemented and amended over time. It is vital that franchisees be vigilant and talk with their trusted advisors.
The information contained in this article is general in nature and offered for informational purposes only. It is not offered and should not be construed as legal advice.