A Taxing Situation
It’s tax season (again). Every year, there are new tax laws to deal with. This year, business owners have been thrown a curve ball with the full implementation of the Affordable Care Act (ACA). An exhaustive treatment of the implications of the ACA for individual business owners can only be addressed by consulting professionals,such as certified public accountants or attorneys who specialize in tax law, and the suggestions below are not intended to serve as legal or financial advice. Instead, the intent is to provide a general guideline for business owners concerning the tax implications of the ACA to make completing federal and state tax returns as painless as possible for the 2014 tax filing season and beyond.
Avoiding the Non-Deductible Excise Penalty
Small employers with fewer than 50 full-time or full-time equivalent (FTE) workers are generally exempt from the requirements of the ACA. Large employers with 50 or more full-time or FTE workers must comply with the ACA as well as state-mandated healthcare-related requirements. Specifically, large employers must offer affordable healthcare coverage to at least 70 percent of full-time employees in 2015 and to at least 95 percent of full-time employees beginning in 2016. Under the ACA, affordable healthcare coverage cannot exceed 9.5 percent of a household’s annual income.
Large employers that fail to provide affordable health insurance for their full-time employees will be subject to a stiff, nondeductible excise penalty beginning in 2016. The penalty for providing no health insurance for employees is $2,000 times the total number of full-time equivalent, or FTE workers. The penalty for offering unaffordable healthcare coverage for employees is either $3,000 times the number of FTEs receiving subsidies through the healthcare exchange system or $2,000 times the total number of FTE’s, whichever is less, according to Michael Mojabi, Principal and Practice Leader for Human Capital Tax Services with Ryan, a tax services firm headquartered in Dallas with offices located worldwide.
The penalty is triggered if a single full-time employee of a noncompliant company receives a tax subsidy through the healthcare exchange system. But employers that offer adequate health care coverage may find themselves subject to the penalty as well, due to a lack of education among employees, Mojabi claimed.
“You’re going to want to do some PR for yourself. Let employees know the value of your coverage versus the exchanges,” he urged.
How Many Employees Does My Company Really Have?
An accurate assessment of the number of workers employed by a company is essential in determining what effect the ACA has for that company. While the answer may seem obvious, the inclusion of FTEs in calculating a company’s size complicates matters significantly, according to Mojabi.
“There is so much added administrative burden, especially with employers like small construction firms with 120 to 150 employees; some full-time, some part-time,” he said.
For the purposes of the ACA, full-time employees are those who average at least 30 hours per week for more than 120 days during the year. Part-time employees are those who worked for more than 120 days during the year, but who average less than 30 hours per week. The formula for calculating FTEs is to divide the total number of hours worked by part-time employees by 30 and add the result to the number of full-time employees. Seasonal employees who work 120 days or less during the year are not included in the calculation of FTEs. For 2015, employers may exclude up to 80 employees in calculating FTEs; the exclusion drops to 30 employees for 2016 and beyond, Mojabi explained.
Dealing with Present Realities and Looking to the Future
During the debate preceding the passing of the ACA, there was speculation that many employers would simply cut full-time workers to part-time status to avoid being subject to the requirement to supply health insurance coverage. But that hasn’t really occurred on a widespread basis, and isn’t likely to do so in the future. Why? For many companies, carrying out essential functions and adequately serving their clients and customers depends on attracting and maintaining a stable core of employees, according to Mojabi.
“On the surface, that may sound great. But in reality it’s such a difficult thing to do. Those people [employees] are full-time for a reason. They [employers] would have to look at the business impact of something like that,” he said.
A better strategy for 2015 and beyond for employers subject to ACA requirements is to generate an accurate employee tally – if they haven’t already done so. Employers should also determine whether they meet the ACA’s requirements for affordable health insurance coverage for their employees, according to Mojabi.
“The main impact [of the ACA] is with ensuring compliance. Employers need to ask if the cost of offering insurance outweighs the cost of not offering insurance,” he said.
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