Are You Subject to the Employer Mandate in 2014?

Starting in 2014, employers (other than exempt employers) must provide affordable health coverage to their staff or pay a penalty. This is called the employer mandate (described as a "play-or-pay" model) and is a key feature of the Affordable Care Act. While the threshold for being subject to the mandate -- having more than 50 full-time employees -- sounds simple, determining whether it applies is rather complex. Here are some of the details you need to know in order to determine whether you'll be subject to the employer mandate in 2014.

Adding up full-time employees
It's not a simple body count to know whether you have more than 50 full-time employees. This is because part-timers can add up to full-time equivalent employees (FTEs). A combination of employees working 120 hours per month (around 30 hours per week) counts as one employee. This has led to the term "29ers," who are employees who do not work 30 hours and, so, are not treated as full-time employees on their own. However, their hours do matter, as you'll see from the calculation below.

The determination of payroll size is made year by year, and is based on payroll for the prior year, called the look-back period. For example, your 2013 payroll information is used to determine whether you are subject to the employer mandate in 2014. You must average the number of employees over the months to find your payroll numbers for the employer mandate. The look-back period is the full 12 months, or at your option, any period of six consecutive months.

First tally the number of full-time employees (those working about 30 hours or more).
Then figure full-time equivalent employees:

  • Step 1:  Figure the aggregate number of hours of service (but not more than 120 hours of service for any employee) for all employees who were not employed on average at least 30 hours of service per week for that month.
  • Step 2:  Divide the total hours of service in Step 1 by 120. This is the number of FTEs for the calendar month.

In determining the number of FTEs for each calendar month, fractions are taken into account in the calculation, but the final FTE number must be a whole number. For example, in one calendar month, employees who were not employed on average for at least 30 hours of service per week have a total of 1,260 hours of service. In this situation there would be 10.5 FTEs for that month (1,260 divided by 120). In addition, there are 12 full-time employees. The company is treated as having 22 FTEs; the fraction is disregarded in the final count.

Off-time counts. In figuring the hours worked, include any paid leave for vacation, sick days, personal days, and maternity leave. Do not count unpaid time off.

Seasonal businesses. You don't have to be in retail or agriculture to have a seasonal business. As long as you are seasonal, there's a special rule to follow: If your workforce exceeds 50 FTEs for 120 days or fewer during a calendar year, and the employees in excess of 50 employed during that same period were seasonal workers, you are not a large employer subject to the employer mandate.

Controlled businesses. Can business owners avoid the employer mandate by splitting up companies so that each has no more than 50 FTEs? Unfortunately, no. Controlled groups of corporations and unincorporated businesses with a certain level of common ownership are treated as a single business for the purposes of the employer mandate. Interestingly, the definitions of controlled groups of corporations and businesses under common control are the same tax-law definitions used for qualified retirement plans. In addition, affiliated groups in service organizations (e.g., accounting firms; third-party administrators) are also treated as a single entity when there is some common ownership (it seems to be a 10% threshold).

Conclusion
Still confused? You're not alone. If you have doubts about whether your payroll subjects you to employer mandate, ask your accountant to run the numbers.

To find ways of staying below the threshold for being treated as a large employer, see my article on "Staying Small."

Find more information about the employer mandate here.

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