When it comes to the Affordable Care Act (aka ACA, "Obamacare"), the most common question asked is whether
or not a business will be subject to a penalty under their current management of employee health insurance. The following
flowchart provides a quick and easy
determination (click here
for a larger version in a PDF):
We start with the basis that the penalty only kicks in for large employers. A large employer is defined as one having
greater than 50 Full-time equivalent (FTE) employees. What is a Full-time equivalent?
for the official IRS definition.
Generally speaking, an FTE is determined by counting any employee that works on average of 30+ hours per week as 1. Then,
add up the hours worked by an employee who works less than 30 hours per week and dividing this total by 30. Add those two
totals together and that is your FTE. Of course there are many exceptions and considerations, so be sure you read the IRS
publication we've linked you to in the previous paragraph.
Once a business is determined to be large there are two quick ways out
of a being penalized.
...If no full-time employee is in an exchange and receiving
a premium credit, then no matter what the size of the employer, there would not be a penalty imposed. This provision is found
in §4980H of the Internal Revenue Code.
...If the employer has less than 30 full-time employees (not
to be confused with Full-time equivalent), then there would not be any penalty. There is no penalty imposed on employees not
classified as full-time.
If the business has not found a way out of a penalty at this point, and adequate* employee health insurance is not provided,
then the subject penalty is $2,000 annually for each full-time employee in excess of 30 full-time employees. The penalty
is actually determined on a month by month basis at the rate of 1/12th of the $2,000 annual amount.
* Coverage is considered adequate if the plan’s actuarial value (i.e., the share of the total allowed costs that the plan
is expected to cover) is at least 60%. The insurance must also be available to the employee’s dependent, which is defined
as a child that has not attained the age 26 (a spouse is not considered a dependent.)
If the business does provide employee insurance then the "Affordable" part of the Act comes into play. Under the ACA,
coverage is affordable to a particular employee if the employee’s required contribution to the plan does not exceed 9.56% of the
employee’s household income for the taxable year. As an employer is not able to determine household income of an employee, a
provision has been made that the employees W-2 Box 1 income would be used to determine affordability. The affordability test
is based on the deduction attributable to employee only coverage. If any deduction is made for spouse and/or dependents, then that
would be excluded from this affordability test.
An employer failing the affordability test would be subject to a penalty calculated the lesser of: $2,000 x (# of full-time employees
less 30) OR $3,000 x (# of full-time employees who receive credits for exchange coverage). This penalty is determined on a monthly
basis by performing this test and taking 1/12th of the respective amounts above.
For more information on this subject, consider visiting either of the following pages: