It has been hard to avoid the buzz surrounding the Affordable Care Act (ACA) and its legislative roll-out these past few months. How exactly will a growing company, one that traces that fine line between “small employer” and “applicable large employer,” be affected? Should you be worried about the stiff penalties everyone keeps talking about?
Before we jump in, let's look at a few definitions:
- A small employer generally has fewer than 50 full-time employees, according to the IRS definition.
- An applicable large employer (ALE) is a company with at least 50 full-time employees. ALEs are subject to the Affordable Care Act’s employer mandate enacted on January 1, 2015.
- Minimum essential coverage (MEC) is the standard of coverage to be met under the ACA in order to avoid penalties. Employer-sponsored coverage includes group health insurance under a governmental plan, or a plan or coverage offered in the small or large group market within a state. Double-check the IRS site to ensure your coverage meets the MEC requirement.
There’s an interesting twist when it comes to the ACA’s employer mandate—the ACA's “pay or play” rules as the media calls them. Either companies play and offer required health coverage, or they pay up on penalties. But, while many employers must now document their health insurance offerings and send that information to the IRS come 2016, there is a company size that avoids ACA penalties altogether. And it’s right in the ballpark of your growing startup’s staff.
What Are These Penalties, Anyhow?
There are two penalties under the ACA that employers across all industries may be subject to. These penalty taxes fall under two specific sections of the ACA, section 4980H(a) and section 4980H(b). People call them penalty A and penalty B for short. The good news is companies can only be subject to one of them, not both.
- First, an employer is subject to the A penalty in 2015 if they do not offer at least minimum essential coverage to at least 70% of their employees.
- An employer is subject to the B penalty only if they are not subject to the A penalty and then one or more of their employees heads to the exchange, receives a subsidy, and you, the employer, are not protected by one of three safe harbors. That’s a longer way of saying your company’s health plan was not affordable or it did not offer minimum value.
An Example for Growing Startups
Let’s say you are an employer at a startup app in the city with 60 full-time employees and a number of part-time folks as well. Many companies in the tech space will find themselves in this situation; they have less than 80 full-time employees but more than 50, so the ACA still considers them a large employer—one that is subject to ACA reporting and 4980H taxes. Don’t fret. Startups can still find themselves in a good spot in 2015 regarding the 4980H penalty taxes.
Let’s say you don’t offer any health care at all. That means you find yourself at risk for the A penalty because you are not offering at least 70% of your employees minimum essential coverage.
Here’s a tip, and it explains why 80 employees is a bit of a magic number. When it comes to calculating the maximum amount you may owe under the A and B penalties, the following formula is used: 1/12 of $2,000 x all full-time employees (less the first 80). Notice that you’ll always multiply by the number of full-time employees minus the first 80. For the example company, 60 employees minus 80 is zero, meaning the company is not subject to the A penalty at all. But of course, in this scenario, your employees wouldn’t be too happy without any health care.
Now, many employers will decide to play by offering minimum essential coverage to at least 70% of their full-time employees. Some will even elect to offer coverage to their part-time employees for good measure. They will still face the B penalty—but the maximum amount those companies can owe is calculated using the same formula. So, any company with 50-80 employees that offers minimum essential coverage to 70% of their employees (avoiding the A penalty) will multiply the formula by zero, and thus never pay for the B penalty.
Here’s one final caveat. If you do get away with offering a plan that does not meet the B penalty’s requirements, i.e. it does not provide minimum value at an affordable price, and your worker accepts the plan, then the worker has just locked themselves out of receiving a subsidy from the exchange. That’s a raw deal for the employee: he or she may have been able to buy a better plan there.
The bottom line is your ACA penalty risk is low if you have 80 or less full-time employees at your startup. Of course, you still want to offer health care—and benefits in general—to keep your current employees happy, attract top new talent, and show all of your teams that you care. Just know, for the 2015 coverage year, you can make those beneficial choices without fear of these unexpected ACA penalties.