by Larry Gearhardt, OSU Extension Field Specialist, Taxation
In March 2010, President Obama signed into law new health care reform. One part of the legislation is known as the Patient Protection and Affordable Care Act. Many of the provisions contained in the law become effective in 2013 and the law will be active beginning in 2014.
While the primary purpose of this reform is to mandate that all U.S. residents obtain health insurance coverage, the law creates a host of tax credits and penalties on taxpayers and employers for failure to do so. In addition, there are several new rules that were created to raise the necessary funds to do so.
This article focuses on the employer’s obligations, especially on agricultural employers that hire seasonal help.
AM I RESPONSIBLE TO PROVIDE HEALTH INSURANCE TO MY EMPLOYEES?
Beginning in 2014, “applicable large employers” must provide affordable health coverage that provides minimum essential coverage. An “applicable large employer” is an employer that employed 50 or more full-time employees (FT) and full-time equivalent (FTE) employees in the preceding tax year. A business that employed fewer than 50 FT and FTE employees in the preceding tax year is not subject to a penalty for failing to provide affordable health coverage to its employees. Applicable large employer status is determined based upon data from the prior year.
WHO ARE CONSIDERED EMPLOYEES?
A full-time employee (FT) is one that works on average at least 30 hours per week or at least 130 hours per calendar month. Full-time equivalent (FTE) employees are determined by adding together all of the hours of part-time employees in a month (with a maximum of 120 hours per employee) and dividing the total by 120.
In calculating FT and FTEs, “seasonal workers” are to be included pursuant to the number of hours they worked per week (part-time or full-time).
EXAMPLE: Fred Farmer has 27 full-time employees who each work 40 hours per week, and 30 part-time employees who each work 25 hours per week over a 4 week period. Fred Farmer has 52 FT and FTEs calculated as follows:
• 30 part-time employees X 25 hours X 4 weeks = 3,000 hours for the month
• 3,000 hours / 120 hours in a month = 25 FTEs
• 27 FT employees + 25 FTE employees = 52 total FT and FTEs
Repeat the above calculation for each of the 12 months in 2013. Add the total FT and FTEs for all 12 months and divide by 12 to get the average number of FT and FTEs per month over the prior year (in this case, 2013). If that average number is 50 or larger, the employer is an Applicable Large Employer that must provide health coverage to its full-time employees in the next year (2014).
THERE ARE EXCEPTIONS
For the purpose of calculating FTEs, the following are not included:
• Seasonal workers who work no more than 120 DAYS.
• Sole proprietors, partners, greater than 2% shareholders in an S-corporation or any greater than a 5% owner of any business.
• A family member or any member of the household who qualifies as a dependent.
A CLOSER LOOK AT SEASONAL WORKERS
If the employer exceeds 50 or more FT and FTEs during a 120 day period, or less, then any employee who performed seasonal labor for no more than those 120 days is not counted toward the total number of employees in those months. If the employer has any seasonal employee on the payroll after 120 days, and in that month the employer also has 50 or more FT and FTEs, the seasonal worker exception is not applicable.
EXAMPLE: Fred Farmer has 40 full-time employees from January – December, and 80 full-time seasonal employees from October – December. Fred Farmer has an average of 60 employees per month calculated as follows:
• 40 FT employees X 9 months (Jan – Sept) = 360
• 120 FT employees X 3 months (Oct – Dec) = 360
• 360 + 360 = 720 / 12 = 60 employees average per month
BUT, Fred actually only exceeded 50 employees for the 3 months that he employed seasonal workers and they would not be counted. Since the seasonal workers were employed for less than 120 days, Fred is not an Applicable Large Employer. Be aware that several government agencies administer the PPACA and not all have agreed on one definition of “seasonal worker.”
However, the IRS has stated that an employer can, at least through 2014, utilize its own reasonable definition of “seasonal” to determine an employee’s full-time status looking at the last 12-month period. For determining which employees must be offered health care coverage, H2-A foreign agricultural workers should be treated like other seasonal workers to determine full-time status.
PENALTY FOR NON-COMPLIANCE
For a penalty to apply to an employer, it must first be determined if the employer is an Applicable Large Employer. An Applicable Large Employer is subject to penalties levied by the IRS if:
1. He does not provide health insurance coverage or provides coverage that does not meet the minimum essential coverage requirements, OR
2. He provides health insurance coverage that is not affordable; AND
3. At least one of the employer’s full-time employees receives a tax credit or subsidy through a State Exchange.
First, if the employer does not provide health insurance or provides insurance that does not meet the “minimum essential coverage” standard, and at least one of the employer’s full-time employees receives a tax credit or subsidy through the State Exchange, then the employer is subject to a penalty of $2,000 for each of the employer’s full-time employees. HOWEVER, for the purpose of calculating the penalty, the first 30 employees are not counted.
EXAMPLE: Fred Farmer has 50 full-time employees and does not offer minimum essential coverage. One full-time employee obtains a subsidy through a State Exchange. The penalty is $40,000 (50 – 30 = 20 X $2,000).
Second, if the employer fails to provide affordable coverage (this subject will be covered in a later article) and an employee receives a tax credit or subsidy to purchase health insurance through a State Exchange, then the employer is subject to a penalty equal to the lesser of:
• $2,000 for each of the employer’s full-time employees, not counting the first 30, or
• $3,000 for each of the employer’s full-time employees that obtain a tax credit or subsidy through a State Exchange.
Example: Fred Farmer has 50 full-time employees and provides insurance that covers only 40% of the value of the benefits. Ten full-time employees obtain a tax credit through the State Exchange. Fred Farmer is subject to a penalty equal to the lesser of:
• $2,000 X 20 full-time employees (50 – 30) = $40,000, or
• $3,000 X 10 full-time employees obtaining tax credit = $30,000.
To avoid having the Affordable Care Act apply, an employer should not have 50 or more employees in any month during the year, or for those employers that have 50 or more employees in a month, make sure that the number of employees 50 or greater are employed for less than 120 days and that they are doing seasonal work. Employers that average close to 50 employees per month should closely monitor their labor usage to avoid triggering the requirement to provide health coverage.