The Affordable Care Act (ACA) has been the law of the land for more than a decade and has survived legal challenges from the Supreme Court as recently as last year. The aim of this law was to help lower the cost of quality healthcare for Americans through a shared responsibility between employers and the government. This law codified several important aspects of employer-sponsored health insurance, including what is considered affordable, a requirement to provide plans that cover 100% of certain preventative health services, and prohibiting the exclusion of individuals with pre-existing health conditions.
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Still, a lot of businesses continue to make compliance mistakes when it comes to the ACA. The IRS has been busy issuing costly penalties for several years. In this article, we’ll explain the differences in ACA compliance between large employers and smaller businesses and identify 10 ways that businesses can avoid expensive ACA compliance mistakes.
Is Your Business an Applicable Large Employer (ALE)?
The ACA requires Applicable Large Employers (ALEs) to offer affordable, employee-sponsored healthcare coverage to full-time employees or face noncompliance fines. The IRS states: “To be an ALE for a particular calendar year, an employer must have had an average of at least 50 full-time employees (including full-time-equivalent employees) during the preceding calendar year.”
If your business is an ALE, you must meet the requirements of Employer Shared Responsibility, or your business can be subjected to penalties. This is often referred to as the “Employer Mandate.”
Smaller Businesses and the ACA
If your business has fewer than 50 full-time or full-time equivalent (FTE) employees, you do not have to provide health insurance to your employees and you will not face ACA fines. However, your business could qualify for the Small Business Health Care Tax Credit if you do choose to provide health insurance.
The ACA gives the option for many small business owners and employees to obtain affordable health coverage through Healthcare.gov and state-based marketplaces. According to analysis by The Commonwealth Fund, “more than half of all ACA marketplace enrollees are small-business owners, self-employed individuals, or small-business employees.” Furthermore, the uninsured rate for small-business employees fell nearly 10% after the ACA became law.
Top 10 ACA Compliance Mistakes
All businesses should understand their opportunities and responsibilities under the ACA. Compliance mistakes can be costly. Here are 10 common errors to watch out for:
Assuming Your Small Business is Not an ALE
Although an ALE is a “large employer” according to the ACA rules, many business owners are of the opinion that 50 employees would not constitute a large business. It’s important to get this right, because ALEs have different ACA reporting requirements and can be subject to hefty compliance penalties.
Incorrectly Counting Full-Time and Full-Time Equivalent Employees
Do you think a full-time employee means a traditional 40-hour work week? Think again. Under the ACA, an employee is considered full-time if they work 30 hours per week or 130 hours (about 5 and a half days) per month.
Calculate your full-time equivalent employees (FTEs). For each month, mark down all of your part-time employees. Add up all the hours, (up to a maximum of 120 hours per month per part-time employee) and divide the total hours by 120. Those are your FTEs for each month.
Now add your full-time employees and FTEs for all 12 months and determine the monthly average. Companies with a monthly average of 50 or more are considered ALEs under the ACA guidelines.
Misclassification of Workers
It is imperative for businesses to correctly classify workers under the ACA. Make sure any independent contractors you hire are properly classified and not incorrectly labeled as employees. A mistake with independent contractors could mean that you thought your business was not an ALE when it really was.
An employer is not an ALE if the workforce only exceeds 50 FTEs for 120 days or fewer, provided that the employees (above 50 FTEs) were seasonal workers.
Inadequate Record-Keeping for Employment Periods
Employment periods are significant, because full-time and full-time equivalent employees are considered on a monthly basis. It’s essential that your business keeps careful records of employee hire dates, termination dates, and rehire dates.
Missing a Filing Due Date
Employers that do not file accurate ACA information returns by the filing deadlines can receive a failure to file penalty. The two forms that need to be filed are:
1094-C Transmittal of
Employer-Provided Health Insurance Offer and Coverage Information Returns
1095-C Employer-Provided Health Insurance Offer and Coverage
Forms 1095-C were due to applicable employees by March 2, 2022 with the exception of a few states who require them by the end of January. The penalty amount for missing a filing date varies based on how late you furnish the returns. If not more than 30 days later, the fine is $50 per return, then $100 per return for days 31 through August 1st.
After this period, the penalties increase substantially. After August 1, the penalty amount climbs to $280 per return. Additionally, if the IRS believes the employer intentionally disregards the filing responsibility, the penalty amount goes up to $570 per late return. That would leave a company with 100 employees with a $57,000 penalty!
Not Performing an Aggregated Employer Group Analysis
Sometimes multiple corporate entities are owned by a single organization. These individual business locations may be set up as separate legal entities with individual tax id numbers. An example would be multiple fast-food restaurants owned by a single franchisee.
How should these businesses count 50 FTEs for ACA? Is each entity considered a separate employer for the ACA or are they counted together? It depends, but multiple entities under the same common control group with the same ownership often have to add their employees together to determine if they exceed the threshold as an ALE.
Companies and business owners should undergo proactive planning to determine whether their businesses would be considered an aggregated group or disaggregated as it pertains to ACA.
Failing to Claim Small Business Tax Credits
Many small businesses qualify for the federal Small Business Health Care Tax Credit. This refundable credit can cover up to 50% of the premiums paid by small business employers or up to 35% paid by small tax-exempt employers. Small businesses are eligible to purchase coverage through the Small Business Health Options Program known as the SHOP Marketplace.
Eligibility for the tax credit includes:
Have fewer than 25 FTE employees (2 half-time employees equal 1 FTE for purposes of this credit)
Pay average wages of less than $55,000 per year per full-time employee
Pay a uniform percentage for all employees that is equal to at least 50% of the premium cost of employee-only coverage
If your business is eligible, you will need to file Form 8941 Credit for Small Employer Health Insurance Premiums to claim your credit.
Poor Time and Attendance Payroll Records
The only way to accurately identify which employees should be considered full-time under the ACA is to have accurate time and attendance records. There are plenty more reasons to improve your record keeping system for time and attendance. You will also need this data to resolve any questions about wage & hour compliance under the Fair Labor Standards Act (FLSA), to properly administer benefits, and to accurately capture overtime hours.
Failing to Provide Proper and Timely Notices
To comply with ACA, all ALEs must provide a Summary of Benefits and Coverage (SBC) to applicants, enrollees, re-enrollees, and policyholders or certificate holders. Additionally, if your group plan is going to change in a material way, you must provide a new SBC giving at least 60 days notice of the changes.
The penalty for failing to distribute an SBC is $1,264 per failure. A company with 50 employees that neglects to provide this notice would owe $63,200 in penalties. Even if your broker failed to supply the notices, the IRS will hold your business responsible for failing to distribute either of these notices.
Failing to Provide Minimum Essential Coverage
If you are an ALE, you are required under the ACA to offer an affordable plan to at least 95% of your employees and it must provide minimum essential coverage that meets both affordability and minimum value thresholds.
The legal definition of affordable coverage is when the employee contribution of the premium does not exceed 9.61% (for 2022) of the employee’s household income. This percentage changes year-by-year, so employers need to keep careful track.
But how can an employer know the amount of each employee’s household income? Fortunately, there are some safe harbor rules you can use to ensure your plan’s employee-only premium will be considered affordable by the IRS:
Federal Poverty Level Safe Harbor uses the affordability threshold (9.61%) multiplied by the Federal Poverty Level ($13,590 in 2022). This is the easiest to calculate, but also the most conservative method. It results in quite low employee premiums—only $108 per month this year.
Rate of Pay Safe Harbor uses an employee’s hou
rly rate of pay or monthly salary to establish affordability. Premiums cannot be more than 9.61% (affordability threshold) of the employee’s hourly rate of pay for 130 hours each month.
Employee W-2 Safe Harbor takes the information from the employee’s W-2 to determine affordability. Take 9.61% of box 1 on the W-2 form for the prior year. This includes more of an employee’s income and usually results in a considerably higher employee-portion premium than the Federal Poverty Level safe harbor.
Your plan must also provide minimum value of coverage. It needs to cover at least 60% of the total cost of allowed benefits and provide substantial coverage for physician and in-patient hospitalization services. Your insurance broker should be able to help you ensure your plan provides minimum value. You can also use the Minimum Value Calculator from the Department of Health and Human Services to double check.
If you do not meet BOTH the affordability and minimum value thresholds, and one or more of your employees receives the premium tax subsidy as a result of your lack of minimum essential coverage, your business can be subject to hefty “Play or Pay” penalties that can run thousands of dollars per employee.
Solidify the Quality of Your Payroll Data, Worker Classifications, and Time and Attendance Records
High quality workforce data and good reporting tools are your company’s best defense when it comes to maintaining compliance with the ACA. Asure’s mid-market HCM platform includes a comprehensive suite of Affordable Care Act (ACA) tools and reports that make it easy to assess and report on employees’ eligibility status. Our software allows you to monitor and maintain employees’ ACA compliance and avoid ACA penalties.
Check out this video for a more detailed explanation of what your business needs to know about the ACA.