Most businesses are aware that the Patient Protection and Affordable Care Act, (commonly called ObamaCare but which I will call the “Act”), contains a penalty tax, starting Jan. 1, 2015, for “applicable large employers” that don’t offer sufficient health care insurance coverage for their full-time employees.
An “applicable large employer” is an employer that employed an average of 50 or more full-time and full-time equivalent employees during the previous calendar year. In an employer has not existed for a full calendar year, the determination is based upon the number of full-time and full-time equivalent employees the employer is reasonably expected to employ during the upcoming calendar year. Neither the Affordable Care Act nor the proposed regulations provide any guidance concerning how new employers are to estimate expected employees.
Whether an employer has employed 50 full-time and full-time equivalent employees is determined by averaging the employer’s monthly totals for full-time and full-time equivalent employees. For each month, the employer tabulates the number of full-time employees employed during that month.
The Act defines a full-time as an employee who was employed on average at least 30 hours of service per week. Because the average month contains more than 4 weeks, regulations adopt 130 hours of service in a calendar month as the monthly equivalent of 30 hours per week for purposes of calculating full-time employee status on a monthly basis.
Once the employer determines the number of full-time employees employed during any given month, the employer must then calculate the number of full-time equivalents employed during any given month. The monthly number of full-time equivalents is calculated by adding together the hours of service in a month, (not to exceed 120), of each employee that is not a full-time employee. This number is then divided by 12. The result is the number of full-time equivalents for the month. Fractional full-time equivalents are not rounded down or up.
The number of full-time equivalents for a month is then added to the number of full-time employees for the monthly total of full-time and full-time equivalents. Fractional monthly totals are not rounded down or up. The monthly totals are then added and divided by 12. Any resulting fraction is rounded down. Thus, an employer who has 49.9 full-time and full-time equivalent employees is not an applicable large employer.
The unit of measure for an employee’s hours is “hours of service.” Hours of service includes each hour for which an employee is paid, or entitled to payment, for the performance of duties for the employer, and each hour for which an employee is paid, or entitled to payment by the employer on account of a period of time during which no duties are performed due to vacation, holiday, illness, incapacity, disability, layoff, jury duty, military duty or leave of absence.
Hours of service for employees not paid on an hourly basis, must be calculated using one the following three methods: (1) the employer can count the actual hours of service from records of hours worked and hours for which payment is made or due for vacation, holiday, illness, incapacity, disability, layoff, jury duty, military duty or leave of absence; (2) the employer can use a days-worked equivalency method whereby the employee is credited with 8 hours of service for each day for which the employee is to be credited with at least one hour of service; or (3) the employer can use a weeks-worked equivalency of 40 hours of service per week for each week for which the employee would be required to be credited with at least one hour of service.
However, the days-worked or weeks-worked equivalency method can’t be used where it substantially understates an employee’s hours of service in a way that would cause the employee not to be considered a full-time employee. For example, a days-worked equivalency can’t be used for an employee who generally works three 10-hour days per week.
The employee clearly works 30 hours a week and should be considered a full-time employee. However, the days-worked equivalency would substantially understate the employee’s hours of service as 24 hours of service per week, which would result in the employee being treated as not a full-time employee. Rather, the number of hours of service calculated using the days-worked or weeks-worked equivalency method must reflect generally the hours actually worked and the hours for which payment is made or due. An employer need not use the same method for all non-hourly employees as long as the classifications are reasonable and consistently applied.
Seasonal employees are included in determining an employer’s number of monthly full-time and full-time equivalent employees. However, the Act provides that an employer is not considered an “applicable large employer” if the employer only exceeds the 50 employee threshold for 120 days or less during the year, if the employees that cause the employer to exceed the 50 employee threshold are seasonal employees. Seasonal employees perform work that, due to its nature, can only be performed during certain seasons or periods of the year, such as agricultural workers employed to harvest crops or retail workers employed during holiday seasons.
A sole proprietor, a partner in a partnership, or a 2 percent S corporation shareholder is not an employee. However, if such an owner also performs services as an employee, such as an officer or director, that person is considered an employee with respect to that person’s hours of service as an employee.
My next article will discuss the attribution of employees of one employer to another employer with common ownership for purposes of determining whether an employer is an applicable large employer.
“Four Rivers Business Journal,” September 2013