Affordable Care Act – Determining the Business Size and Employer Mandate Applicability

Calculating an Employer’s Full-time Equivalent Workforce

An applicable large employer is one that employs at least 50 full-time or full-time equivalent employees. This determination is based on the preceding calendar year. In order to determine whether an employer qualifies as an applicable large employer, follow these steps:

1. Count the number of “full-time employees” who work on average at least 30 hours per week per month.

2. Aggregate the number of hours worked by all non full-time employees and divide by 120 to determine the total number of full-time equivalents.

3. Add together the number of full-time employees and full-time equivalents for each of the 12 months in the preceding year.

4. Add the monthly totals and divide by 12. If the employer has seasonal workers and the average exceeds 50 full-time equivalents, the employer may also determine whether the seasonal employee exception applies.

Impact of Size

An employer’s status as an “applicable large employer” is critical to its treatment under ACA. An applicable large employer is subject to the employer mandate and may be forced to pay tax penalties. If an applicable large employer fails to offer coverage to at least 95% of its full-time staff, and at least one of those full-time employees receives a federal premium subsidy via a state health benefits exchange, the employer is liable for a $2,000 annual penalty for each full-time employee, excluding the first 30 employees.

A different penalty is assessed if an employer offers coverage that does not meet the Affordability and Minimum Value thresholds of ACA. In this case, the penalty is $3,000 for each full-time employee who receives a tax credit, though this penalty in the aggregate can never be higher than the penalty for failing to provide any coverage.

Different Employees, Different Treatment

For purposes of determining “applicable large employer’ status, there are three main categories of employees that should be considered: full-time, part-time (or variable hour), and seasonal.  A full-time employee works an average of at least 30 hours a week in a given month or other designated time period.  A part-time employee is not specifically defined by federal rule, but likely encompasses all workers who are not full-time employees.  Similarly, seasonal employees are typically associated with certain timeframes annually such as the winter holidays or during the summer months.

Calculating Full-Time Status

Once an employer is designated an “applicable large employer,” it must determine how many full-time workers are employed.  Under ACA, a full-time employee is determined within any given month. However, enrolling and dis-enrolling employees on a monthly basis would raise significant administrative issues for employers and regulators. To address these issues, the Internal Revenue Service has promulgated regulations that allow employers to use a “look-back measurement method” to determine an employee’s full-time status over a longer period of time.

For an ongoing employee, an employer may determine his/her full-time status by using a look-back period of between three and 12 months. The employer would calculate which employees were full-time—that is, whether an employee worked an average of at least 30 hours per week. There are different rules regarding what look-back period is permissible depending on the type of worker being analyzed.  For example, new variable hour employees may have a different look-back period than ongoing employees.

In addition to the look-back period are two other time frames known as the “administrative period” and “stability period.”  The administrative period gives an employer time to prepare coverage and enroll its eligible employees. The stability period is the interval of time for which an employee is eligible for coverage. Rules regarding these time periods are also set forth in federal regulations.

Common Ownership Rules and Impact

Determining the size of an employer is complicated by the fact that a single owner or small group of owners may control multiple companies.  ACA requires all employees within the same controlled group to be aggregated to determine whether the owners are subject to the employer mandate. Here are the three types of controlled group relationships: parent-subsidiary group; brother-sister group; and combined group (which encompasses aspects of the first two types).