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The employer mandate and family-owned businesses

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Given the complexity and continued scrutiny of the Patient Protection and Affordable Care Act of 2010 (PPACA), the Obama administration gave employers a reprieve: It postponed implementation of the “play-or-pay” requirements until Jan. 1, 2015.

But agents and brokers need to warn owners of family-owned businesses about the requirements today.

The Centers for Medicare & Medicaid Services (CMS) has estimated that the Internal Revenue Service (IRS) could collect more than $87 billion in Section 4980H play-or-pay taxes from 2014 to 2019.

Business owners may not have to pay the play-or-pay penalties today, but, when they are determining whether they are subject to the provision – Section 4980H to the Internal Revenue Code (IRC) – they will use employee data collected this year.

IRC Section 4980H will require “large” employers that choose not to provide health benefits to pay penalties.

If you are involved in any way with group benefits, you probably know that the mandate applies to companies that employ 50 or more full-time employees or “full-time equivalent” (FTE) employees.

If you are not deeply involved with the group health market, you may not be aware of just how complicated counting the employees can be.

To qualify as full-time, an employee must work 30 hours per week, or 130 hours per month.

A company will determine how many FTE employees it has by adding up the hours worked by all part-time employees. If, for example, an employer has 20 part-time employees, each of whom works 15 hours per week (half the hours of a full-time employee), the hours will be combined, giving the employer the equivalent of 10 more full-time employees.

The IRS is using the common control provisions of IRC Section 414 to define the term “employee.” Under those provisions, a worker is an employee if the employer has the right to direct the ends to be achieved by the employee and the means whereby the employee achieves those ends.

Employers do not have to count leased employees, sole proprietors, or partners or shareholders with ownership interests exceeding 2 percent.

An employer that meets the threshold of having 50 or more employees, or 50 or more FTEs, will have to decide whether to play (offer coverage) or pay “shared responsibility” penalties.

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A “large” family-owned business will have three options:

  1. Provide adequate coverage;
  2. Provide no coverage;
  3. Provide inadequate coverage – either coverage below PPACA standards or coverage that federal agencies define as being unaffordable.

If an employer provides adequate coverage, the employer meets its “shared responsibility” obligations and pays no penalties.

If an employer fails to provide coverage for at least 95 percent of its employees and their dependents, and at least one employee receives federal tax credit for health coverage, the employer will owe a tax.

If more than 95 percent of the employees receive coverage but the coverage is deemed minimal – covers less than 60 percent of expenses – or the premium exceeds 9.5 percent of an employee’s income, the employer will be providing what the government defines as inadequate coverage and will owe a tax. Again, the employer will owe a tax only if at least one employee receives a federal premium subsidy.

To qualify for a federal subsidy, an employee’s household income must be less than 400 percent of the federal poverty level.

When the IRS imposes a tax, the agency will once again look at whether the employer has provided inadequate coverage or no coverage at all. If the employer provides no coverage, the tax is equal to $2,000 per full-time employee, after subtracting the first 30 employees. In other words, if there are 50 full-time employees, the tax will be $40,000: 50 minus 30, multiplied by $2,000.

If the employer provides inadequate coverage, the tax is equal to the lesser of $3,000 per subsidized employee or $2,000 per employee, minus the first 30 employees.

It appears PPACA drafters considered that owners of multiple businesses might try to avoid the Section 4980H mandate by maintaining fewer than 50 employees at each business. To keep owners from using that strategy, the drafters applied the IRC Section 414 business aggregation rules to the employee counting rules.

For purposes of Section 4980H, employees of all corporations that are members of a “controlled group” will be treated as if they were employed by a single employer.

Through constructive ownership provisions, the IRS will seek to prevent owners of entities under common control from using inter-family transfers of interest to circumvent the employer mandate.

One example: The IRS will consider an individual to be an owner of business interests that are owned by the individual’s spouse or children. That could make avoidance of Section 4980H especially difficult for family-owned businesses.

Nonetheless, by utilizing available planning techniques family businesses can avoid the effects of the employer mandate.

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