Arin Carmack & Michael Kraft
If you have 50 Full Time employees and Full Time Equivalents in 2016 you are subject to the $2000 tax/penalty under the Affordable Care Act (ACA) if you do not provide health insurance. Often the option to pay a tax or provide health insurance is framed as two options-pay or play.
Either you pay the $2000 tax or provide health insurance to your employees. And many large employers are doing just that, crunching numbers and watching competitors to decide which of the two options they should take.
An employer that has 150 employees resulting in a yearly $200,000 tax there is considerable incentive to minimize their tax. We will look at some of the other options that have been proposed as alternatives to pay or play to reduce or eliminate taxes under the ACA. At this point weI should note that we are not intending to provide legal or tax advice. These strategies have not been tested and you should really obtain advice from someone that is ‘certified smart’ like a CPA or an attorney. Nor are we responsible for any bad PR should you implement any of these strategies unsuccessfully.
Independent Contractors –
Turning your employees into independent contractors. This option comes up every time there is a new cost of having an employee. An independent contractor does not just avoid the ACA tax but also other costs like workers’ compensation or unemployment taxes. The problem with this option is that the test of the status of an independent contractor is not clear cut and varies within different government agencies. Having dealt with some litigation on this matter, we would recommend getting legal advice before making any of your employees independent contractors. We would also note that once a supposed “independent contractor’s” services are no longer needed they often file for unemployment. The process of obtaining unemployment benefits often begins to unravel the independent contractor status of that firm’s outsourced help.
Employers that want to stay below an arbitrary number, of say 50 employees, can outsource some functions such as payroll, human resources or recruitment. This provides flexibility for employers to offer increased pay in lieu of health insurance so employees can obtain subsidies for themselves and family on the exchange.
Employee Only Health Insurance –
Just like the outsourcing example in the previous paragraph, the availability of health insurance from the employer restricts the ability for the dependents to obtain a subsidy in the health insurance exchange,and employers generally do not pay insurance for spouse or children. If the employer restricts the plan to only employees then the rest of the family can apply for a subsidy on the exchange.
Splitting up the Business –
When the ACA was first passed, we heard talk about splitting up businesses into units smaller than 50 employees. There are rules on what is called combinability in the ACA and reportedly this is very difficult to do. If interested in this option, we would refer you to talk to your attorney but have yet to see anyone to do this.
30-Hour Work Weeks –
If an employer were to transition nearly all their employees part time (30-hour and under work weeks) they could avoid the $2,000 tax. This however is an administrative nightmare by nearly doubling of the number of employees when restricting employees to five six-hour shifts per week. Management would have to monitor employee’s hours to ensure employees do not become full time employees so as to not be required to offer benefits. Plus recruitment and retention would be negatively affected. Is if this option is really worth saving about $1.50 per hour on labor? Probably not. We suspect that the more likely scenario is that full time employee’s hours will be maximized while part time employees are not allowed to pick up additional shifts.
Minimal Essential Coverage Insurance Plan –
To avoid the $2,000 tax a large employer has to offer a health insurance plan that provides minimal essential coverage. The coverage is not required to meet the minimum health insurance offered on the health insurance exchange. Although employees that sign up will not be subject to the individual mandate penalty, these plans generally cover considerably less and that’s why they cost considerably less. The employer pays a significant portion of the plan to ensure that there is at least an initial 70% participation rate. In order to meet the eventual requirement of a 95% participation rate the employer may have to pay for the entire cost of the premium.
Employers can offer a separate plan that meets the definition of minimal value (coverage levels equivalent to the health insurance exchange) and costs less than 9.5% of employee income. Fewer employees would likely sign up for the more expensive plan but again by just offering employees become ineligible to obtain a subsidy in the health insurance exchange.
Arin J. Carmack is Vice President of Risk Management for Cardinal Services; he has conducted trainings on various facets of the Affordable Care Act. Michael Kraft is Senior Consultant and Project Manager for Sequoia Personnel Services; as part of this, he manages Sequoia’s human resource management consultants.