Among the most controversial and widely misunderstood parts of the new health reform law are so-called shared-responsibility payments for employers with 50 or more full-time equivalent (FTE) employees.
The penalty calculation is a two-step process. First, employers must determine how many FTEs they employ at a given point. Unfortunately, this is not a straightforward calculation, as some workers are aggregated to a FTE (e.g., part-time workers) while others are not included in the FTE calculation at all (e.g., seasonal workers). For purposes of the employer penalty FTE calculation, the Affordable Care Act specifies a 30 hour a week definition for full-time. There are many other caveats that must be considered when calculating FTEs. But even more vexing is that the definition of full-time and thus the formula for calculating a FTE is not consistent across the employer shared-responsibility payments, the Small Business Tax Credit and the SHOP Exchanges.
|Provision||Definition of Full-Time|
|Small Business Tax Credit||40 hours a week|
|SHOP Exchange-Federally Facilitated||30 hours a week|
|SHOP Exchange-State Operated||At State’s Option|
|Employer Penalty||30 hours a week|
The second part of the penalty calculation is to determine which employees actually trigger the penalty and then how much is owed per employee. Once an employer is determined to have 50 or more FTEs, only certain “events” can trigger the penalty. For example, an ACA penalty would not be automatically triggered just because an employer does not offer health insurance coverage. The employer who does not offer health insurance or the coverage they provide is not considered “affordable” or “adequate” would be required to pay a penalty only if one of their full-time workers entered the newly-established insurance exchanges and received a premium tax credit. And here lies another inconsistency. In this case while full-time is still defined as 30 hours or more a week, the monthly hour count to determine whether a worker is really full-time and thus triggers the penalty is 130 hours a month (not 120 which is used to determine FTE above).
So beware of online calculators to compute FTEs. Each calculator will differ depending on which provision of ACA it covers. Many small businesses have neither the time nor the resources to wade through thousands of pages of federal regulation to figure out whether they may owe penalties and if they do, how much they owe. As I wade through these regulations myself, I am finding many of these inconsistencies like in the definition of full-time. I will continue to share my insights into other nuances in future blogs.
Next time: When is Small Not Small?
Janemarie Muley, Ph.D. is the author of Health Reform in 2015 and Beyond: A Guide for Small Businesses (coming this Fall 2014).