Think the ACA Thresholds Don’t Apply to Your Business? Not So Fast

ACA Requirements

The Obama Administration’s most recent change to the Affordable Care Act (ACA) may have given some employers the wrong impression. With this modification, employers with 50 to 99 employees now have until 2016 to comply with the “Shared Responsibility” provisions of the law. Some employers — especially those who are close to the threshold of 99 employees — may be surprised to learn they are not really off the hook.

Here’s What You Need to Consider

Two primary factors come into play. First, recall that the employer size thresholds are based on a calculation which includes part-timers. You need to add up their combined monthly hours and divide by 120 to determine the actual number of full-time equivalents (FTEs) you have. This number must then be added to the number of full-timers, to determine your status.

Example: Suppose you have 80 employees putting in at least 30 hours per week (in other words, 80 full-timers) and 40 part-timers. Assume the combined total of the part-timer hours over the course of a month is 2,400 (40 part-timers averaging 60 hours per month). You must then divide the total part-time hours of 2,400 by 120 (as stated in the paragraph above). This gives you 20 FTEs plus your 80 full-timers, for a combined count of 100 full timers and FTEs. That puts you over the 99-employee threshold, and makes you subject to the employer mandate for 2015. However, you would still only be required to cover the 80 full-timers.

Another way you could be in for a nasty surprise is if you use a lot of independent contractors, who the IRS deems to be employees. Use the same example above, of 80 full-timers. Instead of 20 FTEs, you have 20 workers you consider to be independent contractors. However, the IRS has taken a closer look and decided these individuals are really employees. As a result, you now have 100 employees.

Workers who have been classified as independent contractors and then reclassified as employees by the IRS benefit from the change. Others benefit too, like the state unemployment agency, unemployment insurance carriers, state tax authorities, and the IRS. Your company, on the other hand, may face penalties and additional taxes for misclassification (in arrears and going forward). And, depending on where you end up in the total employee count, you may find you are indeed subject to the ACA’s “Shared Responsibility” provision for 2015 after all.

IRS Revving Its Engines

Last year, the Treasury Inspector General for Tax Administration (TIGTA) issued a report highlighting the fact that many employers aren’t paying attention to periodic IRS rulings that establish the independent contractor/employee boundaries. The result, stated TIGTA, is that “millions” of workers are misclassified, resulting in employers failing to pay the payroll taxes they should be paying.

The IRS has a “Determination of Worker Status Program” (also known as the SS-8 Program), which is supposed to make it easy for employers to get a thumbs up or down on a worker’s independent contractor status. The report found that employers often disregard rulings they don’t like. Combined with the fact the IRS, which is supposed to enforce those rulings, is frequently overwhelmed, enforcement has not always been adequate. In response to TIGTA’s findings, the IRS has vowed to make several changes. One of those changes is, they will form a team “to assess potential avenues to improve employer compliance with SS-8 Program determination rulings.”

Proceed with Caution

Note, while this program seems like a way to guarantee your company is in compliance with the IRS, it is not a step to be taken lightly. Filling out an Form SS-8 and letting the IRS handle it may seem easy and straightforward, but by providing the information you may be inadvertently inviting the IRS to rule against you preemptively. This is an area where seeking the guidance of your tax adviser is highly advisable.

Who’s in Control?

You and your tax adviser can evaluate a worker’s status by addressing three basic areas:

  • Behavioral control. The level of direction and supervision the worker receives. How does the worker receive work assignments? Describe the worker’s daily routine, such as his or her schedule of hours.
  • Financial control. What expenses are incurred by the worker in the performance of services for the firm? Does the worker establish the level of payment for the services provided or the products sold? If not, who does?
  • Relationship of the worker and firm. Did the worker perform similar services for others during the time period [covered by the report]? Please identify the benefits available to the worker.

Keep in mind that Form SS-8  can be filled out either by the worker, or you. Workers who believe they have been misclassified can obtain the form and send it to the IRS. In fact, a very high proportion of SS-8 forms submitted to the IRS come from workers who believe they should be treated as employees. Moreover, the TIGTA report found that in one year, nearly three-quarters of SS-8 forms filed resulted in determinations that a worker treated as an independent contractor should have been treated as an employee. This alone should be a compelling reason for you and your tax adviser to examine worker classification and make necessary changes.

Guidelines you can rely on for a determination of who can be classified as an independent contractor are easy to find. A good primer was prepared by Congress’ Joint Committee on Taxation a few years back, but can still be relied upon for the basics.

If you review your situation and conclude you might be vulnerable to a massive re-classification, the IRS has a “voluntary worker classification program.” This program, if you are eligible, offers the promise of a reduction in your liability for payroll taxes you should have paid. Last year, the IRS liberalized the program, to encourage greater employer participation. However, once again, enter this program only after consulting with your tax adviser to avoid unintended consequences.

Back to the ACA

If you do fall below the small employer threshold, and still offer a health plan, remember, while you may not be subject to the play-or-pay rules, your plan still must satisfy other ACA requirements this year. Examples include not denying health coverage due to a pre-existing condition and not having an eligibility waiting period exceeding 90 days.

In addition, if your analysis of your employee plus FTE headcount shows that you will be subject to the employer mandate in 2015, new IRS regulations cut you a little bit of slack. Instead of having to offer coverage to at least 95 percent of your employees, the standard is reduced to 70 percent. That 95 percent standard will still take effect in 2016 — assuming no further regulatory changes occur before then.

With that said, the ACA has proven so far to be a work in progress. Stay tuned as more changes, big or small, continue to roll out.