The first question an employer needs to resolve is whether or not it has enough employees to be subject to the pay-or-play requirement (also known as the employer “shared responsibility” requirement). The simple definition — employers with 50 or more full-time equivalent workers — doesn’t provide the full answer.
First, “full-time equivalent” (FTE) covers employees who average 30 (not 40) hours per week. The time period during which the employee count is determined is the prior year — in other words, 2013, for purposes of whether you’ll face the mandate in 2014.
Note: The IRS, recognizing that determining FTE status can become complicated based on timing issues and seasonal work patterns, issued some “safe harbor” rules last year to help with the determination. (IRS Notice 2012-58)
Attempting an End-Run?
Also, the law attempts to discourage employers near to that 50 FTE threshold to drop below it by cutting back employees’ hours to less than 30 so that they flunk the FTE test. It does so by requiring that you add up all of the hours worked by part-time workers over the course of a month, then dividing that number by 120. The number that results from that calculation is added to your FTE total to determine where you are in relation to the 50 FTE minimum.
Note: Even if the calculation determines that you are subject to the pay-or-play requirement, you are not obligated to provide health benefits to part-time employees.
Some employers could, in theory, lay off a requisite number of employees to fall below the 50 FTE threshold, and deal with them as independent contractors. But simply calling a worker an independent contractor doesn’t necessarily make him so, of course. Independent contractor status is somewhat subjective and determined by a multi-pronged test.
Assuming you are subject to those “shared responsibility” provisions, and even if you are already providing some level of health benefits, you’ll need to determine whether your benefit package provides at least 95 percent of your employees a benefit package that meets “minimum essential coverage” standards (the fine points remain a work in progress). If the answer is no, and you don’t beef up your benefits, the “pay” requirement kicks in. (This of course would also be true if you didn’t offer any health plan.)
According to the law firm Lindquist Vennum, in simple terms, the penalty is the annualized equivalent of $2,000 a year for each full-time employee, minus up to 30 employees, if at least one full-time employee signs up for health benefits through a health exchange “and receives a premium tax credit or cost-sharing reduction from the government.” That is, the penalty for an employer with 70 FTEs would be 70 minus 30 equals 40 times $2,000 equals $80,000. (Lindquist Vennum has created a helpful flow chart summarizing key elements of the pay-or-play rules.)