Defining Small Employer with Regards to Offering Health Insurance

Many business owners of all sizes have been posting to this blog lately with concerns about offering minimum essential health insurance coverage for their employees. It is indeed a complex topic full of both pitfalls and opportunities. When you drill down into the nuances of what it really means to be a small employer in these regards it quite literally seems to cause brain damage.

How do you really know if you are a small or large employer? Your organization’s “size” for defining whether you are a small or large employer for health insurance purposes is determined by the number of people employed. Employers with:

  • Fewer than 25 full-time equivalent employees may be eligible for a Small Business Health Care Tax Credit to help cover the cost of providing coverage.
  • Generally 50 or fewer employees may be eligible to buy coverage through the Small Business Health Options Program (SHOP). Learn more at HealthCare.gov.
  • 50 or more full-time equivalent employees will need to file an annual information return reporting whether and what health insurance they offered employees. In addition, they are subject to the Employer Shared Responsibility provisions.
  • Regardless of size, all employers that provide self-insured health coverage to their employees must file an annual return reporting certain information for each employee they cover.
  • Certain affiliated employers with common ownership or part of a controlled group must aggregate their employees to determine their workforce size.

Why does it matter?

  • Employer benefits, opportunities and requirements are dependent upon the applicable rules based on your organization’s size. Generally, an employer with 50 or more full-time employees or equivalents will be considered a large employer that carries with it annual reporting responsibilities concerning whether and what health insurance is offered to their full-time employees.
  • Recently published IRS guidance (Notice 2015-17) addresses IRC 4980D with regards to an employer’s obligations under the Affordable Care Act (ACA). Small employers are not obligated by statute to offer minimum essential health insurance coverage.
  • Accordingly here the term “small employer means, with respect to a calendar year and a plan year, an employer who employed an average of at least 2 but not more than 50 employees on business days during the preceding calendar year and who employs at least 2 employees on the first day of the plan year.”
  • Starting after June 30, 2015 an excise tax for non compliance with ACA in these regards will be enforced at $100 per day for non exempt employers and the penalties can add up quick. An employee by the way for these purposes is defined as essentially any full time equivalent person working 30 hours per week or more.

Three of the most common questions heading my way are answered as follows:

  1. Yes the penalty DOES apply to reimbursement of Medicare premiums to employees just as a reimbursement of other health insurance premiums.
  2. Yes the penalty DOES apply to a reimbursement of health insurance premiums regardless of whether they are post-tax or pre-tax.
  3. Yes there is a grace period for both – If you reimburse an employee for some or all of the premium expenses incurred for an individual health insurance policy or directly pay a premium for an individual health insurance policy covering the employee you have been provided “transition relief” from the assessment of excise tax under Internal Revenue Code (Code) § 4980D until June 30th 2015.

There is somewhat of a silver lining in 3 regards:

  1. The $100/day penalty DOES NOT apply to an employer who gives an employee a pay raise as long as there is no condition tied to the pay raise, such as a condition that the employee buy insurance. This pay raise is of course subject to normal withholding and payroll taxes, etc. It is treated as any other pay. So you could cancel your ‘plan’ with the employee in lieu of an increase in compensation.
  2. Also the $100/day penalty WILL NOT be assessed in connection with an S corporation’s payment or reimbursement of health insurance premiums for the 2%-or-greater shareholders until further guidance is issued or after December 31, 2015, whichever is later.
  3. If you are the owner of an S corporation the question becomes whether you should continue to prepare Forms W-2 for shareholders and employees in the same way they have been reported in the past including as income the premiums paid through your employer plan? Stay tuned.

This is where it gets confusing for many folks, if you are a risk taking job creator claiming the small business health care tax credit (SHOP) you must have fewer than 25 full-time equivalent employees, Also:

  1. the average annual wages of your employees must be less than $50,000 (adjusted for inflation beginning in 2014), and
  2. you pay a uniform percentage for all employees that is equal to at least 50% of the premium cost of employee-only insurance coverage.

“Each part-time employee counts as a fraction of a full-time equivalent employee (for example, two half-time employees equal one full-time equivalent employee for purposes of the credit). For tax years beginning in 2014 or later, the employer generally must contribute toward premiums on behalf of each employee enrolled in a qualified health plan (QHP) offered by the eligible small employer through a Small Business Health Options Program (SHOP Marketplace) established as part of the Affordable Care Act to qualify for the credit.”

Check out the IRS’ SHOP Q&A page for more information.

In summary if you’ve made it this far, thank you kindly for reading these words. IMHO it seems like quite a cliff to go from 25 FTE employees to 50 FTE so you are best served having a business plan account for the loss of the SHOP tax credit once you exceed 25 employees.

OR candidly recognize that life is short and there really is no reason to work all that hard anymore because you are not going to keep that much in the end anyhow.

IRS FAQs provide more information about determining the size of your workforce.