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Only 20% of all businesses in the United States have employees, but every business with employees may be affected by the Affordable Care Act (ACA).
Whether or not a business is affected by the ACA depends upon its size, and in 2016 the size of a business will become an issue of major concern. In this article, therefore, we will address five of the changes affecting businesses with employees in 2016.
Basic ACA Definitions
In order to understand the impact of the changes generated by the ACA, we need to first define some basic terms.
Applicable Large Employer (ALE): An ALE is any employer with more than a specific number of employees. The total number of employees is equal to the sum of full-time employees and full-time equivalent employees.
Full-Time Employee: An employee who works an average of 30 hours of service per week or 130 hours per calendar month.
Full-Time Equivalent Employee (FTEE): An FTEE "is a combination of employees, each of whom individually is not a full-time employee, but who, in combination, are equivalent to a full-time employee." The number of FTEEs in a business is calculated by combining the number of hours of service of all non-full-time employees for the month (not including more than 120 hours for each employee), and dividing the total by 120.
Employer Shared Responsibility (ESR) An employer may have to make penalty payments if the insurance provided to employees is not "affordable" and of "minimum value."
Basic Requirements of the ACA for Employers
The basic requirements for small employers (SE) versus applicable large employers (ALE) is outlined in the table below:
|Eligible to purchase insurance through the Small Business Health Options Program (SHOP)||Yes*||No|
|File SB annual returns (Forms 1094-B & 1095-B)||Yes||No|
|File ALE annual returns (Forms 1094-C & 1095-C)||No||Yes|
|Subject to ESR provisions||No||Yes|
*Employer must have between 1 and 50 employees.
Changes in the ACA for 2016
1. A Change In The Definition Of An ALE
Probably the biggest change for 2016 is a change in the definition of an ALE. As originally enacted in 2010, the ACA defined an ALE as a business with 101 or more employees. However, on February 10, 2014, the Department of the Treasury issued rules that delayed implementation of the requirements for ALEs that had between 50 and 99 employees until January 1, 2016. That meant that for 2015 only businesses with fewer than 50 employees were small employees.
On October 7, 2015, Congress amended Section 1304(b) of the ACA by enacting the Protecting Affordable Coverage for Employees (PACE) Act. The Act permanently defines a small business as one with 50 or fewer employees. But the PACE Act gives states the option of expanding the limit on the size of an SE, as long as it does not exceed 100 employees. So in 2016 each business with 51 to 100 employees will have to check with its state insurance department to determine whether it is an SE or an ALE.
This will also affect an SEs eligibility to use SHOP in 2016. Even though the definition of small employer will be expanded, the use of SHOP is still limited to employers with 50 or fewer employees unless the state allows a higher limit.
2. Mandatory Information Returns
The filing of information returns for both SEs and ALEs was optional for 2014, but according to IRS Notice 2013-45, returns are mandatory for 2015. Employees must receive their copies no later than January 31, 2016, and employers have until February 28, 2016, to file their copies (or March 31, 2016, if the returns are filed electronically).
3. Required Dependant Coverage
The requirement for dependent coverage also changes in 2016. In 2015 employers were only required to cover employees, but beginning in 2016 dependent coverage must be offered as well.
4. ESR Penalties For Minimum Essential Coverage
The ESR provisions will also be changing in 2016. In 2015 an employer could avoid having to make an ESR penalty payment if it provided minimum essential coverage for 70% of its employees and dependents. The percentage of coverage required for 2016 increases to 95%.
5. ESR Inflation-Adjusted Penalties
ESR penalties are equivalent to $2,000, adjusted for inflation, for each full-time employee based on the number of FTEEs reduced by a certain number of employees. In 2015 the number full-time employees could be reduced by 80 before calculating the penalty, but in 2016 the number can only be reduced by 30. In addition, the inflation-adjusted penalty for 2015 increased to $2,080, and in 2016 it will increase to $2,160.
In this article we focused on the changes that will affect employers in 2016. Although we introduced the basic requirements of the ACA above, in the next article we discuss these provisions in more detail.
The final article in this mini-series provides more information on the ESR penalties, as well as show how small businesses with fewer than 25 FTEEs may be eligible for tax credits.
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This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.