Getting Close to 50 Employees? Unlocking the IRS mistakes that could cost you.
Starting in 2017, the IRS had begun sending notices to "applicable large employers"(ALEs) of their potential liability for an employer shared responsibility payment.
See here for sample letter 226j.
This letter, sent to employers, after a plan year, will outline your responsibility to pay a
penalty between $54,000 and $203,000 due to Employer Benefits mistakes. This article will draw on resources to help you dodge common mistakes and have a game plan for your group.
Am I an ALE? In short, you have 50 employees.
A bit more depth and the questions start to pile up. When do they consider me having 50 employees? With new hires and turnover, your headcount may be a moving target. The IRS provides guidance here. If your prior fiscal year(and for many small employers this is the calendar year) you average more than 50 full-time equivalent employees you are considered an ALE. So for the 2020 plan year, we are looking at 2019. For this upcoming plan year(2021), you should be looking at your employee numbers now.
Full-time equivalent(FTE) is any combination of full time(30+ hours), part-time(<30 hours), and seasonal workers.
Full-time employees clearly count as one FTE
Part-time employees count against 30 hours a week or 130 hours per month. While other regulations and government agencies define FTE differently, when it comes to the Patient Protection and Affordable Care Act (PPACA) defines 30 hours and 130 respectively. For instance, a part-time employee that achieves 15 hours per week would be recognized as a .50 FTE
Alternative employees, due to the complexity of other arrangements, seasonal employees and those eligible for TRICARE and/or VA benefits, do not need to be included in your FTE calculation.
Example: On December 31st, 2019, you had 35 employees working 30 hours or more per week and 30 part-time employees working 20 hours per week. To determine if you are an applicable large employer you must determine your full-time equivalents.
35 Full-Time Employees = 35 FTE's
30 Part-Time Employees *20 hours(total weekly hours worked) / 30 hours(what would be a full-time employee) = 20 FTE's
55 FTE's (adding 35+20 FTE's) for the 2020 plan year
What are the risks?
What if I do nothing?
What should I do?
The Section 4980H(a) penalty—the A penalty—applies when the ALE does not offer minimum essential coverage to at least 95 percent of its full-time employees in any given calendar month and at least one full-time employee receives a premium tax credit to help pay for coverage through an ACA marketplace exchange. Full-time employees are those who average 30 or more hours of work per week. The penalty is waived for the first 30 full-time employees.
Employees with household income between 100 percent and 400 percent of the federal poverty level are eligible for tax credits for exchange coverage if they do not have access to affordable employer-sponsored coverage that provides at least minimum value.
The A penalty in 2020 is $214.17 per month ($2,570 annualized), multiplied by all full-time employees (minus the first 30). For 2021, the penalty increases to $225 per month ($2,700 annualized).
• The Section 4980H(b) penalty—the B penalty—is where the affordability threshold comes into play. It applies when the ALE does offer coverage to at least 95 percent of full-time employees, but each full-time employee was not offered an option of "minimum essential coverage" that was "affordable" and provided "minimum value." The penalty is triggered when a full-time employee of an ALE declines an offer of noncompliant coverage and instead enrolls in subsidized coverage on the ACA marketplace exchange.
The B penalty for 2020 is $321.67 per month ($3,860 annualized) per full-time employee receiving subsidized coverage on the ACA marketplace exchange. For 2021, the penalty increases to $338.33 per month ($4,060 annualized).