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Affordable Care Act - Plan of Attack

love jerryBy now every employer and CPA assisting employers is well aware of the Affordable Care Act (The Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act of 2010 - together known as the Affordable Care Act or ACA). As of January 1, 2016 all employers with more than 50 full time equivalent employees (FTE), are now required to offer affordable health insurance to all full time employees. CPA Magazine has published several articles in the past few years about ACA and if you are looking for an introduction to ACA, you might start with some of the earlier articles. Before ACA, offering health insurance to employees was optional.

This topic continues to be strongly debated from both sides and has become a prime topic in the 2016 Presidential debates. However, the purpose of this article is not to enter into the debate but to give some practical implementation steps.

ACA mandated applicable large employers (ALE) offer affordable health insurance to their employees. This was phased in by requiring ALEs with 100 or more full time equivalent employees (FTE) to comply by January 1, 2015. Beginning with January 1, 2016 ALEs with 50 or more FTEs are required to comply. There is an earlier article which discusses how to determine your FTE count and access to a spreadsheet to assist you in the calculation of FTEs.

Determine if you are an ALE. The determination of your status as an ALE is based on the prior calendar year. For 2016, an employer uses the calculation of their FTEs in 2015 to assess if they have more than 50 FTEs and would thereby be considered an ALE. This is called your “testing period” in many publications and articles. An excellent description of this process was written by Scott Dondershine, Esq. “Understanding the ACA Employer Mandate #2” in June 2013. http://www.dbd-law. com/Client-Alerts/Understanding-The-ACA-Employer-Mandate- June2013.shtml

“A large employer is defined as a company (including related entities) that has fifty or more (1) full-time employees (30 or more hours per week or 130 or more hours per month) plus (2) full-time equivalents (FTE). The test is relaxed a bit for seasonal workers.

“The number of full-time equivalents is basically determined using the hours of all non-full time employees, e.g., parttime employees. The hours for each part-time employee up to 120 per month are added and then divided by 120 to determine the number of FTEs.

“The computation is performed each month of the “testing year” which is the calendar year before the applicable year for determining whether coverage is required. For instance, 2013 is the testing year for determining whether an employer is “large” for 2014 and is subject to the employer mandate. Each month’s total is then averaged to determine the total for the testing year. Note that an employer can be large (subject to the mandate for one year) but then small for the next.”

It is important to distinguish between the testing period which is the previous calendar year which is used to determine you are an ALE and the measurement period which is used to identify the full-time employees that you will offer health insurance to them. Continue reading to understand the importance of identifying your measurement period.

Controlled or Affiliated Groups

It is very important that you develop an understanding of when you have a controlled or affiliated group. When you do then your ALE determination is made after combining the FTE from all the applicable entities. For more information of this aspect go to IRC Sec. 414(b), (c), (m), or (o); for controlled groups or affiliated service groups which are to be treated as one employer see [IRC Sec. 4980H(c) (2)(C)(i); Reg. 54.4980H-1(a)(16)].

New Employers

A new company that was not in existence on any business day of the prior calendar year will need to determine if they will be an ALE by estimating their work force.

The health insurance to be offered is to provide minimum essential coverage/benefits. Essentially the employer is required to offer a Bronze plan. See https://www.healthcare.gov/choosea- plan/plans-categories/ for more specifics about the type of plans in the Health Insurance Marketplace.

The cost of the health insurance to the employee must be affordable. Rev. Proc. 2014-37 has given the employer a safe harbor. Unaffordable will be defined as will the amount of the premium paid by the employee exceed 9.5% of the gross wages reported in box 1 of the employees W-2. Note the implication of using box one is this is not their gross wages prior to pre-tax deductions such as flex plans and 401k.

The first issue facing the employer is to know what period of time will be used to determine your full time employees. The employer can use a look-back measurement period. Using this method, the employer assesses the employee’s status as a full time employee during this measurement period. Note the employer is only required to offer health insurance to full time employees and this does not include the part time employees who were part of the FTE calculation.

Determine the measurement period. When determining if an employee is a full-time employee and, therefore, must be offered affordable health insurance coverage that provides minimum value, and coverage for his or her dependents that is at least minimum essential coverage, employers can use the look-back measurement method [Reg. 54.4980H-3(a)].

The measurement period can be a minimum of three months up to a maximum of 12 months. A stability period immediately follows the measurement period and generally cannot be shorter than six months or, if longer, the length of the measurement period. In addition, an administrative period can be scheduled at the end of the measurement period, to allow the employer to process the measurement period numbers and offer coverage to full-time employees. Make note that there are important limits on the length of an administrative period and important exceptions regarding the permitted length of the stability period, so employers should seek professional advice before designing a measurement and stability period approach.

Determine the “ongoing employees.” Generally, this will be any employee who averaged at least 30 hours of service per week or had at least 130 hours of service during a calendar month. The key here is to identify the FTE during the measurement period. It is very important to specifically identify this group of employees because if you are identified as an ALE, this is the group of employees you are required to offer affordable health insurance.

Penalty Elimination

The penalty for any month for the employer is an excise tax equal to the number of full-time employees in excess of 30 employees multiplied by one-twelfth of $2,160 (penalty amount for 2016).

No Harm No Foul

The employer penalty is assessed if one or more of the bona fide full time employees is certified by the Exchange as having purchased insurance through the Exchange and they qualified for a premium credit or cost-sharing reduced premium.

Avoiding an employer penalty. ACA requires an employer to offer coverage to the full-time employees (note this does not include employees who were part of the calculation to arrive at FTE but just those who are bona fide full time employees working more than 30 hours per week on average). However, if the employer offers affordable coverage which is rejected by the employee, the employer will not be penalized for that employee. It is very important to document the type of coverage offered, the method used to justify the coverage is affordable and if the employee rejected the coverage then have them sign a document stating such.

This is an article focused on the employer implementation segment of ACA and is not intended to be a comprehensive of all aspects of ACA or even all aspects of the employer obligations. It is written to give an employee the flow of how to know when they are an ALE and when they need to identify the employees to whom they must offer affordable insurance.

RAND’s Study of ACA

In April 2014, The RAND Corporation, which is a research organization that develops solutions to public policy challenges, reported in an online article written by Katherine Grace Carmen and Christine Eibner:

“Using a survey fielded by the RAND American Life Panel, we estimate a net gain of 9.3 million in the number of American adults with health insurance coverage from September 2013 to mid-March 2014.

“The survey, drawn from a small but nationally representative sample, indicates that this significant uptick in insurance coverage has come not only from enrollment in the new marketplaces established under the Affordable Care Act (ACA), but also from new enrollment in employer coverage and Medicaid.

“Put another way, the survey estimates that the share of uninsured American adults has dropped over the measured period from 20.5 percent to 15.8 percent. Among those gaining coverage, most enrolled through employer-sponsored coverage or Medicaid.

“Although a total of 3.9 million people enrolled in marketplace plans, only 1.4 million of these individuals were previously uninsured. Our marketplace enrollment numbers are lower than those reported by the federal government at least in part because our data do not fully capture the surge in enrollment that occurred in late March 2014.

“A more detailed report describing the results summarized below can be found:

• Of the 40.7 million who were uninsured in 2013, 14.5 million gained coverage, but 5.2 million of the insured lost coverage, for a net gain in coverage of approximately 9.3 million. This represents a drop in the share of the population that is uninsured from 20.5 percent to 15.8 percent.

• The 9.3 million person increase in insurance is driven not only by enrollment in marketplace plans, but also by gains in employer-sponsored insurance (ESI) and Medicaid.

• Enrollment in ESI increased by 8.2 million.”

On December 4, 2015 The RAND Corporation updated the expansion of health coverage as they reported in a report “Connecting Consumers to Care” by Laurie T. Martin and Jill E. Luoto:

“As of early 2015, more than 16 million Americans had gained access to health insurance, many of them for the first time. Reducing the number of uninsured Americans was a basic goal of the Affordable Care Act (ACA); accordingly, early implementation efforts focused heavily on enrollment. Encouraging these newly insured Americans to take an active role in their health care — helping them connect to routine primary care and preventive services — is crucial to the broader goals of the ACA: better health and lower costs. The challenge going forward is to make sure that consumers not only understand their health insurance policies but also use them to access primary care and preventive services.”

The Heritage Foundation published the following assessment of the enrollment figures in an article by Edmund F. Haislmaier and Drew Gonshorowski published October 15, 2015:

“Health insurance enrollment data for 2014 shows that the number of Americans with health insurance increased by 9.25 million during the year. However, the vast majority of the increase was the result of 8.99 million individuals being added to the Medicaid rolls. While enrollment in private individual-market plans increased by almost 4.79 million, most of that gain was offset by a reduction of 4.53 million in the number of people with employment-based group coverage. Thus, the net increase in private health insurance in 2014 was just 260,000 people.”


Jerry Love is the sole owner of Jerry Love CPA, LLC in Abilene, Texas. He graduated from Abilene Christian University. In addition to being a CPA, he has also earned the designations of PFS, CFP, CVA, ABV, CITP, CFF, and CFFA. In 2006-07, Love was the Chairman of the Texas Society of CPAs.