Director of Business Development Elizabeth Fullington, CPA, JD at Global Resources, addresses common myths.
Q: Can the 50 employee rule (the mandate that all businesses with 50 or more employees provide health insurance) be avoided by splitting a business into multiple corporations?
Fullington: Under the Internal Revenue Code and Treasury regulations, all employees of related companies will be considered in determining whether any company has exceeded the 50-employee rule. Thus, splitting a company into multiple, smaller companies will not help a business in avoiding the mandate. Even worse, reliance on this myth exposes business owners to crippling penalties and taxes.
Q: Should a business use the strategy of only employing part-time employees to avoid the 50 employee rule?
Fullington: Another myth is that businesses can avoid the mandate by reducing current employees to part-time, hire more part-time workers, or classify employees as ‘independent contractors.’
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Part-time employees are considered in determining whether the 50 employee rule is satisfied. Using independent contractors to avoid the mandate is problematic as the IRS aggressively audits worker classification. It is impossible to reclassify current employees as independent contractors without a drastic change in their compensation, oversight, and status. There are also no mitigating safe harbors from the penalties imposed by the Act for past employment misclassifications (unlike those from past payroll tax assessments).
Rather than relying on misguided strategies to avoid the mandate, a business owner should strive to reduce health care costs by providing tax advantaged benefit plans that comply with the mandate.
Q: How are employees determined to be full-time or part-time?
Fullington: For purposes of the Affordable Care Act, both full-time and part-time employees are used to determine the 50 employee threshold:
- Full-Time (Employees working at least 30 hours per week in any month) – Counted as one full-time employee.
- Part-Time – Calculated by taking the hours worked by all part-time employees in a month, divided by 120, and rounded down to the nearest whole number.
- Seasonal – Not counted for those working up to 120 days in a year.
Example: A company has 40 full-time and 10 part-time workers. The total part-time hours per month are 1,150. Under the Act, the company has 49 full-time equivalent employees (40 full-time employees, and 9 full-time equivalents).
Q: How likely is the Act to hinder small businesses?
Fullington: When the media says that “Obamacare, or the Act, has been delayed,” they are referencing the health care compliance portion. It is important for business owners to realize that new taxes are in place, currently, such as the 3.8% Medicare Contribution Tax on passive income and a new .9% Medicare Excise Tax.
A misguided owner may face a much higher tax burden than anticipated, which could impact cash flow and the ability to make purchases, expand the business, make payroll, or even take on a new project.