The Affordable Care Act:

What Will Obamacare Mean For Your Business In 2016?

The Affordable Care Act (also commonly known as the ACA or Obamacare) is a topic that most business owners are familiar with (the ACA first went into effect in 2014 and, as outlined, has progressively applied to more business types and employees). In January of 2016, a new tier of requirements and penalties will go into effect, impacting medium- and large-sized businesses.

Put simply, starting in January 2016 (January 2015 for employers with 100+ employees), the ACA will require qualifying businesses (those with 50+ full-time employees or full-time equivalent employees) to provide health benefits that meet minimum standards in price and quality to 95% of their employees -- or face hefty fees.

How can you make sure you've got all the facts when it comes to how Obamacare will impact your business? We've outlined the key elements here, as well as a section of definitions and resources that will help you stay informed and on top of the ACA.

Are You an Applicable Large Employer?

Applicable Large Employer ALE 2016 Requirement

Determining whether or not your business qualifies as an ALE, or applicable large employer under the ACA is the first step in understanding whether the Affordable Care Act applies to your business. You're required to determine your ALE status each year at the end of the year; the results (of whether or not you're an ALE) will then apply to the following year.

Important: In 2015, only companies with more than 100 full-time employees/FTEs were ALEs. That threshold has dropped to 50 full-time employees/FTEs (keep reading to learn more!). As 2015 draws to a close, it's important that you determine whether or not you're an ALE!

In 2014 and 2015, there were several ways to determine ALE status. However, in 2016 (and onward) there is only one way to determine this status.

Put simply, a company is an ALE if it employs 50 or more full-time employees or full-time employee equivalents (FTEs). That's the good news. The bad news is, determining who qualifies as a FTE is harder -- and the only way to determine whether you're considered an ALE.

Important: Independent contractors, sole proprietors, leased employees, partners, 2-percent S corporation shareholders, and IRC §3508 workers (primarily real estate agents) are not counted as part of the 50-employee threshold. Take great care to when it comes to making sure your employees are classified correctly to avoid getting hit with double penalties (ACA penalties plus employer wilthholding penalties).

Determining Your ALE Status

To determine your total number of full-time and FTE employees, you must count actual employee hours of service for the previous year.

Important: A full-time employee is any employee who has contributed 30+ hours per week or 130+ hours per month. FTEs are calculated a little differently. You'll get the correct number of FTEs by adding up all hours of non-full-time employees in a month and dividing by 120. (Don't include more than 120 hours for any given employee. Also know that you're allowed to round the resulting number to the nearest hundredth).

Finally, add up your number of full-time employees and your FTEs. If you have 50 or more, you're considered an ALE.

Important: If you don't end up with a whole number, you're allowed to round down. E.g., if your calculations give you 49.88 full-time/FTE employees, you're allowed to claim 49.

It's important to know that you're not allowed to use the "Lookback Method" (see "Triggering Penalties" section) when determining whether or not you're an ALE. This method can be used to determine your obligation to insure a particular employee/pay the ESRP, but not to determine your ALE status. To determine ALE status, actual hours of service must be used.

Important: Use TSheets to calculate actual employee hours in seconds!

Determining Applicable Employee Hours

What about PTO, FMLA, and sick leave hours? The mandate states that paid vacations, paid sick leave, paid incapacity (paid disability leave), paid jury duty, paid military duty, paid maternity or paternity leave, or other leaves of absence where the employer has agreed to pay the employee are counted toward an employee's hours of service.

What about Temp or Seasonal Workers?

Under Obamacare, seasonal workers only affect your ALE number if (using the calculations above) you effectively have more than 50 full-time employees and FTEs for more than 120 days out of the year.

Important: The employees that tip the employer into ALE status during the 120 must be seasonal employees.

Put Simply

If you're feeling overwhelmed, you're not alone. Calculating ALE status can get complicated. If you'd rather choose simplicity than delving into the details, just follow these three steps, and you'll have your ALE number.

  1. Add up the total number of hours for all employees in one calendar month (remember, don't include more than 120 hours per employee)
  2. Divide by 120 to get your ALE for the calendar month
  3. Complete steps 1 and 2 for all 12 calendar months, add up the total, then divide by 12 to get your ALE number for the year.

I Just Learned I'm an ALE: Now What?

As the year draws to a close, many medium-sized businesses will learn that they meet ALE status for the first time. Concerns about penalties and next steps are natural first concerns, but thankfully the ACA allows for a grace period during the first year a company learns it has reached ALE status (note that this grace period applies only the first year!)

Obamacare costs: morale vs. money

Know Your Options

If you didn't offer coverage to employees during 2015 and realize that you are an ALE in 2015, you essentially have a grace period of three months to determine whether you will offer healthcare coverage and then determine an insurance provider, without any penalties being assessed as long as employees are covered by qualifying health insurance by April 1.

Important: If you elect not to insure employees by April 1, you will be penalized retroactively for January, February and March.

As the calendar year draws to a close, monitor your ALE status closely to avoid any surprises that will affect your business in the coming calendar year when it comes to the ACA.

Important: Your ALE status is fixed as of January 1st each year (based on your prior year's numbers). Dropping below 50 employees during the year does not change your status for that year.

Look at the Big Picture

It may be overwhelming to think about the costs associated with insuring every single one of your employees. However, the reality is that a very low percentage will actually take advantage of the benefits you offer, for a lot of reasons. Many will still consider the coverage unaffordable (even if it meets minimum cost requirements, see below), many will already be insured by a partner or parent, and many will simply prefer to pay the individual fee imposed by the government rather than their premiums for insurance. In 2015, 75% of non-millennials took advantage of employer offered insurance, while only 44% of millennials participated in employer-provided insurance.

Important: You're still required to offer insurance as an ALE, even if very few (or no) employees take advantage of the offer.

Obamacare Coverage & Cost Requirements

If you've determined that you are required to provide health insurance for your employees, it isn't as simple as choosing any plan. Health insurance must meet minimum essential coverage and cost requirements to be considered acceptable under the ACA.

Minimum Essential Coverage Requirements

To be considered as offering minimum essential coverage, plans offered to employees must have an actuarial value of 60%. Actuarial value can be tricky to pin down and is based on some complicated calculations. It essentially ranks the plan based on the amount of value it holds for consumers. To read more about actuarial value, or download an Actuarial Value Calculator, you can visit CMS.gov.

Important: Don't be fooled by the % sign in the actuarial value of a plan. It isn't based on the amount the plan pays, or the expenses it covers. The calculation pulls in a lot of factors. Talk to your health insurance broker to get the actuarial value for plans you're considering.

Minimum Cost Requirements

To meet the ACA's minimum cost requirements (i.e., to be "affordable" under ACA standards), insurance premiums can't cost more than 9.5% of the employee's household income. But how do you know whether your coverage meets this cost requirement, when you don't know your employee's total household income?

Safe Harbors

You're allowed to use one of the following three options to determine whether you're meeting minimum cost requirements for employee-paid premiums.

  1. W2s. Look at your employees' W2s. If the cost of your employee-paid premiums is less than 9.5% of the total in Box 1, your premiums are considered affordable. The downside to this method is that it has to be done employee by employee and could take a lot of time. You also might be safer than you need to be, since pre-tax income (like 401k contributions) won't be included.
  2. Rate of Pay. Simply look at your lowest-earning employee's pay, and calculate premium affordability accordingly. The caveat for this method is that you're not allowed to use this method if you cut your employees' pay rates during the year.
  3. Federal Poverty Line. The most fail-safe and easiest way to meet minimum cost requirements is to take 9.5% of the federal poverty line.

Triggering Penalties

ACA Pay or Play Calculator

Knowing how penalties (also known as Employer Shared Responsibility Payments) are triggered is critical to avoiding surprise, hefty payments. In 2015, fees were applicable to employers with 100+ employees who were insuring less than 70 percent of employees. That threshold is increasing in 2016. In general, beginning in 2016 fees are triggered if you have 50+ full-time employees/full-time employee equivalents and and their dependents, OR when one or more employees secures health insurance through the Marketplace exchanges and receives a premium tax credit. At this point, you'll be required to pay a monthly Employer Shared Responsibility Payment. (Note that penalties are calculated based on full-time employees only, not FTEs).

You'll be assessed the lesser of the following, which are calculated as follows:

If insurance is offered, but doesn't meet minimum value or cost requirements:
$3,000 per full-time employee, per year (assessed on a monthly basis)

If insurance isn't offered:
$2,000 per full-time employee, per year (assessed on a monthly basis)

Important: The first 30 employees are excluded from this fee. E.g., if you have 50 full-time employees, you'll be required to pay a monthly fee for 20 of them, until qualifying insurance is provided. If you have 100 full-time employees, you'll be required to pay the penalty for 70 of them.

Determining Employees Who Require Penalty Payments

When determining the amount of fees, either actual hours of service (also called the Monthly Measurement Method) or the Lookback Method can be used. In the Lookback Method, employees' full-time or part-time status is based on a set "measurement period" in which employee hours are evaluated and determined as either full-time (and requiring a penalty payment or benefits) or part-time.

This measurement period is then followed by a "stability period" that is equal in length to the measurement period, in which a full-time employee is either given benefits each month or the employer pays a penalty each month.) The measurement period can be set between 3 and 12 months in length; the ensuing stability period is either of equal length to the measurement period, or six months, whichever is longer.

Important: The Lookback Method is most advantageous for new employees, employees with variable hours, or seasonal employees.

Read more about the effects of Obamacare

A Few Commonly Asked Questions

  1. What if I own more than one company? Are they treated as one entity for the ALE qualification? Yes, they are treated as one entity.
  2. Are non-profits included in the ACA regulations? Yes, all for-profit, non-profit and government entities are included under the ACA.
  3. What if my company didn't exist during 2015? You're required to give a "good faith estimate" of whether or not you will have 50 or more full-time/FTE employees, and comply with the ACA accordingly.
  4. Do employees working outside the United States count toward the ALE? No. Whether or not they are US citizens, employees working abroad will not be counted.
  5. Can I offer more expansive coverage that what's outlined in the ACA? Yes, the ACA is meant to be a guideline of minimum coverage requirements.

More Resources

Can't get enough of the Affordable Care Act? Check out these helpful resources for additional information!

Critical Definitions

Affordable coverage Coverage offered by employers is considered "affordable" by the government if the cost for the lowest priced plan is no more than 9.56% of annual household income (see "Safe Harbors" section for ways to safely estimate employee income). If employees are offered affordable coverage (that meets minimum value requirements, see below) they aren't eligible for a premium tax credit.

ALE/Applicable Large Employer ALE stands for "Applicable Large Employer." You're considered an ALE under Obamacare if you have 50+ full-time employees or full-time employee equivalents (FTEs). If you're an ALE you're either required to offer employees qualifying insurance or make an Employer Shared Responsibility Payment.

Annual dollar limit Previously, health plans could put limits on the amount the plan would pay out in a given year. Plans can no longer place limits on the amount they'll pay for medical bills.

Coverage tiers Plans in the marketplace are offered in four different tiers or "metal levels." Individuals shopping the exchanges can choose from bronze, silver, gold and platinum plans. The levels are based on how much overall value the plan has to consumers in relation to premiums, deductibles, and copays. Bronze plans have the lowest premiums and the highest overall costs to consumers. Platinum plans have the highest premiums and the lowest overall costs to consumers.

Employer Shared Responsibility Payment (ESRP) Employers with 50 or more full-time employees (or full-time equivalent employees) are required to either offer minimum value/minimum cost health insurance to their employees (and dependents) or make a tax payment known as the Employer Shared Responsibility Payment, or ESRP. This penalty/shared responsibility payment is triggered when at least one employee receives a premium tax credit for purchasing health insurance in the health insurance marketplace.

Full-time employee For purposes of the ACA, this is an employee who works 30+ hours per week or 130+ hours per month.

Full-time employee equivalents (FTE) The simplest way to calculate your number of full-time employee equivalents is to take the cumulative number of all non-full-time employees' hours in a given month, then divide the resulting number by 120. This will yield your FTE number, which can be rounded to the nearest hundredth.

Note: You're not required to count more than 120 hours for any given employee during any given month.

Health Insurance Marketplace Individuals can use this online marketplace to shop for health insurance coverage. Consumers can compare plans and determine financial aid eligibility for help with premiums and copayments.

Lookback Method The Lookback Method can be used to determine whether an employee is full time or not, for the purposes of clarifying whether or not insurance must be offered/penalties will be imposed. In the Lookback Method, employees' full-time or part-time status is based on a set "measurement period" in which employee hours are evaluated and determined as either full-time (and requiring a penalty payment or benefits) or part-time. This measurement period is then followed by a "stability period" that is equal in length to the measurement period, in which a full-time employee is either given benefits each month or the employer pays a penalty each month.) The measurement period can be set between 3 and 12 months in length; the ensuing stability period is either of equal length to the measurement period, or six months, whichever is longer. The Lookback Method is most useful for new employees, employees with variable hours, or seasonal employees.

Important: The Lookback Method cannot be used for determining ALE status.

Minimum value Health plans are considered to have minimum value when they have an actuarial value of 60% or higher.

Premium tax credits These credits will be offered to some qualifying individuals and small businesses that purchase health insurance using the Health Insurance Marketplaces, to help mitigate the cost of premiums and copays. The credit can be applied over the course of the year, or when taxes are filed.

Private individual health insurance plans Individuals who don't have access to qualifying health insurance through their workplace qualify for private health insurance plans through the Health Insurance Marketplace.

Seasonal Workers Under the ACA, seasonal workers are those employees who work fewer than 120 days out of each year.

Safe Harbors You're allowed to use one of the following three options to determine whether you're meeting minimum cost requirements for employee-paid premiums.

  1. W2s. Look at your employees' W2s. If the cost of your employee-paid premiums is less than 9.5% of the total in Box 1, your premiums are considered affordable. The downside to this method is that it has to be done employee by employee and could take a lot of time. You also might be safer than you need to be, since pre-tax income (like 401k contributions) won't be included.
  2. Rate of Pay. Simply look at your lowest-earning employee's pay, and calculate premium affordability accordingly. The caveat for this method is that you're not allowed to use this method if you cut your employees' pay rates during the year.
  3. Federal Poverty Line. The most fail-safe and easiest way to meet minimum cost requirements is to take 9.5% of the federal poverty line.

Waiting period This is the amount of time before health care coverage kicks in for employees or dependents. Under the ACA, the waiting period can't exceed 90 days.

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