The Affordable Care Act (ACA) contains significant legal risks that few employers are aware of that have nothing to do with the structure or content of health insurance plans.
Under the ACA, applicable large employers (50 or more “full-time” employees) must offer affordable, minimum-value coverage, to at least 70 percent of their full-time employees in 2015 (95 percent in 2016). Employers are not required to offer coverage to employees who work less than 30 hours a week (i.e., part-time employees). Failure to meet this 70-percent level of coverage can result in penalties of $2,000 per year for nearly each full-time employee, even those enrolled in the health insurance plan. For an employer with 1,000 full-time employees, the penalty is almost a $2 million non-tax-deductible expense.
How can this happen? To illustrate, Lexicon Industries has 1,200 employees (1,100 full-time + 100 part-time. The company offers health insurance coverage to 70 percent of full-time employees (770) and no coverage to part-time employees. No penalty, no problem? Not exactly. If Lexicon misclassified only one employee as part-time, when the worker should be full-time under ACA standards,
and that employee purchases health insurance coverage from an exchange and receives a subsidy, Lexicon has failed the 70-percent-coverage rule. The company offered coverage to 770 full-time employees, but actually had 1,101 full-time employees due to a single misclassification. Therefore, the company offered coverage to less than 70 percent of full-time employees triggering a tax penalty of nearly $2 million.
While the Internal Revenue Service (IRS) can assess tax penalties against employers that do not offer compliant health insurance coverage to enough full-time employees, employees can “blow the whistle” on employers when they are denied coverage through the employer plan due to an erroneous classification. Congress amended the tax code to authorize payments to individuals who blow the whistle on businesses that fail to pay taxes owed. The $2 million tax penalty to the employer in this illustration could net the complaining employee $600,000.
To minimize risk, employers should:
1. Correctly identify full-time employees using ACA standards,
2. accurately calculate part-time hours, and
3. review worker classifications to ensure they are compliant.
Employers who try to use independent contractors rather than hire employees, or use a PEO, employee-leasing firm, temporary-staffing agency, or outsource functions to avoid ACA requirements may increase their potential liability.