2023 Tax Calendar
VIEWpoint Issue 2 | 2022
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HUD Strengthens the Effects Test
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by Bill Leary, CPA, Tax Director
Following the Supreme Court ruling on the constitutionality of the health care law, many companies are considering how to implement the new rules. Businesses face a fundamental question: Must I offer health coverage to my employees, or is the business exempt?
For employers that clearly fall under the mandate, a subtle danger lurks – are you covering 95 percent of your business’s employees, and is the cost no more than 9.5 percent of an employee’s wages? If not, you will owe an “assessable payment” of up to $2,000 per employee.
The law applies to both domestic and foreign businesses. Foreign nationals are included if they are legally present in the United States. However, directors, 2 percent shareholders, partners, etc. are not employees for these purposes, nor are independent contractors. Whether or not an employee is an independent contractor is governed by Department of Labor and IRS rules, e.g., the so-called “20-factor test.” Full-time employees do not include seasonal employees who work fewer than 120 days during the year. When considering employees, the IRS has warned employers not to try to avoid the new rules through evasive planning strategies.
Exempt businesses include those that employ fewer than 50 full-time (working an average of at least 30 hours a week) and full-time equivalent employees (collectively, “FTE”).
Effective Jan. 1, 2014, large employers that fail to provide affordable coverage to all of their FTEs and dependents may be subject to “shared responsibility” monetary penalties. Penalties will be triggered when any FTE (or his or her dependent) of a large employer qualifies for and uses a tax subsidy or credit to purchase coverage on a health care exchange. Specifically, under § 4980H of the Internal Revenue Code, an “applicable large employer” that does not meet those standards may be liable for an “assessable payment.”
The law states that a “no-coverage penalty” will apply to any eligible large company that “fails to offer [coverage] to its full-time employees,” and the current penalty has been pegged at $166.67 per month, multiplied by the number of full-time employees, excluding the first 30. By that formula, a business with 51 full-timers that doesn’t provide coverage would generally pay a penalty of $3,500 per month (21 times $166.67). A business is permitted to exclude up to 5 percent of its FTEs from health care coverage without being subject to the § 4980H(a) penalty.
The rule serves as a penalty “cliff.” For example, assume an employer believes it has 100 FTEs, all of whom have employer-provided coverage, and 10 workers without coverage who are classified as independent contractors. If six or more of the supposed independent contractors turn out to be employees, the annual penalty of $2,000 multiplied by all full-time workers applies, and the business will have to pay the penalty on its employee base, even though most of its employees are covered under a health plan. Companies need to consider a review of their work force to be sure that all “employees” under the rules are properly taken into account.
For purposes of § 4980H, “employer” means the entity that is the employer of an employee under the common-law test. In addition, § 4980H provides that all entities treated as a single employer under pension rules (§ 414) are treated as a single employer. Thus, all employees of a controlled group or an affiliated service group are to be taken into account in determining whether any member of the controlled group or affiliated service group is an applicable large employer. The IRS is continuing to refine guidance on these matters.
The critical issue for large employers required to offer health coverage is whether the group’s independent contractors and leased employees are considered employees for this purpose. Global businesses also need to consider how the new rules apply to foreign employees working in the United States, as well as the status of expatriates for testing purposes. These analyses should be undertaken now before businesses decide on health insurance options.
Thorough due diligence is required for acquisition candidates to assure conformity with the new rules. In particular, acquired businesses could affect a group’s compliance with the 95 percent test.
To review the status of your employees under the health care law and what it means for your business, contact Doeren Mayhew’s CPAs in Troy, Mich., Houston, Texas, or Ft. Lauderdale, Fla.
This publication is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional opinions on specific facts for matters, and, accordingly, assumes no liability whatsoever in connection with its use. Should the reader have any questions regarding any of the news articles, it is recommended that a Doeren Mayhew representative be contacted.
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