Imagine that in 2012 you quit your job and poured all your savings into opening a restaurant that had 18 full-time employees and 15 part-time employees. The restaurant was a success. In 2013, you opened a second restaurant based on the same model and with the same number of employees. Another success. Your restaurants were profitable enough for you to take a salary of $60,000 in 2013. You decide to open a third restaurant in 2014.
Your third restaurant opens January 1, 2014 with the same number of employees as the first two. Based on your track record of success, you expect to be able to take a salary of $90,000 in 2014. But that was before you realized how ObamaCare can swallow your profits.
You’ve read and heard industry rumblings that ObamaCare’s employer “shared responsibility” rules require employers to provide coverage to full-time employees if you employed at least 50 full-time employees in the prior year. You had only 36 full-time employees in 2013. Regardless, you already offer coverage to your full-time employees, so you don’t worry about it. You instead work long hours with very few days off to establish your new third restaurant.
You receive notice from the IRS that you are subject to an ObamaCare penalty excise tax of $5,000 for January. Why? You failed to account for your part-time employees in 2013 when determining whether you are an “applicable large employer” subject to the new employer mandate. The rules require employers to aggregate all part-time employees into “full-time equivalents.”
You had 30 part-time employees in 2013. These employees averaged 60 hours/month. The rules consider 120 hours/month to be full time for purposes of this determination (but, confusingly, not other determinations). Therefore, every two of your part-time employees counts as one full-time equivalent, meaning you had 15 full-time equivalent employees in 2013. These full-time equivalents are added to the 36 true full-time employees you had. According to the ObamaCare rules, you actually had 51 full-time employees in 2013 and are therefore subject to the coverage requirement.
Now you try to determine why you’re subject to a $5,000 penalty for January. After all, you offer health coverage to your full-time employees. Again, ObamaCare thinks differently. You offered coverage to employees working at least 35 hours/week. That’s how your restaurant policies define a full-time employee eligible for benefits. ObamaCare defines a full-time employee as 30 hours/week.
You had two employees at each of your restaurants who worked 30 hours/week in January, for a total of six ObamaCare-defined full-time employees who were not offered coverage. ObamaCare imposes an excise tax penalty where the employer fails to offer coverage to the greater of 5% or five total full-time employees.
You had 60 full-time employees in January (54 working at least 35 hours/week, plus 6 working at least 30 hours/week). You missed offering coverage to the six working 30 hours/week. At least one of those six went to the ObamaCare exchange and received a premium tax credit to purchase coverage because they were under 400% of the federal poverty level ($94,200 for a family of four). You’re therefore subject to the penalty under IRC Section 4980H(a) – known as the “(a)” penalty.
The (a) penalty is calculated by multiplying all full-time employees (minus the first 30) by $166.67 per month. Your 60 full-time employees is reduced by 30, and the remaining 30 is multiplied by $166.67, for a total penalty for January 2014 of $5,000. You consult with your tax advisor. The excise tax is non-deductible.
You contact your insurance broker and arrange for your plan to offer coverage to your 30 hours/week employees as of March 1.
You receive notice that you were hit with the (a) penalty of $5,000 again in February because you weren’t able to arrange for the 30 hour/week employees to be offered coverage until March.
Just when you thought you had taken the steps necessary to avoid the penalty, the IRS notifies you that the same $5,000 penalty applies for March. What now? You learn that the ObamaCare rules require you to offer coverage to all full-time employees and their children to age 26. Your plan offers coverage only to employees and their spouse or domestic partner. You contact your broker and arrange for the policy to include children. Again, this cannot be arranged until the next month.
You receive notice that you were hit with the (a) penalty of $5,000 yet again for April because you weren’t able to arrange for employees’ children to be offered coverage until May. You’ve now racked up nondeductible ObamaCare excise tax penalties of $25,000.
You receive notice from the IRS that you are subject to a different ObamaCare penalty for May, this time for $4,000. What is it now? You finally satisfied the (a) penalty requirements in May, but that’s only half the story.
Under the 4980H(b), or the “(b)” penalty, once you’ve offered coverage to full-time employees and their children, you have to make sure that coverage is “minimum value” and “affordable.” To be minimum value, the plan must cover at least 60% of the total allowed costs. Your policy met this requirement.
Where you went wrong this time is you failed to offer “affordable” coverage. Under this standard, the employee share of the premium for the lowest cost, employee-only coverage cannot exceed 9.5% of the employee’s income (as determined by the employee’s W-2 wages or a rate of pay calculation). Your employer policy has always been to pay for ¾ of the cost of coverage, leaving the employees responsible for ¼ of the premium.
Your plan’s coverage didn’t meet the affordable standard for 16 full-time employees who: (1) declined to enroll in you plan, and (2) instead received subsidized coverage on the ObamaCare exchange. Under the (b) penalty, you’re subject to a penalty of $250/month for each those 16 full-time employees. Hence the $4,000 (b) penalty liability for May.
You have to decide: Will you make coverage affordable for all full-time employees or pay the (b) penalty every month? At significant expense, you choose to increase the employer contribution to make coverage “affordable.” Because payroll can’t be changed on a whim, the higher employer contribution won’t take effect until July 1.
You’re hit with the same $4,000 (b) penalty for June for offering unaffordable coverage to 16 full-time employees who received subsidized exchange coverage. Also, you offer two summer intern minimum wage positions at each of your three restaurants to kids at the local high schools.
You’re hit again with the (a) penalty again! This time it’s $6,000 for July. What went wrong now? The summer interns were your common law employees, and they worked at least 30/hours per week. You didn’t offer coverage because your policies exclude interns from benefits. ObamaCare doesn’t approve.
You had 66 full-time employees in July when you count the interns. You failed to offer coverage to the greater of 5% or five total of your full-time employees by not offering coverage to the six summer interns. At least one of those interns received subsidized coverage on the ObamaCare exchange for July. The penalty amount is 66 full-time employees, minus 30, multiplied by $166.67 = $6,000.
You contact your broker, but it’s too late to offer coverage to the interns for August before they go back to school in September.
You’re hit with the $6,000 (a) penalty again in August for failing to offer coverage to the interns. We’re now at a running tally of $45,000 in ObamaCare employer shared responsibility penalties in 2014.
Did you think you were safe? Didn’t think so. The IRS gives notice that you’re subject to a $1,000 (b) penalty for September. Your plan offered coverage to 30 hour/week employees in September, and you took steps to ensure that the coverage was both minimum value and affordable. So how were you subject to more ObamaCare penalties in September???
You own restaurants, and restaurants have variable hour employees. Even though you offered coverage to everyone regularly scheduled to work 30 hours/week, there are certain months where your part-time employees average 30 hours/week. In September, four of your part-time employees picked up extra hours to make up for the departure of the summer interns. Those four received subsidized coverage on the exchange in September.
The (a) penalty doesn’t apply because you were within the 5% or 5 total full-time employee margin of error. But the (b) penalty does apply for these four employees. At $250 a pop, the penalty amount is $1,000.
You contact your broker inquiring how to offer coverage to a variable hour employee because you won’t know how many hours they’ll work in any given month until the month is over. The broker advises you to seek legal counsel.
You engage the services of an attorney. The attorney advises you of a safe harbor approach with a measurement period to test variable hour employees for full-time status. Employees will then be offered coverage for a set stability period based on the results of the measurement period. These measurement and stability periods are complicated and administratively demanding, plus there are additional rules for new hires that add an additional layer of complexity.
You determine that you need to hire an HR manager to oversee all of this. The HR manager will implement the measurement/stability period safe harbor in November.
Despite your best efforts to keep your part-time employees under 30 hours/week to avoid the penalties, you needed two of your part-time employees to work at least 30 hours/week in October to meet staffing demands. Both employees received subsidized coverage on the ObamaCare exchange. Your (b) penalty bill: $250 x 2 employees = $500.
Your measurement and stability periods ensure that you will avoid ObamaCare penalties. But you get a different surprise this month. You owe the insurance carrier $5,040 for an ObamaCare fee — something called the transitional reinsurance program to fund the ObamaCare exchanges. It’s $63 per covered life, including the spouses/domestic partners and children of your employees. There are 80 covered lives under your plan.
End of the Year Wrap-Up
You anticipated taking a salary of $90,000 entering 2014. However, you ultimately could afford a salary of only roughly $20,000 after accounting for a number of ObamaCare expenses:
- ObamaCare employer shared responsibility (a) penalty: $37,000
- ObamaCare employer shared responsibility (b) penalty: $9,500
- Additional employer contributions to the health plan to make coverage affordable: $12,000
- Legal fees: $2,500
- New HR manager salary October - December: $10,000
- Transitional reinsurance program fees: $5,040
- Total added ObamaCare costs in 2014: $76,040.
You cancel plans to open a fourth restaurant in 2015. You hope you don’t have to lay off employees or cap hours at 29 hours/week, but you’re worried you may need to. You can’t make it on a $20,000 salary again next year. Welcome to ObamaCare.