Obamacare: Shuffling the employee deck of cards
One of the most significant provisions of the Patient Protection and Affordable Care Act is that beginning 2014, employers with over 50 full-time equivalent employees must provide health insurance to their employees or face a penalty. Note that full-time equivalent for this provision means 30 hours per week – not 40 hours per week.
So, for an employer that has over 50 employees and does not want to provide health insurance to employees or pay a penalty, can they just break down their operations into multiple business entities such that each entity has fewer than 50 employees thereby escaping the health insurance mandate?
No, an employer really can’t do that.
The IRS has some tools at its disposal to combine entities into “control groups” for purposes of measuring the number of employees.
If one business owns 80% or more of another entity, then you have a “parent-subsidiary” control group. In this case, employees in both entities will be combined to determine whether there are more than 50.
If 5 or fewer persons or entities collectively own either (i) at least 80% of the equity in two organizations, or (ii) more than 50% of the equity in two organizations (considering only the ownership that is identical with respect to each of the two organizations), then you have a “brother-sister” control group. Like the parent-subsidiary control group, the employees in both entities will be combined to determine whether there are more than 50.
A third type of control group can arise when service businesses such as a law firm, accounting firm, engineering firm or temporary staffing company have as little as 10% common ownership and the companies closely collaborate on the services they provide. This is called an “affiliate service group”.
So what is an employer to do?
Well, you might consider taking on a subcontractor to keep your employee count under 50. Of course, this can lead to some loss of control over the quality and timing of the work product.
Or, you might take a look at your processes and see if any of those processes can be automated to reduce the number of current and/or future employees.
Or, if your employee count is over 50, you might consider paying the $2,000 per employee penalty for employees who are not covered by health insurance. Note that the first 30 employees who are not covered are excluded from the penalty calculation and the penalty is not deductible for tax purposes.
Or, you might consider offering insurance to your employees in lieu of other compensation or benefits. If you do, make sure the employee cost for the coverage does not exceed 9.5% of the employee’s income and the insurance pays on average at least 60% of covered expenses. The cost of the insurance will be deductible by the employer, not subject to FICA and not taxable to the employee.
To avoid mandated employer provided health insurance, you need to cut the employee deck of cards – not just shuffle.
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