Who Must Report under the ACA?
Under the Employer Shared Responsibility provisions of the ACA, certain employers must file annual information returns with the IRS, as well as provide summary statements to employees.
The mandatory reporting communicates important information about employees’ health care coverage. The forms are used by the IRS to verify that an employer met the requirement of offering “minimum essential coverage” at an affordable cost, as defined by the law. Copies of the forms must also be provided to employees so that they can report on their coverage when filing their tax returns (and avoid being fined for not having health insurance).
The reporting requirements affect applicable large employers (ALEs) with 50 or more full time (or full-time equivalent) employees and self-insured employers, regardless of size.
Are You an ALE?
To determine whether your business is considered an ALE for the 2018 tax year, you must calculate your average number of employees in 2017. In making those calculations, it’s important to distinguish between the two categories of employees as defined under the ACA:
- Full-time employee: Averages at least 30 hours of service per week during the calendar month (or 130 hours in a calendar month). This is different from the typical 40 hours a week you associate with full-time employees, making the distinction important when counting employees.
- Full-time equivalent employee: A combination of part-time employees that, together, counts as a full-time employee.
For hourly employees, you must calculate the actual hours worked (and paid). For non-hourly, salaried employees, you can either count the actual hours worked, or use one of two other measurements:
- Days worked equivalence (count 8 hours for each day the employee worked at least one hour), OR
- Weeks worked equivalence (count 40 hours for each week the employee worked at least one hour)
Calculating Full-Time Equivalent (FTE) Employees
Your part-time workers also contribute to your overall employee count. A full-time equivalent (FTE) is a combination of part-time employees that counts as a full-time employee.
To convert your part-time employees into FTEs as defined by the ACA, use this formula:
- Add up the total service hours worked by part-time staff in each month (max of 120 hours per part-time employee)
- Divide the total by 120
Example: If 7 employees worked 5 hours/day in a month with 22 work days…
- 7 employees x 5 hours/day x 22 work days = 770 hours
- 770 hours ÷ 120 = 6.4
IMPORTANT: With all of the above calculations, you must count all payable “service hours,” including vacation, sick time, disability, jury duty, military duty and other leaves of absence.
Do not include in your calculations any independent contractors, temp workers, seasonal employees working 120 days or less in a year, COBRA enrollees or retired enrollees. Paid interns should be counted while unpaid interns should not.
Calculating the Average to Determine ALE Status
Once you have determined the number of employees for each month in 2016 (full-time plus FTEs), simply add the 12 months together and then divide by 12 to calculate an average. If the result is a fraction, round down to the nearest whole number (49.8 would round down to 49).
If the final number is 50 or greater, your business is considered an ALE and you must file ACA forms for 2018.
- Monitoring your full-time employee count is important not only for determining ALE status, but also because it’s a trigger for when employees are eligible for coverage. There are measurement methods for this, too — the monthly measurement method and the look-back measurement method, which is often used with variable-hour employees. The point is that when an employee becomes full time, you must offer minimum essential coverage under the ACA to avoid penalties.
- For example, if seven employees work 20 hours/week, you would have four FTEs. (7 x 20 hours/week = 140; 140 x 4 weeks/month = 560; 560 (divided by) 120 = 4.66, or rounded down, 4)
Something else to keep in mind: An ALE may be a single entity or may consist of a group of related entities (such as parent and subsidiary, or other affiliated entities). If the combined number of full-time and full-time equivalent employees for the group is large enough to meet the definition of an ALE, then each employer in the group (called an ALE member) is part of an ALE — and subject to the Employer Shared Responsibility provision, even if it wouldn’t be an ALE separately.
Reporting for Smaller, Self-Insured Employers
For small businesses — which the ACA defines as those with fewer than 50 full-time, full-time equivalent employees — your ACA reporting requirements depend on whether your business is self-insured.
Self-insured businesses that are not ALEs must report the name, address and Social Security number (or date of birth) of all covered individuals, including spouses, dependents and other covered individuals. This is done on a different form — 1095-B — along with the corresponding transmittal form, 1094-B.
Businesses that are not ALEs and are not self-insured have no reporting obligations under the ACA.
Are You Insured or Self-Insured?
This can be tricky, so it’s important to understand the difference.
A fully insured health plan is one where the employer pays the insurance carrier premiums (often with the help of contributions from the employee) and the insurer covers the health care claims based on the policy benefits.
With a self-insured (or self-funded) plan, the employer generally contracts with an insurer only to administer its plan, but pays medical claims out of its own company funds. This option is more common in large companies that are able to spread the risk among thousands of employees, but some small companies also choose this option.
This is an important distinction because it affects which portions of the 1095-C must be filled out. If you’re a fully insured employer, you’ll complete only Parts I and II of the 1095-C (and your insurance carrier will submit the information for Part III separately). If you are self-insured, you must complete Parts I, II and III.