Published 9/1/2014
Adam June

The Impact of the ACA on Orthopaedic Practices

Could you be subject to tax penalties?

Since passage of the Affordable Care Act (ACA), many orthopaedic surgeons have expressed concern about its potential negative impact on their practices. One area that could affect orthopaedic practices is the mandate for large employers to provide health insurance coverage for their employees or risk being subject to significant tax penalties.

Although this mandate does not go into effect until 2015 (delayed from an original effective date of 2014), now is the time for orthopaedic surgeons to determine whether the mandate applies to their practices and to make potentially difficult decisions about their business structure, employment strategies, and employee benefit program.

Who is a large employer?
Many orthopaedic practices that consider themselves small or midsize employers may actually meet the definition of “large employers” under the ACA. According to the Internal Revenue Service (IRS), an “applicable large employer” is one that has employed an average of 50 full-time employees or full-time equivalents (FTEs) on business days during the preceding calendar year.

When the IRS delayed enforcement of the mandate, it also provided additional transition relief. Thus, in 2015, the employer mandate applies only to large employers with 100 or more FTEs. All large employers, including those with 50 to 99 FTEs, will be affected beginning in 2016.

Full-time employees are those who work at least 30 hours a week on average during a month. All part-time employees (including seasonal workers) who averaged less than 30 hours per week for a calendar month are included in calculating the number of FTEs. A distinction must be made between full-time employees and FTEs because employers are only responsible for providing coverage to full-time employees and only the full-time employee is relevant to the incurrence of tax penalties.

To determine the number of FTEs in a practice, first total the number of hours worked by part-time employees during a month and divide by 120. For example, during May 2014, Bones&Joints, LLC, had 40 full-time employees and various part-time employees whose hours of service for the month totaled 1,560. Dividing 1,560 by 120 equals 13 FTEs for the month. Adding 13 to 40 means Bones&Joints, LLC, had 53 full-time employees and FTEs, and would be considered a large employer for that month.

To determine whether a practice would be considered a large employer for 2015, take the following steps:

  1. Determine the number of full-time employees and FTEs for each month in the preceding year (2014).
  2. Add the monthly totals and divide by 12.

If the result is more than 50, the practice would qualify as a large employer for 2015. In the example above, if every month was the same in 2014, Bones&Joints, LLC, would be considered a large employer for the year in 2015. Thus, although Bones&Joints, LLC, would meet the definition of a large employer, in 2015 it would not be subject to the mandate or possible penalties due to the transition rules.

Why worry now?
The proposed regulations provide for a transition period and give employers the option of determining their full-time employees and FTEs by using a period of at least 6 consecutive months (chosen by the employer) in the 2014 calendar year. Afterward, the calculation must be based on an entire year.

It is imperative, therefore, that orthopaedic practices determine the number of full-time employees and FTEs now, which would give the practice time to make adjustments during the rest of 2014 and potentially alter this number for the 2015 reference period.

Although unlikely to apply to orthopaedic practices, a special rule in the proposed regulations protects employers from being treated as large employers if they have more than 50 full-time employees solely as a result of seasonal employment. However, an aggregation rule, or controlled group test, may apply, particularly if the orthopaedic group owns ancillary services. This rule prevents the employer from spreading employees across several related businesses to avoid the threshold amount.

Tax penalties
Internal Revenue Code Section 4980H provides that large employers may be subject to tax penalties in the following situations:

  • The employer fails to offer minimum essential coverage under an eligible employer-sponsored plan to all full-time employees (and their dependents).
  • The employer offers health insurance, but the plan is unaffordable for employees (premiums exceed 9.5 percent of the employee’s household income).
  • The employer offers health insurance under which the plan’s share of the total allowed cost of benefits provided under the plan is less than 60 percent of those costs (minimum value test).
  • Two separate taxes can be assessed depending on whether an employer offers coverage or not.

The first tax applies when a large employer does not offer any coverage and at least one full-time employee receives a premium tax credit for purchasing coverage through a new health insurance marketplace (also known as a “state exchange”). The employer would be assessed a tax of $2,000 annually per full-time employee over the first 30 employees.

For example, Bones&Joints, LLC would be exempt from penalty in 2015 due to the transition relief. However, if the practice did not offer employees health insurance and met the definition for a large employer in 2016, and one of its 40 full-time employees purchased coverage through an exchange and received a premium tax credit or cost-sharing subsidy, the practice would be assessed a $20,000 penalty ($2,000 × [40−30]).

The second tax applies when a large employer offers minimum essential coverage, but a full-time employee may still qualify for the premium tax credit because the plan is unaffordable or does not meet the minimum value test. In this case, the penalty is $3,000 annually per full-time employee who receives a premium tax credit or cost-sharing assistance through an exchange. The 30-employee reduction rule does not apply, but the tax penalty is capped at the amount that would be assessed if the employer offered no coverage at all.

Orthopaedic practices must begin preparing now for 2015 and the shared responsibility mandate. They must determine their potential status as an applicable large employer and begin considering strategies that could prevent or mitigate penalties. Large employers must ask and answer many questions in the next several months, including ultimately whether or not to offer an employer-sponsored plan.

Adam June is a tax services manager at Weltman Bernfield, LLC, certified public accountants and consultants. He can be reached at ajune@weltmanbernfield.com

Editor’s Note: This article is intended for general information purposes only and should not be construed as offering legal or financial advice. The reader should consult with knowledgeable tax counsel to determine how applicable laws apply to specific facts and situations.