With the changes brought about by the Affordable Care Act (ACA), understanding and accounting for accurate employee headcount has taken on a new urgency. Knowing how many full-time employees and full-time employee equivalents your company averaged in the calendar year 2014 factors into the following ACA compliance issues:
• Whether your company is subject to Affordable Care Act employer shared responsibility for tax year 2015;
• If your company must complete ACA reporting by filing IRS Form 1094-C and 1095-C for tax year 2015;
• If your company is sponsoring a fully insured medical plan, if your 2015 renewal is subject to the ACA fair health insurance premium rules (age-banded rates)
With so many important issues connected to your company’s total number of full-time employees and full-time employee equivalents, employers should make sure that their accountants, benefits adviser, and ERISA attorney are all clear on the number to be able to make the necessary adjustments and prepare for the next three years.
It’s not good enough to estimate or guess at this number. It should be carefully reviewed with an accounting professional for accuracy to avoid penalties and to plan accordingly for compliance.
Consequences of Calculating Incorrectly
Calculating the number of employees correctly makes a difference in whether your company is considered an applicable large employer (ALE) for IRS purposes. This impacts eligibility for small-group or large-group market and ACA shared responsibility, and whether your company has to prepare, distribute, and file IRS Forms 1094-C and 1095-C.
How to Get to Your Number
The definition of a full-time employee for ACA purposes is an employee who has on average at least 30 hours of service per week during the calendar month, or at least 130 hours of service during the calendar month.
The number of full-time-equivalent employees for a month is determined with these two
1. Combine the number of hours of service of all non-full-time employees for the month (those working less than 30 hours per week or 130 per month), but not including more than 120 hours of service per employee, and
2. Dividing the total number of hours from step 1 by 120.
The number of full time employees (working 30+ hours per week or 130+ per calendar month) are then added to the number of FTE’s (full time equivalents) to determine your total number for ACA purposes under the IRS rules.
Remember, the total number of employees working for the company is not the same as the total of full-time employees plus full-time equivalents needed for the purposes of IRS definition of ALE for ACA compliance.
Things to remember when calculating FTE:
If your company has at least 50 full-time employees, including full-time equivalent employees, on average during the prior year, your company is an ALE for the current calendar year, and is therefore subject to the employer shared responsibility provisions and the employer information reporting provisions (IRS Forms 1095-C and 1094-C).
To determine your workforce size for a year, add the total number of full-time employees for each month of the prior calendar year to the total number of full-time equivalent employees for each calendar month of the prior calendar year and divide that total number by 12 to get the monthly average.
Regardless of the size of your organization, the burden of proof will fall on the employer to provide accurate records showing whether or not the company is considered an ALE. Even if the business has only 49 FTE’s for 2014, if the IRS contacts you, you will need to be able to provide backup documentation to support your status.
If there is common ownership across multiple companies, even if it’s minority ownership, there may be a need to calculate employer size across those entities. If you or someone in your organization has ownership in multiple companies, consult a CPA or other tax professional to determine whether or not you are required to comply with Pay or Play.
What Employers Should Do Next
Employers should review their calculation for full-time employees plus full-time equivalents for 2014, have their CPA or legal advisor review it and verify the accuracy, and determine if there are any adjustments necessary. Next, consult with your benefits adviser on what is required based on your number.