The chances have increased dramatically in 2016 that a nonprofit employer could owe significant excise taxes under the Affordable Care Act (ACA) for not offering coverage to enough of its full-time employees. In 2015, an employer had to offer coverage to only 70 percent of its full-time employees to avoid the tax. Starting in 2016, the percentage increases to 95 percent.
That doesn’t leave much room for error, according to Eddie Adkins, partner in the Washington National Tax Office of Grant Thornton LLP. He made the comment during his session ACA Deep Dive at the AICPA Not-For-Profit Industry Conference in National Harbor, Md.
The potential tax applies to employers that have 50 or more full-time plus full-time equivalent employees. The tax is significant, amounting to $2,160 per year per full-time employee (as indexed for inflation in 2016), with the first 30 full-time employees not counted in making the calculation, Adkins told the session’s attendees.
An employer that slips below the 95 percent threshold will be assessed the full tax, even if the employer offers coverage to the vast majority of full-time employees. For example, an employer with 500 full-time employees would owe a tax of $1,015,200 if it didn’t reach the 95 percent threshold, even if it offered coverage to 94 percent of its full-time employees, Adkins told the group.
In contrast, an employer that offered coverage to exactly 95 percent of its full-time employees would owe nothing.
Many nonprofit employers offer coverage to all or nearly all full-time employees. Nevertheless, managers cannot assume the organization will not be subject to the excise tax. It takes only a few employees to slip below the 95 percent threshold to trigger the tax.
Employers may qualify for an exemption, but managers should not count on it. The exemption applies if no full-time employees decide to purchase health insurance through a state or federal exchange, and among those employees, no employee’s household income is low enough to qualify for a premium tax credit.
Regardless of the employer’s size, if just one employee purchases insurance through an exchange and qualifies for the credit, the exemption does not apply. Most employers cannot count on the exemption, because the income thresholds to qualify for the credit are relatively high.
Adkins warned that nonprofit employers should be aware of special circumstances that could cause them to fail to offer coverage to at least 95% of full-time employees. Here are a few examples:
* Independent contractors or workers from staffing agencies who should be treated as full-time employees under the common law standards must be taken into account in the 95% threshold test.
* When hours are actually tracked for employees whom the employer classifies as part-time, those employees have an average of 30 or more hours per week. This causes them to be treated as full-time employees for purposes of the 95% threshold test.
* If an employer fails to offer coverage to a full-time employee for any day of the month, the employee is treated as not having been offered coverage for the entire month.
* A full-time employee can be counted as one who has been offered coverage only if coverage is also offered to all of the employee’s dependent children.
The risks associated with falling below the 95 percent threshold are too great to take chances. Nonprofit employers must sharpen their pencils and be very careful to ensure they don’t drop below the 95 percent threshold and trigger the tax.