Defining Small Business
We’re all familiar with the term “small business.” Under this umbrella, the Small Business Administration (SBA) states there are 27 million small businesses in the U.S.; but, depending on who’s using the term, it has different meanings. As mentioned, the SBA defines “small business” as any actively operating company with 500 or less employees. Contrast this to how the Internal Revenue Service (IRS) defines the term in conjunction with the Affordable Care Act (ACA)— fewer than 50 full-time and full-time equivalent employees—though there are exceptions to this rule. Confused?
This confusion is compounded by employer layoffs in 2020 due to COVID-19. How do you, as an employer, determine whether it’s appropriate to lay-off your employees, keep up-to-date with state and local ordinances that change weekly, and figure out how to fund your next payroll cycle.
Then, there’s the question of how to juggle compliance with the ACA and learn the ramifications if you don’t. Once the economy becomes more stabilized and you think you’re out of the woods, you could be notified by the IRS that you’re subject to penalties for not remaining ACA-compliant during the pandemic. And, ACA penalties aren’t small.
Does Your Business Qualify as a Small Business?
For starters, there are two sets of rules that classify as a small business, as identified by the ACA and as outlined in the ACA section of the IRS website:
“…generally those with fewer than 50 full-time employees, including full-time equivalent employees.
If you have fewer than 50 employees but are a member of a group with a certain level of common or related ownership with 50 or more full-time employees, including full-time equivalent employees, then you’re subject to the rules for large employers.”
According to the ACA:
- As a self-employed sole small business proprietor with no employees, you’re exempt from penalties, referred to as Employer Shared Responsibility Payment (ESRP), which falls under the ACA.
- If you have approximately 50 employees, both part-time and full-time, and they meet this threshold, then the ACA applies to you. Note that “full-time equivalent” generally means your employees work 30 or more hours weekly. Plus, the hours your part-time employees work must be configured to determine the number of Full-Time Equivalent employees.
- If you have a member-owned business, one that the members govern, and it has fewer than 50 employees, you’re exempt. However, if those employees are part of a larger group under common ownership, which, together employ 50 or more full-time equivalent employees, then your business is considered a large business and the ACA rules apply.
- To report information regarding your employees’ health care coverage to the IRS, use forms 1094-C and 1095-C, irrespective of whether you offer coverage to your full-time employees or not.
- Give your full-time employees a copy of Form 1095-C, the same information you’re reporting to the IRS.
Options and Responsibilities
If you fall under the classification of a small business, according to the ACA, here are your options and responsibilities:
- You can purchase health and dental insurance through the Small Business Health Options Program (SHOP). It offers plans through an insurance company or with the assistance of a SHOP-registered agent or broker. The site provides a graphic that helps you work through the pros and cons of a SHOP plan and an HRA to determine which is right for your small business and your employees. Check out HealthCare.gov for more information.
- In 2013, the IRS issued final regulations implementing the Additional Medicare Tax as added by the ACA. The Additional Medicare Tax applies to wages, railroad retirement (RRTA) compensation, and self-employment income over certain thresholds. Employers are responsible for withholding this tax in certain circumstances. The amount you will need to withhold is an additional 0.9 percent of employee wages or compensation when it exceeds $200,000 in a tax year.
- Once your company offers health insurance, you are obliged to offer it to all eligible employees within 90 days of the start date of their employment.
As an employer, you can face penalties if:
- under 4980H(a), you fail to offer minimum essential coverage (MEC) to at least 95% of your full-time employees (and their dependents), and at least one of your full-time employees was certified, as allowed by the Premium Tax Credit (PTC).
- under 4980H(b), you offer MEC to at least 95% of your full-time employees (and their dependents), but at least one of your full-time employees was certified as being allowed the PTC (because the coverage was unaffordable or did not provide minimum value, or the full-time employee was not offered coverage).
- You need to be particularly diligent when completing the 1095C-form related to ACA Compliance, especially lines 14, 15, and 16. Lines 14 and 16 require you, as the employer, to select the most accurate “Indicator Code” that expresses the offer of coverage and subsequent safe harbor relief that was or was not made to the employee. This form needs to be submitted both to your employee and the IRS, because it ultimately determines noncompliance by the IRS and is used to calculate penalties that you, as an employer, may owe.
To further confuse matters, until recently, there were 10 choices that you needed to pick from among the Indicator Codes to complete Line 14. Recently, eight additional Indicator Codes have been added to Line 14, which further complicates things and makes it easier to make an error, which you would be held responsible for.
These eight new Indicator Codes were prompted as a result of the Trump administration’s expansion of Health Reimbursement Arrangements (HRAs). In 2019, the administration finalized new rules that let HRA’s that met certain conditions be considered for minimum essential and affordable coverage related to ACA compliance. Check for more information and guidance from the IRS on Indicator Codes and all aspects of the draft forms. Note that these new updates can compound the confusion related to what already exists for employers.
There are other practical issues related to COVID-19 that are expected to create problems for employers, as they try to keep compliant. An example is employers who furlough employees or reduce their hours may need to properly identify the change in status in the tracking process, and subsequently, in what is reported to the IRS. While some of these nuances existed before, they will be magnified as things keep evolving and changing, possibly increasing the chance of employers making errors. It’s important that you, as the employer, are prepared to handle this in order to remain compliant.
Remaining ACA Compliant
Keeping abreast of ACA-compliance issues can be a full-time job. For example:
- Performing all legally required IRS and employee reporting.
- Documenting that you offer your employees health insurance.
- Accurately tracking payroll deductions.
- Checking for employee eligibility.
- Determining your employees’ affordability.
It’s critical that you know how to navigate through these stormy waters. Check out the compliance tool at business.USA.gov/healthcare for more information. Remember, non-compliance can result in penalties.
If you need help maneuvering through all this reporting, ASAP Payroll Service can help. We can assist with:
- handling all legally required IRS and employee reporting.
- tracking all employer-provided health care offers.
- documenting employee health care options, including waiving offers.
- bridging health care options to employee payroll deductions, resulting in easy maintenance.
- handling scheduled status updates to monitor health care eligibility for new and variable-hour employees.
- utilizing payroll data to track employee eligibility for health care offers going to ongoing employees.
- gathering employee wage information and using it to determine affordability of health care offers for each full-time employee.
- handling additional HR reporting, such as OSHA, EEO, and Veteran reporting, provided education/required education tracking, performance evaluation tracking, property tracking, document storage, and more.
The Importance of Tracking and Reporting
While these 2020 form changes were expected, they were still a surprise in terms of the extent they have been proposed in draft forms by the IRS. Plus, the pandemic has created problems for employers who are working on being compliant. For example, if you have furloughed employees or reduced their hours, you may need to properly identify their change in status in the tracking process, and subsequently, in what you report to the IRS. As an employer, if you lay-off employees and rehire them again when the economy picks back up, know that this, too, can have an impact on an employee’s status related to employee tracking. There are very specific rules related to rehiring and how you treat those employees, based on a timeframe. This references breaks in service and the 13-week rehire rule. While this rule has been in place prior to COVID-19, now it will be magnified during this ongoing pandemic, thus opening up the possibility of increased errors in reporting. Juggling all these requirements is challenging to say the least, but necessary to remain compliant.
As we head into the last quarter of 2020, to date, it’s been a year replete with employer challenges and is expected to continue through December. As an employer, you need to be smart and diligent about keeping apprised of any and all changes that occur, including changes to state and local ordinances; legislative opportunities, such as new SBA loans; and compliance changes, such as 2020 draft 1095-C forms. As an employer, rely on your service provider to help you navigate through these changes and remain compliant. Your service provider (hopefully, ASAP Payroll Service) can play a major role in keeping you on track and helping you avoid major penalties.