Healthcare reform is a hot topic for business owners, and it has raised many questions for employers. Employer mandates of the already enacted Affordable Health Care for America Act (H.R. 3962) are set to take effect on January 1, 2014. The mandates will greatly impact the type of health insurance plans employers in the hospitality industry will offer and whether they will offer those benefits at all. Employers must consider the financial effect of healthcare reform as well as its impact on a company’s ability to recruit and retain employees.
Beginning in 2014, hospitality owners with 50 or more employees who are either full-time (FT) or full-time equivalent (FTE) will be required to offer health insurance coverage to their FT employees. The number of FTEs is determined by dividing the total hours of all part-time employees worked in one month by 120. Seasonal employees are not included in this calculation.
While the test of whether health insurance must be provided is based upon calculating the number of both FT and FTE employees, employers would only be required to provide health insurance to those employees who work 30 or more hours per week.
In order to be compliant with the Act, health insurance coverage must pass two tests:
- Minimum Value Coverage: The employer’s health insurance plan must pay out at least 60% of the incurred medical charges.
- Affordable Coverage: The employee’s contributions towards health insurance coverage can not exceed 9.5% of their W-2 wage income.
What happens if I choose not to comply?
Some employers have said that they will opt to take a penalty rather than offer insurance as mandated by the act, but those employers with 50 or more FT and FTE employees who take this route may be underestimating the impact of these penalties. Effective January 1, 2014, if coverage is not offered, the employer could face penalty of $2,000 per year for each full-time employee, reduced by 30 if one or more FTs receive assistance from a Health Insurance Marketplace that would be offered by the federal or state government.
Example 1: ABC’s Boutique Hotel has 35 full-time employees and 40 FTE employees. In 2014, ABC decides they will not provide health insurance coverage to their employees. If one FT acquires insurance coverage from a government-provided Health Insurance Marketplace, ABC could face a penalty of up to $10,000 ((35 FTs-30) x $2,000).
Can I divide my business into separate legal entities to stay under 50 FTEs?
In an effort to stay below the 50 FTE threshold, some restaurant or hotel owners may decide to divide up their business operations into separate entities. The number of FTEs for compliance under the Affordable Health Care Act is determined by those employed by a “single employer,” which is defined by Internal Revenue Code Section 414(b) as “common control,” meaning two or more legal entities having the same five or fewer owners, collectively owning at least 80% of the shares or interest by vote or value.
As a result, restaurant and hotel owners that decide to split up their business operations among various entities will still be mandated to provide health insurance to employees working 30 or more hours per week, assuming they have 50 or more FTEs among the entities where “common control” is applicable.
Example 2: Restaurant owners Donald and Dave own 90% of Pizza Palace (split 45/45) and 80% of Spicy Meatball (split 40/40). Pizza Palace and Spicy Meatball would be considered a single employer since Donald and Dave have “common control” of both restaurants by collectively owning at least 80%. If the FTEs of both restaurants are added together is at least 50, both Pizza Palace and Spicy Meatball would be mandated to offer health insurance to employees working 30 or more hours per week.
The Bottom Line
Whether employers decide to fund the extra cost for a health insurance plan or pay the penalties for not providing coverage, restaurant and hotel owners should financially prepare for the mandates the Affordable Health Care Act will bring in 2014. Year-end tax planning and future business decisions will be impacted, including the potential challenge of retaining employees or restructuring the enterprise’s workforce to rely on more employees who work fewer hours, should employers decide not to provide health insurance coverage in an industry that already has a transient workforce.