Under 50 Employees? Think you are safe from the ACA? Maybe not!

by Michael Haberman on May 21, 2013 · 4 comments


Employers on the cusp of 50 employees may be on thin ice if they are using improperly classified independent contractors.

Employers on the cusp of 50 employees may be on thin ice if they are using improperly classified independent contractors.

The Affordable Care Act (also known as the PPACA or Obama Care) goes “live” on January 1, 2014, although aspects of it are effective now. The law requires that “large” employers with 50 or more employees must provide health coverage or pay a penalty. This has been described as “Play or Pay”. (BTW, this is the only time where a company with 50 employees would ever be described as a “large employer.”) So many employers that have fewer than 50 full time employees breathed a sigh of relief. They thought they were safe from coverage. Turns out some of them may not be.

What is a full time employee?

Most people think of full time employee as someone who works 40 hours per week. Some companies require more, some specify full time as less, such as 37.5 hours. The ACA however defines it as 30 hours per week. But the ACA doesn’t stop there. They are actually interested in “full time equivalents” or FTEs. Read more here and here. You do that by summing the hours those people work and dividing that by 120 to get the number of FTEs for that month. You make this calculation for each month, add the months up, and then divide by 12 and that would give you the average number of FTEs for the calendar year. If that number is more than 50 then you are covered by the law. This is one way that a smaller employer who thinks they are under the 50 employee threshold may get thrown over the line. However there is another way as well.

Independent contractors

One of the major mistakes many companies make is the misclassification of independent contractors. I have written numerous times on this subject. The USDOL, the IRS and state Boards of Workers’ Compensation don’t like employers improper use of independent contractors. The USDOL and the IRS in particular are on a mission to stop the misuse of this classification. Under the ACA there is also now another penalty for employers who wrongly call people independent contractors. If, due to the number of ICs an employer is now covered by the ACA then, according to the law firm of Morgan Lewis, the employer will suffer the following penalties:

Failure to Offer penalties of $2,000 per year times the total number of full-time employees (minus the first 30 full-time employees) if misclassification results in a failure to offer coverage to 95% of those deemed to be the company’s full-time employees and just one such individual obtains subsidized exchange coverage.

Insufficient Coverage penalties of $3,000 per year for each misclassified full-time worker who actually obtains subsidized exchange coverage because the employer coverage is either unaffordable or does not provide minimum value (capped at the maximum “Failure to Offer” penalty).

According to Morgan Lewis this should prompt many employers who are on the borderline of being covered to re-evaluate any independent contractor relationship they have. I agree.

Contractor standards

To avoid any problems with a government agency all employers who use independent contractors need to make sure they abide by standards set forth by the government. These are what they call the common law and include:

  • Behavioral control. Facts that show whether the busi-ness has a right to direct and control how the worker does the task for which the worker is hired.
  • Financial control. Facts that show whether the business has a right to control the business aspects of the worker’s job.
  • The type of relationship. In other words is there a specific contract.

More can be found on this by reading this IRS publication.

As we hasten down this road to 1/1/2014 it will be a good idea to fully understand every relationship you have with employees and non-employees that perform work.

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