How Independent Contractors Factor Into Your Affordable Care Act Compliance

If any of them are, your HR staff will need to add them to calculations of total employees as part of your Affordable Care Act (ACA) compliance. If not, your company will risk incurring a hefty excise tax.

“To comply with the ACA, your company must offer health care coverage to 70% of your full-time employees (those working an average of 30 or more hours per week) in 2015 and 95% thereafter.”

To comply with the ACA, your company must offer health care coverage to 70% of your full-time employees (those working an average of 30 or more hours per week) in 2015 and 95% from 2016 and beyond. The 70% threshold applies only to employers with 100 or more full-time plus full-time equivalent employees. The 95% threshold applies to employers with 50 or more full-time plus full-time equivalent employees.

Your HR staff will need to divide the number of full-time employees who are offered coverage by the total number of full-time employees, including common law employees who work full-time and may currently be classified as leased employees or independent contractors. If your company misses the threshold, it will owe a tax of $2,000 per year times the total number of full-time employees minus the first 80 employees in 2015 and 30 employees thereafter.

The penalty adds up: For example, a company with 250 full-time employees would pay an annual penalty of $340,000 in 2015 and $440,000 after 2015. Even if you miss the 95% threshold by just 1%, your penalty will be the same as if you hadn’t offered any coverage. Clearly, it’s essential to correctly classify workers and add common law employees into your count.

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Eddie Adkins
Eddie Adkins is Partner, Washington National Tax Office; Technical Tax Practice Leader, Compensation and Benefits Consulting Grant Thornton.

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