The Affordable Care Act (ACA) requires all applicable large employers (ALEs) to offer affordable, minimum value health insurance to their full-time employees or face a penalty. According to the IRS, an ALE is an employer that has at least 50 or more full-time employees. But determining which employees must be offered coverage isn't as straightforward as it sounds, especially considering that ACA misclassification can result in hefty financial penalties.
Under the ACA, there are four types of employees.
Full-time employees work 30 or more hours per week.
Part-time employees work less than 30 hours per week.
Seasonal employees work a duration of six months or fewer at a job, and the job starts and ends at the same time each year.
4. Variable Hour
A variable hour employee works hours that vary from one week to the next. When the employee begins work, it's not determined whether the employee will work at least 30 hours per week.
Seasonal and Variable Hour Employees
To avoid potential penalties, organizations should offer affordable, minimum value coverage to at least 95 percent of full-time employees, according to the IRS. This includes seasonal and variable hour employees if they average at least 30 hours per week during their initial measurement period. But the initial measurement period can be up to 12 months long for seasonal and variable hour employees, and coverage does not have to be offered during the measurement period.
If you have seasonal employees or variable hour employees, you'll be monitoring hours every month, year-round, to determine employees who must be offered coverage. But if a full-time employee is misclassified as seasonal or variable hour and not offered coverage by the first day of the fourth month of employment, the organization will face penalties if that employee enrolls in a plan through the exchange and receives a subsidy.
If your organization uses independent contractors, it's imperative that you're aware of the requirements that must be fulfilled in order to accurately classify someone as an independent contractor. You could face penalties if you misclassify employees as independent contractors and therefore don't offer them coverage. Most organizations have long been aware of the adverse implications of misclassifying employees as independent contractors, but the ACA's employer shared responsibility provisions add an additional penalty. Because the ACA penalty is calculated based on the organization's total number of workers, rather than just the number of workers who weren't offered coverage, the penalty can be disproportionately large, even if a small number of employees are misclassified and thus not offered coverage.
You can outsource your ACA compliance tasks, including monthly eligibility verification, or you can complete the work in-house. Either way, you'll need to have an ongoing record of hours worked and coverage offers made. Keeping track of this information on a monthly basis ensures your data is always up-to-date, and will help you quickly spot errors — and avoid future penalties if you've inadvertently misclassified an employee.
Misclassifications will eventually be reconciled, in addition to the ACA informational reporting that employers are required to remit. The IRS also has Form 211 that people can use to report violations and potentially be rewarded financially for doing so.
How Finance Leaders Can Partner With HR
Increasingly, successful organizations recognize the importance of a collaborative approach to compliance between HR and finance. A big part of HCM is workforce planning, and human capital is typically the single largest expense for most organizations. To avoid ACA misclassification, it's more important than ever for finance leaders and HR to work together to optimize a plan for adequate staffing while ensuring the positions they're filling are accurately classified.
Classifying employees has traditionally fallen under the umbrella of the HR department. But the ACA's penalties mean that classifications have more significant financial ramifications than in the past, pushing this issue into the realm of finance departments. And while some of those classifications used to be defined internally and often meant different things to different organizations, the ACA has created uniform definitions for each employee classification. As a finance leader, you should work with HR to review your workforce on an ongoing basis, ensuring that employees are being accurately classified.
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