Are There ACA Requirements for Businesses With Less Than 50 Employees?

SMBs that employ less than 50 FTE workers are not required under the ACA to provide healthcare coverage. But calculating the number for FTE staff can get complicated.

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Learn more about ACA rules for small businesses and online calculators you can use

For small to medium-sized businesses, often the ability to stay open hinges on keeping costs to a minimum. Healthcare coverage for workers is among the highest expenditure an employer can provide, but is it a requirement under the law?

Many SMBs are confused about the Employer Shared Responsibility Payment requirements of the Affordable Care Act, which require businesses that employ more than 50 full-time staffers provide medical coverage to workers and their dependent children.

Some employers, designated as applicable large employers (ALEs), must offer affordable health coverage that provides a minimum value to their full-time or full-time equivalent employees. These businesses have more than 50 full-time or full-time equivalent (FTE) staff on the payroll. The ACA has specific designations for ALEs, including thresholds of coverage or contributions to Healthcare Reimbursement Arrangements (HRAs), with detailed information about employer responsibility.

The SMB clause

SMBs that employ less than 50 FTE workers do not have a requirement under the ACA to provide healthcare coverage. The challenge for SMBs is determining whether they meet the threshold for FTE staff — calculating that number can be complicated.

For smaller businesses, the devil is often in the details. It’s easy to calculate headcount for some employers. But there are other employers that will need to carefully examine the the operable term full-time or full-time equivalent employee (FTE) to assure compliance with the law.

What is a FTE?

Under the IRS/ACA guidelines, workers who average 30 hours a week are full-time employees. But the guideline does not exclude part-time staffers who work less than 30 hours per week on average. They are also calculated into headcount. These employees are considered full-time equivalent employees. Together with full-timers, they are calculated to create a final headcount that may or may not trigger ACA coverage requirements.

To determine FTE totals, employers calculate the number of hours all employees work in a month, then divide by 130 (30 hours per week for approximately 4.33 weeks) to come up with their FTE count.

For example, a company employs 10 part-time staffers who each work 20 hours per week (80 hours per month). A total of 800 hours, divided by 130, equals 6.15. Businesses may round down, which means the company’s 10 part-time staffers are equivalent to 6 full-time employees.

You can add this number to the number of full-time staff (those who work over 30 hours per week). If the same company has another 10 workers who average more than 30 hours per week, their head count would be 16. This total FTE number determines if an organization meets the 50 minimum necessary to trigger ACA healthcare mandates.

The IRS also has a FTE employee calculator that helps SMBs determine their mix of full- and part-time employees and come up with a total.

The IRS also has a FTE employee calculator that helps SMBs determine their mix of full- and part-time employees and come up with a total. The calculations are based on the amount of hours employees worked in the previous year. New businesses are asked to estimate the average weekly hours expected for the coming year.

Some exclusions apply

There are several types of workers employers do not have to include in FTE headcounts. Under the guidance of the ACA and IRS rules, they include:

  • Owners of a sole proprietorship
  • Partners who own the business
  • Shareholders who own more than 2% of an S corporation
  • Owners of more than 5% of another business

Family members, or members of the household who qualify as dependents on the business owner’s income tax return, do not need to be counted in FTE headcounts. These family members include:

  • Spouse
  • Children / stepchildren
  • Grandchildren
  • Parents / stepparents
  • Grandparents
  • Nieces / nephews
  • Aunts / uncles
  • Son- and/or daughter-in-law
  • Mother- and/or father-in-law
  • Seasonal workers employed 120 days or less per year
  • Independent contractors
  • Retired employees on Consolidated Omnibus Budget Reconciliation Act (COBRA) enrollment

Just to confuse you

If you recently applied for and/or received a loan/grant under the Paycheck Protection Program (PPP) and its subsequent Flexibility Act (PPPFA), the definition of a full-time equivalent employee is not the same one that applies to the ACA Employer Mandate.

Don’t be confused by the PPPFA’s 40 hour per week threshold for a full-time or full-time equivalent employee. Under the ACA, the threshold for full-time equivalency is only 30 hours per week. More than 50 staffers who meet that minimum trigger the need to provide healthcare coverage for staffers under the ACA. The higher threshold, 40 hours per week, only applies to PPP loans.

Don’t be confused by the PPPFA’s 40 hour per week threshold for a full-time or full-time equivalent employee. Under the ACA, the threshold for full-time equivalency is only 30 hours per week.

50+ FTE employer mandate

If your organization staffs more than 50 full-time equivalent employees, the ACA employer mandate applies. To comply, businesses must offer healthcare coverage that is affordable and meets specific requirements:

Who employers must offer coverage

Employers must offer health insurance to 95% of full-time employees and their dependent children up to age 26. Under the ACA mandate, employers do not need to offer or provide coverage to spouses.

Minimum value requirement

A plan must provide a “minimum value” to staff members to qualify under the Employer Mandate. To do so, the plan must pay at least 60% of the cost of covered services — including copays, coinsurance, and deductibles. The United States Department of Health & Human Services has a minimum value calculator employers can use to verify their plan meets requirements.

Affordability requirement 

To comply with the mandate, coverage must be affordable to the staff member. To meet this threshold, the employer contribution for single (employee-only) coverage cannot exceed a percentage of the staff member’s household income. This includes the employee salary and the salary of their spouse/partner.

For 2020, coverage cannot exceed 9.78% of the employee’s annual household income. In 2021, coverage costs cannot exceed 9.83% of annual household income.

Mandated or voluntary, healthcare coverage is sought after

SMBs do not have to provide healthcare coverage for staff members under the ACA if they employ less than 50 full-time equivalent staffers. For many, however, the ability to attract and retain staffers may hinge on offering healthcare coverage.

Whether you must by law, or voluntarily offer the benefit, employees and job seekers are looking for medical coverage. Zenefits recently surveyed over 1,000 workers employed by SMBs. Topping their list of desired benefits was healthcare coverage.

Providing healthcare coverage may be more affordable and tax-beneficial than many SMBs assume. With tax incentives, ACA Small Business Health Options Program (SHOP) Plans, and other financial considerations, healthcare coverage may help attract and retain top talent — a boost to every business’ bottom line.

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