So in the last post about the Affordable Care Act, we broke the bad news. If you have a farm labor contracting business (or for that matter, any ag business with enough employees), you likely will not qualify for the seasonal employer exemption. Your company will be subject to the law’s requirement that you provide affordable health insurance coverage to your employees.
Of course the government can’t make you do something. But they can penalize you for not doing something. And that is how the law “encourages” employers to offer health insurance coverage: penalties (or as they like to call it, the “Employer Shared Responsibility payment”).
There are two different penalties.
The first penalty kicks in if you do not offer any coverage at all to your workers and at least one worker obtains an individual health insurance policy through the state or federal Exchange and receives a tax credit or subsidy. This penalty is calculated on a per month basis: 1/12 of $2,000 for each full time employee that you have (except for the first 30 employees) per month. If you start offering coverage midway through the calendar year, then the penalty will only be imposed for the months that you didn’t offer coverage.
The second penalty kicks in if you do offer coverage to your workers but that coverage is offered to fewer than 95% of your employees and their dependents or it is not affordable and at least one employee gets a tax credit/subsidy when purchasing individual coverage on the Exchange.
The affordable coverage test consists of two parts:
- Does the insurance pay for at least 60% of covered health care expenses for a typical population?
- Do employees have to pay more than 9.5% of household income for the employer based coverage?
If the affordability tests are not met, or you don’t offer coverage to 95% or more of your employees, or you don’t offer coverage for dependents, then your company will be subject to a $3,000 fine for each employee that obtains coverage through the Exchange and receives a tax credit/subsidy. This penalty is actually calculated on a per month basis. The IRS will total up the number of employees that receive a tax credit for each month of the calendar year, and multiply this number by $250 (1/12 of $3000). This penalty is also has a cap based on the calculation for the “no-coverage offered” penalty. This means that if you offer coverage and it is not considered affordable, you won’t pay a larger penalty than you would have if you didn’t offer coverage at all!
The penalties imposed by the ACA are nondeductible for tax purposes.
This is why the ACA employer mandate is sometimes referred to as a “play or pay” system: you either play by the rules set by the government and offer affordable health coverage, or you pay the penalties. Either way, this will be a new cost for your business. For growers, this cost is a new overhead expense, for farm labor contractors, that cost will have to be passed on to your growers.
In effect, ACA costs will become a new payroll overhead expense (in addition to payroll taxes and worker’s comp insurance) for all large employers, whether you decide to opt out of the system and pay the penalties or to offer coverage to workers.
For farm labor contractors, how you end up passing that cost along will be the subject of a future post, including determining what the overhead cost be and how it will appear on your invoices.
What happens if you don’t play?
If you managed to follow along this far, you may have realized that all of these penalties have to be assessed after the fact. If you are going to go with the “pay” option and not offer health insurance coverage to your employees at all, figure your maximum penalty per worker per month, $166 + taxes (because the penalties are not deductible), and this should give you an idea of the additional overhead that you need to charge your growers.
Another important note: the penalties will be indexed for inflation each year, so you will need to adjust your estimates for penalties paid each year.
Accounting Consideration for FLCs
While farm labor contractors will need to collect additional money to cover the additional overhead of the penalties, the penalties themselves cannot be assessed by the IRS until it has received and processed all of the information returns from your company and most likely, all of the tax returns of your employees. That means that you may not receive a bill from the IRS for your “Employer Shared Responsibility Payment” for the 2015 calendar year until well into 2016!
There’s an accounting implication: during 2015 you will collect additional money for ACA penalties, but unlike employer taxes and worker’s comp insurance expenses that are paid in the same year, you won’t pay the penalty until next year. This will boost your profit for 2015. And since ACA expenses are not deductible, you cannot accrue them in 2015 to reduce your profit.
What happens if you play?
On the other hand, if you are planning to offer health insurance coverage to your employees, there are a number of questions you need to answer to determine what your ultimate cost will be to offer that coverage. For instance:
Will your company pay the entire cost of the premiums for health insurance coverage? If not, how much will employees contribute? (As we noted above, the ACA sets a limit on employee contributions.)
Do you have a relatively stable workforce do you have a lot of employees that come and go?
How likely is it that employees will opt for health insurance coverage if they have to pay for part of the premiums vs. no cost to them?
Will employees opt for coverage for their dependents and/or spouse? (The law requires that the employer offer dependent coverage, but it doesn’t require that the employer pay for that coverage.)
Are you going to attempt to cover as many employees as possible (minimizing the chances of an audit from the IRS)? Or do you want to try to keep the overhead expenses low by designing a coverage system that covers year round employees but not seasonal employees?
If you haven’t already, it is time to talk to your insurance agent/broker! They can help you understand what options are available and give you an idea of what your costs will end up being.