It pays to know the nuances of the Affordable Care Act

Robert Sheen

Restaurant owners and operators have more than their share of challenges, from finding and keeping good employees and satisfying the ever-changing tastes of diners to health and safety in the kitchen and eking out a profit. For most of these hard-working entrepreneurs, having to understand and implement the complex new requirements of the Affordable Care Act, or “Obamacare,” may seem like yet another government burden on their time and budget.

You may disdain the ACA as a bureaucratic intrusion into private decisions about healthcare, or you might admire it as a much-needed reform of the nation’s healthcare system. Regardless of how you view the law, it now has to be part of your business planning.

For many small restaurants, those with fewer than 50 employees, the law doesn’t apply. If this is your situation, you are exempt from the ACA’s “employer responsibility” requirements, and don’t have to offer your workers health insurance.

However, you may be eligible for tax credits if you voluntarily choose to provide health insurance for your employees. Federal tax credits can cover up to half of your company’s share of the cost of that insurance. Some states offer additional credits as well.

If your company has more than 50 employees (including full-time equivalents, which we’ll discuss in a moment), you are subject to the ACA “employer responsibility” rules. In essence, the ACA says employers must offer good-quality health insurance at an affordable price.

Many large restaurant operators, especially those that are competing to attract and retain talented and productive employees, already offer health insurance. Prior to the ACA’s enactment, 97 percent of all U.S. companies with more than 100 workers offered health coverage, as did an impressive 92 percent of companies with just 51 to 100 workers. If this is true of your company, it’s likely that the plan you provide to your employees now meet the ACA’s standards. In that case, compliance with ACA rules will mostly be a matter of recordkeeping, making sure your employees are given the required information, and filing some additional forms with the IRS.

However, a significant number of restaurant companies across the nation have had to make some serious changes. They face significant additional costs for healthcare benefits that they didn’t previously offer, as well as administrative costs associated with complying with the law, or they will face serious penalties that are not tax-deductible.

Whether you have a health insurance plan in place now, or your growth will eventually require you to comply with the ACA, here are some issues you must consider.

Who is an employee?

You may think the answer to the question “who does our restaurant employ?” is obvious. But with the ACA, the way the Internal Revenue Service counts employees is what matters.

The ACA categorizes employees as (a) “full-time,” meaning they work an average of at least 30 hours per week during the year; (b) “part-time,” meaning they work fewer than 30 hours per week, or (c) “full-time equivalent,” a term that requires some explanation. A full-time equivalent is a combination of employees, each of whom individually does not work an average of at least 30 hours per week, but who, in combination, are counted as the equivalent of a full-time employee. For example, two dishwashers who each work 15 hours per week are the equivalent of one full-time (30-hour) employee.

This means your human resources and payroll departments must track the hours worked each week by any part-time workers you employ. You don’t need to report this information to the IRS until early in 2016, but that report must cover all of 2015—and in a monthly snapshot format. So if you have not started gathering that information, don’t wait any longer. You may want to talk with your information processing people about teaming with the HR and payroll staff to collect the data every pay period.

Complicating the recordkeeping and reporting tasks for restaurants is the relatively high rate of turnover in the industry, and the significant use by most restaurants of part-time workers.

The “who is an employee” umbrella also raises the issue of independent contractors. The IRS is looking closely at these relationships, and the impact on your company can be significant if they decide that your contractors are really employees. If that happens, you will be responsible for withholding taxes, Social Security and other employment-related expenses. In addition, the reclassified workers can end a small company’s exemption from the ACA’s employer shared responsibilities. For example, if you have 45 full-time workers and five independent contractors, and the IRS categorizes the five as employees, your company has 50 workers and is no longer exempt.

An important issue in the restaurant industry is the “common control” rule. Let’s say you own a couple of pizza restaurants, with 20 employees at each location. Then you buy a donut shop, which has 15 employees. To the public, the pizza place and the donut shop are entirely separate, and you may operate them as completely separate businesses. But because they have one owner (you, or perhaps you and a few partners), the IRS may treat all three as a single entity. If the “controlled group” has 50 or more employees, together the operations are subject to the law’s requirements.

What about low-wage employees?

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The restaurant industry traditionally has been an important source of employment for young people with little work experience and people with limited job skills. Historically, these low-wage jobs did not include health insurance benefits. Now the ACA is requiring restaurant operators to factor in the cost of health coverage, which can have a serious impact on the bottom line.

However, many if not most of these low-wage employees will actually be better off enrolling in Medicaid or another government health insurance program rather than signing up for the company-sponsored coverage.

Educating employees about these options, and understanding the totality of their family situations, can involve sensitive discussions that some HR departments are reluctant to undertake, which is why they often outsource this task to firms that specialize in this cost minimization activity.

Here’s why Medicaid and similar programs may be preferable for both the employee and the restaurant operator. The company must offer a plan that provides at least “minimum value” in ACA jargon; that means it covers at least 60 percent of the actuarial cost of benefits. The plan also must be “affordable,” which in practical terms often means the employee’s share of the premium must not exceed 9.5 percent of his or her rate of pay, W-2 income wages or the federal poverty line for a single individual.

If a low-wage employee’s share of the premium for coverage under the company plan would be more than the “affordable” level, he or she may be able to enroll in Medicaid (or Medicare, VA insurance, Tricare, etc.) without causing the employer to be subject to penalties under the ACA.  Also, government health insurance plans don’t have the burdensome deductibles or copays associated with company health plans.  The employer, meanwhile, saves by not having to pay its portion of the employee’s coverage under the company plan.

Robert Sheen is founder and president of First Capitol Consulting, Los Angeles, which advises companies on implementation and cost minimization of Affordable Care Act–compliant employee health insurance programs. This content is for general information purposes only, and should not be used as a substitute for consultation with legal advice.