Article

4 things you don't know about the ACA (but should)

The employer shared responsibility rules under the Affordable Care Act (sometimes called "pay or play") is just one more area that is moving so fast that many restaurant owners are falling behind without even realizing it.

April 6, 2016

By Ann E. Murray, Nelson Mullins Riley & Scarborough LLP

It's difficult to keep up with the changing times in the restaurant industry, and the employer shared responsibility rules under the Affordable Care Act or ACA (sometimes called "pay or play") is just one more area that is moving so fast that many restaurant owners are falling behind without even realizing it. Below we highlight four of the most common areas that you may not have considered.

1. Identify your related entities

The ACA applies only if you have enough employees to be subject to the law (generally, 50 or more, after counting each full-time employee and then totaling your part-time employees' hours to come up with full-time equivalents). You have several restaurants that fall below this threshold, so they don't have to worry about it, right? This is likely not the case.

In determining your employee count, you must include all companies in your "controlled group." Controlled groups can consist of corporations, unincorporated businesses or a combination of both. A controlled group exists when either:

1.  A company owns at least 80 percent of the voting power or the total share value (or, for partnerships or LLCs taxed as partnerships, either capital or profits interests) of one or more businesses
2. Or five or fewer individuals, trusts or estates own at least 80 percent of the stock (by vote or value), capital or profit interests of two or more companies, and the combined identical ownership of those common owners is more than 50 percent. This includes direct and indirect ownership (such as stock options or ownership of certain family members).

If you share ownership with family members, or you have invested in your restaurants with several individuals, you need to consider whether a controlled group exists. If you have assumed that some of your entities are too small to have to worry about the ACA, think again.

2. Do you have service groups?

Similar to the controlled group rules described above, you must also count employees of all "affiliated service groups" of which you are a part. 

An affiliated service group may exist where:

1. One company (or its owners, officers, or highly-compensated individuals) owns certain interests in another company and the first company regularly performs services for the second company, or is regularly associated with the second company in performing services for third parties, or a "significant portion" of the first company's business is performing services for the second company that are of a type historically performed by employees in the second company's type of business (e.g., payroll, office support).
2. Or where more than 50 percent of one company's revenue comes from performing, on a regular and continuing basis, management functions for (e.g., planning, organizing, staffing (hiring and firing), supervising, directing or controlling) another company or group of related entities. 

The rules are very complicated, but if your structure includes one company that oversees and handles back-office functions for your various restaurants, you need to consider whether the structure qualifies as an affiliated service group. The typical structure that sources support services or management in one company could cause all of the companies receiving those services to exceed the ACA threshold.

3. Are you only treating managers and assistant managers as "fulltime"?

One of the most popular ways for restaurants to minimize or delay their obligation to offer health coverage, and thus save on costs, is to classify employees as "variable employees," because this allows you to sit back and measure the employee's hours of service over his or her first year of employment and then offer coverage only if he or she worked enough hours (average of 130 per month). Great approach, right? Be careful.

You can only classify a new hire as a "variable hour" employee if, based on the facts and circumstances at their date of hire, you can say that you don't reasonably expect them to be employed on average at least 130 hours per month. Factors to consider include:

• Is the employee replacing an employee who was a full-time employee?
• Are employees in comparable positions full-time employees?
• And did you advertise, communicate to the new hire, or use a job description that says the job was full-time? (e.g., must be able to work at least 30 hours per week).

Many restaurants have taken the simple approach of simply classifying all managers and assistant managers as "fulltime," and relegating all other employees to "variable hour" status. But is that really accurate for all of your workers? A small mistake could jeopardize your entire company's compliance and trigger a penalty based on your entire workforce.

4. No premium reimbursement allowed

You are in the restaurant business, not the health-care business, so you figure you will just tell the employees to go get their own coverage and you'll reimburse all or a portion of the cost. Good solution, right? Not so fast.

The ACA rules generally prohibit you from reimbursing or paying your employee’s premiums for health coverage that is not sponsored by you, even if it's post-tax. While some exceptions apply if you have less than 20 employees, in most cases this kind of arrangement is going to trigger an excise tax under Section 4980D of the Internal Revenue Code equal to $100 per day per affected employee. That means you could owe $36,500 per year for each worker you employ.   

There are quick solutions: Pay a taxable cash bonus that's not tied to purchasing health coverage, provide an "opt-out bonus" or flex credits within the employer’s cafeteria plan, but they need to be properly structured.

The ACA pay or play rules likely represent a significant additional cost for your companies. Whatever approach you are taking (complying or opting for the penalty), make sure that you have properly analyzed your exposure. Failure to properly consider any of the above points could throw your entire ACA strategy out the window.

Ann Murray is a partner in Nelson Mullins Riley & Scarborough LLP's Atlanta office where she practices in the areas of employee benefits and executive compensation.