Act Now

Beginning in 2014, a nondeductible excise tax will be assessed on restaurant industry employers — those with 50 or more full-time and full-time-equivalent employees — who do not offer healthcare coverage to their full-time employees. A requirement of the Patient Protection and Affordable Care Act (PPACA or Affordable Care Act), the tax is significant — amounting to $2,000 per year, per full-time employee. The number of full-time employees is reduced by 30 for purposes of the calculation.

The regulations require coverage to be offered to 95 percent or more of full-time employees, using complex rules that define exactly who is and who is not a full-time employee. A restaurant industry employer who slips below the 95 percent threshold will be assessed the full tax – even if the employer offers coverage to many full-time employees.

The excise tax exposure is significant, as the table illustrates.

Employers who offer coverage to their full-time employees cannot assume they will not be subject to the excise tax. To avoid it, restaurant operators must identify full-time employees in a way that aligns with the complex approach in the IRS’s regulations. It takes only a few workers, relative to the total number of employees, to cause an employer to fall below the 95 percent threshold and trigger the tax.

Restaurant employers will be unable to ignore this tax. The IRS is establishing a vast information-gathering pro-cess through which it will calculate and assess the tax proactively without self-reporting by employers.

Don’t Count On It

Employers might qualify for an exemption, but they should not count on it. The exemption applies if two conditions are satisfied:

  1. No full-time employees decide to purchase health insurance through a state or federal exchange.
  2. Among those employees, no employee’s household income is low enough to qualify for a premium tax credit or subsidy to help pay for out-of-pocket costs.

Regardless of an establishment’s workforce size, if just one employee purchases insurance through an exchange and qualifies for the premium tax credit or cost subsidy, the exemption does not apply.

Employers cannot count on satisfying the first condition for the exemption because they do not control an employee’s decision to purchase health insurance through an exchange. Most employers cannot count on satisfying the second condition because the income thresholds to qualify for the credit or subsidy are relatively high.

Complexity In The Details

Restaurateurs who want to avoid the excise tax face the challenge of understanding the IRS’s complex rules defining who is a full-time employee, and aligning their plans with the rules.

The basic rules are simple. A full-time employee is an employee with 30 or more average hours of service per week, and a full-time employee is counted in the 95 percent threshold calculation after the first three months of employment. Underlying these simple concepts, however, are details that may not be clear. The following exemplifies the complexity:

  • The 95 percent threshold must be calculated monthly because the excise tax is assessed monthly at a rate of $166.67 ($2,000/12). Therefore, an employer must identify his full-time employees each month based on weekly average hours of service during the month, and then he must determine whether they have been offered coverage for the month.
  • To make the full-time employee determination more predictable, the restaurateur can take advantage of rules that allow an employee’s status as a full-time employee in future periods to be based on hours of service in prior periods. Although these rules are helpful, they have very exacting standards. Under these rules, 2013 is the prior period for determining full-time employee status in 2014. Thus, now is the time to review employee demographics.
  • Treatment of a new employee depends on a determination re-garding whether he or she is reasonably expected to have on average at least 30 hours of service per week. This determination is very important because it significantly affects when the employee is first treated as a full-time employee.
  • Special rules govern the determination of the full-time status of both seasonal employees and rehired employees.
Take Action Now

Risks associated with falling below the 95 percent threshold are too great to take chances. With the regulation’s complexity comes the chance of misunderstanding, misinterpreting and making errors. For any restaurant industry employer, a few details might make all the difference in reaching or falling below the 95 percent threshold.

Employers who want to offer coverage and manage the risk can start by convening a meeting of key stakeholders, led by an employee benefits professional who thoroughly understands the IRS’s regulations. Consider involving those responsible for health plans, inside and outside of the organization (i.e., employee benefits directors, insurance brokers and legal counsel). During the meeting, the employee benefits professional can help stakeholders create an action plan to reach the 95 percent threshold.

Understanding the rules – and even creating a plan – is of limited value without proper implementation. The employer still must establish administrative procedures that reflect the rules. An employee benefits professional also can assist with implementation, using step-by-step procedures that incorporate details of the regulations.

When it comes to the Affordable Care Act’s excise taxes, there’s too much at stake for restaurateurs to not take action now.

Eddie Adkins is a partner in the National Tax Office at Grant Thornton LLP. He may be reached at 202-521-1565, or at [email protected].

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