News and Articles

October 2015 NEWSLETTER

Yogi Patel - Monday, October 05, 2015

Dear valued clients and supporters: This month's newsletter will focus on: (1) the current and upcoming obligations for employers under the Affordable Care Act; (2) the differences between employees and independent contractors; and (3) Non-Qualified Stock Options as a tool for entrepreneurs to attract expert advisors/consultants/employees.

The Affordable Care Act Employer Mandate
Under the Affordable Care Act ("ACA"), employers with over 50 full-time employees are required to provide health insurance. The insurance must meet certain minimal standards and must be offered to the vast majority of employees in large businesses. Employers who fail to meet the ACA's requirements face penalties that could total in the tens or hundreds of thousands of dollars. While the ACA's rules for 2014 and 2015 have been more flexible, beginning in 2016, employer obligations and penalties will be in full effect. For smaller employers who are not required to provide insurance, the ACA offers tax incentives for doing so. All employers are encouraged to consult with counsel to make sure they are in compliance and can read more about this issue in our article available here.

Employees vs. Independent Contractors
Understanding what makes a worker an employee or an independent contractor under the law is one of the most important distinctions a business owner should be able to make. Depending on the classification, employers are required to make specific tax withholdings and carry workers compensation and unemployment insurance policies. Additionally, employees (as opposed to independent contractors) are protected by minimum wage, overtime, and other labor laws both under City, State and Federal Laws. Employers who misclassify workers and then fail to meet their obligations and/or violate the law can be held liable for penalties and damages that are as much as triple what they owe. Additionally, employers may be subject to investigation by government agencies. Recently, the U.S. Department of Labor issued an interpretation that clarified the standard used for determining a worker's status and the extent to which State and Federal agencies are auditing employee classification. For more information, including the test used for determining whether a worker is an independent contractor or an employee, see our article here.


Non-Qualified Stock Options
For entrepreneurs and business owners who might not have substantial cash on hand, offering equity in exchange for services is a commonly utilized option. One way in which this can be done is through Non-Qualified Stock Options ("NQSOs"), which grants an individual the right to purchase shares in a company at a low, fixed rate, in exchange for providing expert advise or other services. If the price of the company's stock goes up, the option holder will be able to purchase the shares at the lower, fixed rate and enjoy the increased stock price as profit. NQSOs come with built-in limitations that are designed to protect the interests of the business and allow the parties to establish their relationship first. Most commonly, the option holder does not gain the right to purchase shares until he or she has provided services to the company for a certain period of time. Understanding how to use NSQOs can be a powerful tool for business owners and is something all entrepreneurs should have at their disposal. For more information and in-depth discussion on NQSOs, see our article here.


Readers are encouraged to peruse the more in-depth articles on our website and to follow us on Twitter (@lloydpatelllp) and Facebook to receive updates on this and other legal developments throughout the month.

Navigating Employers’ Responsibilities Under the Affordable Care Act

Kyle Carraro - Friday, October 02, 2015

Confused about your obligations as an employer under the Affordable Care Act (“ACA”)? The good news is you are not alone. With a sea of rules and regulations that have undergone several revisions and delays, knowing exactly what you are supposed to be doing as an employer with regards to your employees’ health care can be overwhelming. However, as the benefits and penalties of the ACA are set to take full effect soon, employers must take steps to educate themselves.

Employer Responsibilities: Who Must Provide Insurance and When Must They Do So

While the term “employer mandate” has made headlines and is quickly becoming part of the pubic vernacular, few people can explain its precise meaning. First, the employer mandate is a reference the Employer Shared Responsibility (“ESR”) provisions of the ACA. The ESR provisions state that any employer with over a certain number of employers must provide insurance coverage to its workers. Generally speaking, larger employers with 50 or more full-time employees must offer health care coverage to their employees and their dependents. The coverage must be affordable and meet certain minimal criteria. Employers who fail to comply with this requirement can be assessed hefty fines by the Internal Revenue Service.

For the year 2015, the government has offered “transitional relief” for employers who have between 50 and 99 full-time employees, meaning that for these employers, coverage does not have to be provided until January 1, 2016 if they meet certain requirements.

Here is where it can get a little confusing: In order to be exempt from the coverage requirements under the ACA, the employer must have had between 50 and 99 full-time employees from February 9 through December 31, 2014. Additionally, the employer must certify that it has not made any reductions to its workforce in order to meet the exemption requirements and must maintain any health coverage that was already previously being offered. If no such coverage was being offered, there is no requirement to begin offering coverage for employers who qualify for transitional relief until January 1, 2016. Of course, if an employer has legitimate business reasons for reducing or modifying her workforce, she is permitted to do so.

Businesses with 100 or more full-time employees are not exempt from providing insurance in 2015, but there is partial relief available. For 2015, if such a large employer offers coverage to at least 70% of its employees (and their dependents) and no employee receives a premium tax credit to help pay for coverage through an insurance Marketplace, then the employer will not be subject to any penalty payment. For 2016, the threshold is raised to 95%. Any employer with 100 or more full-time employees that does not offer insurance to the threshold number of employees and/or which has at least 1 employee who receives a premium tax credit, it will be subject to a penalty.

So Just How Bad Could the Penalties Be?

The short answer is: steep enough to incentivize employers to offer insurance to their employees. Any employer who is required to provide insurance but fails to do so, and which has at least one employee that receives a premium tax credit through an insurance Marketplace, will be subject to a penalty equal to the number of full-time employees it has for the year roughly equivalent to $2,000 per employee. The penalties are calculated on a monthly basis, meaning they only apply to the months during which no insurance was offered, but some employers could easily see fines in the tens or even hundreds of thousands of dollars each year.

Even employers who are providing insurance can be subject to penalties if they are not providing adequate coverage or if they fail to offer insurance to enough of their employees. While there are certain reduced penalties for 2015 only, there is currently no relief being offered from the complicated and stringent requirements of the ACA for 2016 or later. Any employer who is concerned about meeting the ACA’s requirements, even those who currently provide insurance, would be wise to consult with an attorney. Our lawyers are knowledgeable of employers’ obligations under the ACA and are dedicated to working closely with our business clients to make sure they are in compliance and avoid paying these steep penalties.

How to Calculate the Number of Full-Time Employees

A full-time employee is defined under the ACA as one who works at least 30 hours a week or 130 hours per month on average. For an employer who employs only full-time employees, this is a straightforward calculation taking the total average number of full-time employees she had each month over the previous calendar year. For employers who have part-time employees, the calculation is a little more complicated.

For the purposes of determining an employer’s obligation to provide insurance only, the ACA provides for the inclusion of Full-Time Equivalents (FTEs) into the calculation. This works by multiplying the total number of hours part-time employees work by the number of part time employees, all divided by 30. For example, 21 part-time employees who work 20 hours per week would amount to 14 FTEs.

Keep in mind, employers who own or operate more than one business will likely have the employees from each business added together for the purposes of determining whether or not the employer is required to provide insurance.

Tax Credits for Small Businesses

Under the ACA, businesses with less than 25 full-time employees who are paid, on an average, less than $50,000 per year are eligible for a tax credit if they pay at least half of the insurance premiums for their employees. The maximum tax credit is 50% of the premiums paid for small businesses, and 35% for small tax-exempt employers. Employees must generally enroll in a qualified health plan offered through a Small Business Health Options Program (SHOP) Marketplace in order to qualify. The credit is refundable, or it may be applied to future taxes.

Filing Requirements

Beginning in 2016, businesses with over 50 full-time employees must fulfill reporting requirements with the IRS. Employers are responsible for forms 1095-c and 1094c, which provide information to the IRS on the employers’ full-time employees and their insurance coverage. When employees, in turn, file their personal income taxes, the IRS will know whether or not an employee received a premium tax credit. The IRS then uses the employee’s personal income taxes and the employer forms to determine what, if any, penalty to assess.

So What Should Business Owners Do?

If business owners have over 50 full-time employees, they should plan to provide health coverage to their employees (and their dependents) beginning January 1, 2016. For every month afterwards that coverage is not provided, employers will face stiff penalties for non-compliance. Employers should work closely with an attorney and a payroll professional to make sure not only that they have in place the necessary coverage, but also are maintaining proper records, making withholdings from employees’ paychecks, and fulfilling their filing requirements. Smaller business should also consult with an attorney or tax professional to help determine if they are eligible for certain tax incentives. Finally, an employer who is growing a business or who owns multiple businesses should seek professional assistance to determine what her future obligations might be under the ACA to avoid paying hefty fines.

Employers of any kind should keep in mind that this article is intended to provide a general overview of some of the most pressing obligations under the ACA and should not be construed as legal advice. As with any important decision, there are nuances and specific details that may pertain to your situation and you are best advised to work with a licensed professional to meet your business’s needs. If you would like to consult with one of our attorneys about your ACA obligations, you can contact us here.


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