The Impact of the Affordable Care Act on Startups

The Affordable Care Act or Obamacare, which most businesses are familiar with at this point, could have serious implications on your business depending on where in your growth you currently are.

Right off the bat, the important thing to keep in mind is the number 50. According to the ACA, small businesses with fewer than 50 full-time employees (FTE) or full-time equivalents are not required to offer group health plan coverage. This is a key impact of the Affordable Care Act on startups. One detail that many fail to represent is that part-time employees do count towards your total employee count, they just count differently than full-time employees.

How ACA Defines Full-Time Employees

The easiest way to define a FTE is to first disqualify a bunch of potential candidates.

What is NOT a full-time employee:

• A partner, owner, shareholder owning more than 2% of an S corporation

• Certain seasonal employees

• An independent contractor

• COBRA and retired benefit plan enrollees 

Once you’ve crossed all of those people off the list, you’re left with what could be full-time employees. In the government’s eyes, a FTE is someone that works an average at least 30 hours a week, or 120 hours a month. In most cases, anyone who averages less than 30 hours a week will be considered a part-time employee.

Part-Time Employees Count Toward ACA Minimums

Perhaps you only need a part-time designer and a part-time marketer based on where you are in your business’ growth. This is where hours really come into play because you have to combine all the hours of your part-time employees and determine how many “more” full-time equivalents you have (in the form of part-time employees).

Let’s do a little math to illustrate.

Imagine you have three PTEs who each work 20 hours a week over the course of a month. That’s three employees working a combined 60 hours a week, or 240 hours a month. (Remember that a full-time employee is only considered such if they work at least 120 hours a month.)

If you take your three employees’ combined monthly hours (240), divided by the minimum monthly hours for an FTE (120), you’re left with 2 FTE. So these three part-time employees, in this example, actually total up to two full-time equivalent employees that will be counted towards your ACA minimums.

Does the ACA Employer Mandate Affect You?

The number of full-time employees (and full-time equivalents) at your company will directly impact how you must comply with the ACA.

50 full-time employees marks the threshold for the ACA impacting your business. If your total combined full-time employees and full-time equivalents equal 50 or more, then you are going to be impacted by the Affordable Care Act. If you’re under 50, for the most part, you’re unaffected.

The primary effect for those averaging 50+ employees is what’s called the Employer Mandate. This mandate demands that employers offer qualified health plans — a phrase we’ll talk about more below — to full-time employees. If you meet the Employer Mandate criteria and don’t offer qualified health plans, you may have to pay a penalty of over $2,000 per year for every full-time employee (excluding the first 30). That’s enough to seriously hurt a business.

A penalty of $2,570 (for 2020) per full-time employee minus the first 30 will be incurred if the employer fails to offer minimum essential coverage to 95 percent of its full-time employees and their dependents, and any full-time employee obtains coverage on the exchange.

Offering Group Health Insurance Coverage If Your Business is Smaller Than 50 Employees

With all this talk about the Employer Mandate, it helps to remember that it only affects you if your business has 50+ full-time employees or full-time equivalents. If you’re an employer with fewer than 50 FTEs, there are a few coverage options for your employees.

First, these employees might opt to get health insurance on their own, since the ACA still requires that everyone have health insurance.

Second, as an employer, you can still offer your employees coverage, and the government may offer a tax incentive for doing so. This tax credit is available if you meet all of the following criteria, according to the IRS:

• You’re a business under 25 employees

• You pay at least 50% of your employee’s health insurance premium, known as a “qualifying arrangement”

• The average employee salary is lower than an indexed $54,200 per year, as of the 2019 tax year

This is the government’s way of trying to entice small businesses into offering their team health insurance.

Qualified Health Plans & Rules

Now that you know you may have to provide group health insurance coverage, the next step is to find the correct insurance. It has to be what’s called a “Qualified Health Plan,” which simply means that it meets the requirements put forth by the Federal government.

At a high level, the rules require specific coverage and that there is a cap on cost sharing for the individual. There are requirements on having to cover certain pre-existing conditions, removing caps on lifetime benefits, and for those that have children, they have to be eligible for coverage up until the age of 26.

To stay compliant, you have to provide your employees with a summary of benefits. This lets them know about what the costs are and how much is covered. Finally, in most cases, you have to offer coverage within 90 days of a full-time employee's hire date.