ACA - Allocated Reduction for 1 Employee ALEM

[Morgan]

I have a client with 120 employees (All Full-time) who is currently ACA-compliant with their offer of coverage. They are creating a new entity with only one employee (Full-Time), but with identical ownership to the existing business, so this new entity will be considered an ALE Member within the same controlled group. I’m trying to confirm what their ACA penalty exposure would be if they decide not to offer benefits under this new entity.

For Penalty A, my understanding is that the new entity would be exempt due to the allocated reduction of 30 full-time employees. The allocation for the new entity’s share of the 30-employee reduction would be:
(1 / 121) × 30 = 0.24. Based on the guidance below, this would round up to 1, and since the new entity has only 1 employee, Penalty A wouldn’t apply?

“If an applicable large employer member's total allocation is not a whole number, the allocation is rounded to the next highest whole number. This rounding rule may result in the aggregate reduction for the entire controlled group exceeding 30.”

My next question is, Would Penalty B also not apply since no offer of coverage is made ? It appears that a requirement for penalty B to apply is an offer of coverage:

an applicable large employer offers to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan (as defined in section 5000A(f)(2)) for any month, and 1 or more full-time employees of the applicable large employer has been certified to the employer under section 1411 of the Patient Protection and Affordable Care Act as having enrolled for such month in a qualified health plan with respect to which an applicable premium tax credit or cost-sharing reduction is allowed or paid with respect to the employee,

 

 

[Brian Gilmore]

This is an interesting one.  I agree the A Penalty does not apply, but it's not because of the proportional 30-employee reduction for each ALEM.  That reduction is used for purposes of calculating the applicable A Penalty amount where a full-time employee of ALEM has triggered the A Penalty by receiving a subsidy on the exchange.

But in this case, the (one and only) full-time employee of the ALEM can't even trigger the A Penalty.  The A Penalty generally applies if the ALEM fails to offer coverage to at least 95% of it's full-time employees (and at least one full-time employee receives an exchange subsidy).  However, there is an additional rule that says if greater, the ALEM can fail to offer to up to five full-time employees without A Penalty exposure.  Given that the ALEM doesn't even have five full-time employees, there is no way the A Penalty can apply.

So in any case, we're reaching the same result here but the different reasoning is still interesting.

With that in mind, I agree the ALEM's one full-time employee can still trigger B Penalty liability by receiving subsidized exchange coverage.  But that raises yet another interesting point, which is that B Penalty liability cannot exceed A Penalty liability.  As you noted, even if it were possible to trigger the A Penalty, the one-employee proportional reduction would result in no A Penalty. 

The end result I'm seeing is that there is no potential ACA employer mandate liability for this ALEM with only one full-time employee because a) the A Penalty can't be triggered, and b) the B Penalty can't exceed the A Penalty, which is zero.

I know this is real life, but you really couldn't design a better law school exam question on the employer mandate than this scenario here. 

Here's the relevant points:

https://www.federalregister.gov/documents/2014/02/12/2014-03082/shared-responsibility-for-employers-regarding-health-coverage

The alternative margin of five full-time employees (and their dependents), if greater than five percent of full-time employees (and their dependents), is designed to accommodate relatively small applicable large employer members because a failure to offer coverage to a few full-time employees (and their dependents) might exceed five percent of the applicable large employer member's full-time employees.

...

Notwithstanding the foregoing, the aggregate amount of assessable payment determined under this paragraph (a) with respect to all employees of an applicable large employer member for any calendar month may not exceed the product of the section 4980H(a) applicable payment amount and the number of full-time employees of the applicable large employer member during that calendar month (reduced by the applicable large employer member's ratable allocation of the 30 employee reduction under § 54.4980H-4(e)).

[Morgan]

Thank you as always @Brian Gilmore! I was thinking this might be the one-off where an ALEM can decide to not offer coverage and not be exposed to ACA penalties. Thank you for pointing out the alternative margin of five Full-Time employees as I was only considering the 30 employee allocated reduction for Penalty A.

In regards to Penalty B, the rule that you point out mentions utilizing the allocated Reduction. 

Notwithstanding the foregoing, the aggregate amount of assessable payment determined under this paragraph (a) with respect to all employees of an applicable large employer member for any calendar month may not exceed the product of the section 4980H(a) applicable payment amount and the number of full-time employees of the applicable large employer member during that calendar month (reduced by the applicable large employer member's ratable allocation of the 30 employee reduction under § 54.4980H-4(e)).

Assuming this ALEM continues to hire Full-Time employees, the alternative margin of 5 employees could be used for penalty A and that ALEM would only start their exposure to penalty A on the 6th Full-Time Employee? Would the penalty B exposure start on the 2nd Full-Time employee (Should that employee receive a PTC) though? Since the rule that states Penalty B can't exceed Penalty A references the ratable allocation of the 30 employees? and the calculation above once rounded to the nearest whole FTE is 1. 

 

[Brian Gilmore]

Yeah that's how  I read it.  The A Penalty could only be triggered above five full-time employees.  However, they could trigger B Penalty liability at any number of full-time employees.  There would be no B Penalty liability at one full-time employee given that it's capped at the A Penalty amount--which is zero based on the one employee proportional reduction.  But at two or more full-time employees there would be an A Penalty amount.  Then an employee triggering the B Penalty would create a calculation scenario of which penalty amount (A or B) is lower to determine the actual potential liability.