The 2010 Patient Protection and Affordable Care Act (ACA) significantly impacts national healthcare reform. The major effect for school bus contractors is the requirement to offer health insurance to their full-time employees (FTE) and dependents in 2014, and the financial consequences of failing to comply. The critical issue is determining what an FTE is.

Recently, the Internal Revenue Service (IRS) and the departments of Labor and Health and Human Services issued separate guidance to employers showing when part-time or seasonal employees (e.g., bus drivers and monitors) must be treated as full time.

General background
If a “large employer” does not offer affordable minimum healthcare insurance on Jan. 1, 2014, to its FTEs, significant non-deductible tax penalties will be imposed. A large employer is defined as employing 50 full-time workers (defined as working an average of at least 30 hours per week) or full-time equivalents (part-time employees are converted into FTE by dividing the total monthly hours worked by 120) during the year. The rules cover “related businesses,” meaning that if an owner controls several entities, they are combined for purposes of determining the large employer classification. As an example, a common owner of a bus contracting company and a related leasing business are combined for the purposes of defining a large employer.

Even if you offer health insurance, penalties could arise if the coverage is considered unaffordable or doesn’t meet minimum value or coverage and, as a consequence of such flaws, your FTEs are approved to receive a subsidy via the state exchange. Coverage is considered unaffordable if the amount paid by an employee exceeds 9.5% of his or her annual household income (IRS guidelines allow employees’ W-2 as an acceptable substitute for household income). Bus drivers have relatively low earnings, thus the 9.5% rule could trigger penalties considering the high cost of health insurance. Guidance on minimum value plans is pending. The good news is that having fewer than 50 FTEs results in no penalties, nor having to provide health coverage.

[PAGEBREAK]Determining full-time employees
IRS Notice 2012-58 provides safe harbor methods that large employers may use (but are not required to) to determine who is an FTE for purposes of ACA shared responsibility rules. The guidance is only effective for the year 2014, and more restrictive guidelines may apply to future years.

If a large employer hires someone expecting him or her to work at least 30 hours per week, that person is eligible for healthcare coverage within 90 days of being hired or penalties will be imposed in 2014. If you hire variable-hour workers (e.g., school bus drivers) and are unsure of meeting the 30-hour average, the safe harbor rules can be used to determine if they should be classified as FTEs. The remainder of this article assumes variable-hour workers and large employers.

Ongoing employees
An ongoing employee is someone employed for at least one “standard measurement period” (SMP). The SMP is the timeframe (between three and 12 months, as selected by the employer) in which an employer measures if an employee is working an average of 30 hours per week. The timeframe selected must be used uniformly and consistently for all employees within the same category. Using a 12-month SMP captures annual work variations (holidays, summer sessions, seasonal activity trips), thus providing the contractor the truest profile.    

An employer also establishes a “stability period” (SP), the timeframe during which insurance coverage must be provided. The SP is the greater of six months or the SMP timeframe. Thus, using a 12-month SMP (testing period) dictates a 12-month SP (coverage) timeframe.

An Administrative Period (AP) can be slotted between the SMP and SP timeframes, allowing time to determine who is eligible for coverage as well as notifying and enrolling employees. This period cannot exceed 90 days.

A suggested model is:
•    SMP (measurement) timeframe: Oct. 1, 2012, to Sept. 30, 2013
•    AP timeframe: Oct. 1, 2013, to Dec. 31, 2013
•    SP (coverage) timeframe: Jan. 1, 2014, to Dec. 31, 2014

If the SMP testing classifies a worker as an FTE, then coverage must be provided during the SP period regardless of the number of hours worked during the SP period. Thus, a qualified FTE during the SMP period who drops to part-time hours during the SP timeframe is still eligible for coverage until the end of the SP period, so selecting the appropriate SMP timeframe and knowing the rules are critical.

Annual analysis for variable-hour workers is necessary until the employee gains FTE status. However, in a typical contractor’s business model, with school bus drivers dominating the employee count, this administrative burden remains.

[PAGEBREAK]New employees
Another measurement timeframe termed “Initial Measurement Period” (IMP) is required for new employees, including seasonal workers. The IMP is identical to the workings of the SMP, is between three and 12 months, and may begin on the start date or the first day of the following month. In addition, the IMP and AP timeframes cannot extend beyond the last day of the first calendar month after the employee’s one-year anniversary (13 full months).

Here’s an example: Hire a variable-hour worker on Jan. 15, 2013, using a 12-month IMP. Thus, hours are measured from Jan. 15, 2013, to Jan. 14, 2014 (or Feb. 1, 2013, to Jan. 31, 2014), to determine if the employee meets FTE status. If he or she qualifies for FTE status, coverage must begin by March 1, 2014, and be available for 12 months (same as the IMP timeframe) or penalties apply (AP is shorter for new employees).

But you must also include this new employee in the SMP measurement period for the following year (Oct. 1, 2013, to Sept. 30, 2014), and if he or she is deemed an FTE, the person must be included in coverage from Jan. 1, 2015, to Dec. 31, 2015. If the employee fails the SMP test, you still provide coverage up to Feb. 28, 2015, based on IMP testing results. Thus, all “new employees” may fall into the “ongoing employees” pool for testing purposes.

Penalties for large employers
Offering no insurance means the non-deductible penalty is $2,000 (2014 rates) times FTEs in excess of 30, even if only one employee seeks a subsidy on the exchange. For offering unaffordable insurance (or not meeting minimum value criteria), the penalty is $3,000 for each FTE receiving a subsidy via the exchange, limited to $2,000 times each FTE in excess of 30.

Conclusion
Obviously, the new regulations increase the administrative burden on school bus contractors. Even if companies classify some school bus drivers as FTE and offer health insurance, it appears almost certain that some drivers will be eligible for government assistance due to the unaffordable features included in ACA. Thus, the operating costs to larger contracting businesses will increase, and contractors may find that paying the penalty is cheaper than offering health insurance.        

Bruce Leauby is associate professor of accounting at La Salle University’s School of Business in Philadelphia.