Restaurant Law Blog

I have been getting many calls from clients asking whether their restaurant (or restaurant group) needs to provide (and pay for) health insurance for their employees.  Unfortunately, the answer is not a simple one.

Beginning this year, companies with 50 full-time equivalent employees (“FTE”) must provide health insurance to at-least 70% of their employees.  In 2016, at-least 95% of all employees must be covered starting in 2016.  If your initial reaction was “I don’t have 50 full-time employees” don’t get too comfortable just yet.  Lets look at the facts:

What is a FTE?  A FTE is ‘technically’ an employee who works a minimum of 30 hours per week, or at-least 130 hours per month, for more than 120 days per year.   That doesn’t mean that you are off the hook though if you have, say, 40 FTE and multiple part-time employees.  Why…..

How do you calculate how many FTE’s you have working for you?  Take the total number of FTEs that you have working for you and add the total number of hours worked by part-time employees, and then divide that number by 30.   If the number you get is more than 50, than you are on the hook.

My restaurant group operates several restaurants, but we have set it up so that separate companies own each restaurant, none of which have 50 FTEs.   Does that mean I do not have to pay?  Not necessarily.  Recognizing that several employers might divide their businesses into several smaller companies to avoid the 50 FTE rule (or for other liability reasons), ObamaCare also contains rules that require businesses with common ownership (or “control groups”) to be treated as a single employer.   

Control groups fall into one of three categories: (1) a parent-subsidiary controlled group, (2) a brother-sister controlled group, or (3) a combination of parent-subsidiary and brother-sister controlled groups. 

A “parent-subsidiary controlled group” exists when a common parent company (LLC or Corporation) owns 80% or more of one or more subsidiary companies.  

A “brother-sister controlled group” exists where two or more companies, in which five or fewer common owners own a “controlling interest” of each group and have “effective control.”  “Controlling interest” generally means 80% or more of each company (but only if such common owners own a part of each).  “Effective control” means more than 50% of each company, but only to the extent that such ownership is identical with respect to such corporation.  If you think this is confusing…you are right.  Let’s look at an example.  

For example, if A, B, C and D are each 25% owners of two companies, they each own 25% of both companies and together they effectively control 100%, so the companies would be brother-sister companies.

In this example, A, B, C and D together own 100% of the stock of both companies, but they do not have “effective control” because the sum of each stockholder’s common ownership in both companies does not exceed 50% (A = 20%, B = 10%, C = 5% and D = 5%, and the sum is 40%).  See Larry Lawson and Jeff Nelson, Controlled and Affiliated Service Groups, IRS Tax-Exempt and Government Entities, pp. 7-7 – 7-8 (available here). 

The effective control test raises some interesting possibilities, as stock ownership can be arranged to flunk the test and therefore avoid aggregation as a large employer.  The following charts show ownership percentages for corporations with two and three shareholders that will not pass the effective control test. 

Example for two owners: 

In this case, A has 24% common ownership in both companies, and B has 24% common ownership in both companies.  The total is 48%, which is below 50%, and the companies should not be a brother-sister controlled group.

Example for three owners:

In this case, A, B and C together will not have more than 48% common ownership in any two companies.  The total is 48%, which is below 50%, and none of the companies should be considered a brother-sister controlled group.

Ok, I am on the hook, what exactly does that mean?  That means that you must provide ‘Affordable’ health insurance coverage, which provides ‘Minimum Value’ for all FTEs.  Affordable means that the employees cost for the insurance cannot exceed 9.5% of that employee’s household income.  You are permitted to require employee contribution to the plan, provided that each employee’s personal contribution does not exceed the 9.5% threshold.  Minimum Value means that that the plan must provide the minimum essential coverage and costs sharing in line with a Bronze plan found on the marketplace.  

I’m not going to provide health insurance, now what?  If you fail to provide health insurance you will be required to pay the government a fee equal to $2,000 per FTE (minus the first 30 FTEs).  (e.g.  If you have 51 FTEs, you would pay $42,000.  51 – 30 x $2,000)

I provide insurance but the government is saying that the insurance was unaffordable or failed to meet the minimum value standard.  Will I be fined?  Yes.  If, when filing their year end tax returns, even one of your FTEs receives a premium tax credit because their return suggests that the coverage you provide is deficient, then you will be required to pay either the lesser of: (a) $3,000 for each employee who received a tax credit, or (b) $2,000 for each FTE (less the first 30 FTEs).  

I offered my employees health insurance, but many won’t take it.  How does that effect me?  You are required to offer.  Employees are not required to accept.  So long as you offer, you will not be penalized. 

If you are own a restaurant and have questions about this complex matter, please call the DiPasquale Law Group today: (646) 383-4607.  - See more at: www.restaurantlawny.com