Are You in Compliance with the ACA?

By Nicole Nelson, CPA
Director, Assurance & Audit Quality

Last month on our blog, our colleague Kim Flett discussed the IRS filing requirements mandated by the Affordable Care Act (ACA) and the steps restaurant businesses must take to ensure compliance. But filing the right documents at the right time is not the only thing restaurant owners need to keep in mind; they also must determine whether the health plans they offer provide sufficient and affordable coverage as defined by the ACA. Failure to do so could incur significant new penalties this tax season.

The ACA requires that, effective 2015, all employers with 100 or more full-time and full-time equivalent employees must offer minimum essential healthcare coverage to at least 70 percent of their full-time employees, or they will be subject to an excise tax penalty of $166.67 per month per full-time employee. Beginning in 2016, these rules will apply to more companies and will become more stringent—businesses employing 50 or more full-time employees must provide coverage to 95 percent of those employees to avoid the penalty. Full-time and full-time equivalent employees are defined as those employees working an average of 30 hours per week or at least 130 hours in a month. Certain vendor contractor relationships may also be considered full-time equivalent employees under specific facts and circumstances as defined by the law.

The offered healthcare coverage must also be “affordable” and provide “minimum value” as defined by the ACA in order to maintain compliance. If both of those standards are not met, the penalty is the lesser of the amount described above or $250 per month applied only to each employee who obtains a premium credit when purchasing insurance from a state or federal health insurance exchange.

Many companies may find themselves not yet in compliance with the new standards—not an uncommon result when implementing costly new regulations. Restaurant businesses should assess their exposure to penalties under the ACA, developing internal controls to determine whether they are subject to the penalties, and if so, estimating and accruing the penalties as required by ASC 450, Contingencies.

ASC 450 outlines the accounting and disclosure requirements for loss contingencies. An estimated loss contingency is recognized only if the available information indicates that (1) it is probable that an asset has been impaired or a liability has been incurred at the reporting date, and (2) the amount of the loss can be reasonably estimated. Loss contingencies that do not meet both criteria for recognition may need to be disclosed in the financial statements.

As part of Commitments and Contingencies audit protocols, auditors may perform certain procedures during the year-end reporting process to evaluate the completeness of full-time employee figures and the accuracy of calculations. As a starting point, auditors typically discuss ACA compliance and readiness requirements with businesses to develop a working level of familiarity, then determine how many full-time employees the business has on staff and how that figure is monitored over time.

A Company should compile a memo documenting the process the used in defining full-time employee status, average period and how the company has captured the various risk areas, and conduct a full analysis and calculation showing all full-time employees that were captured and who was eligible for benefits. This allows the auditor and the company to understand the processes and internal controls around how the company maintains compliance with employer mandate regulations under the ACA, and if it is filing the required documents with the IRS.

As various provisions of the Affordable Care Act continue to enter into effect, restaurants must be diligent in reviewing the law, noting critical deadlines and making an honest assessment of where they may be falling short. Though it will always remain important to adjust business practices to ensure compliance, it also essential that restaurants take appropriate steps to mitigate the impact of potential noncompliance, as well.