One of the more significant issues facing today’s franchise owner are the requirements under the Affordable Care Act (ACA). For owners with multiple locations, particularly in the restaurant and automotive industries, the concept and calculation of “Full Time Equivalent” (FTE) employees can significantly impact the profitability of the business. Failure to understand and prepare for the mandate could be devastating to the business.
What businesses are affected?
According to the law, businesses with 50 or more FTEs are required to provide health insurance, also called “minimal essential coverage” to their full time employees. The requirement goes into effect on January 1, 2015 for businesses with 100+ FTEs, and on January 1, 2016 for businesses with 51 to 99 FTEs.
How can a employer determine if they need to provide insurance?
The following steps can help a business owner determine if they need to provide health insurance per the terms of the law:
The answer to step one is simple. A FTE is an employee that works 30 hours/week per month. Note how this is different than traditional definition of 40 hours per week so business owners need to pay close attention.
The second step requires us to convert part time workers to FTEs. The formula below will complete the calculation.
Total hours/week worked by part time employees in a month/120
The third step is to take FTEs from step 1 and add it to the number from the formula in step 2. If the number exceeds 50, the business will be required to provide minimum essential coverage ONLY to the employees who are FTE’s (working 30+ hours per week/month).
Three Businesses May Count As One
Here’s the tricky part. The ACA considers multiple locations from the same owner (even if held in different business entities) to be part of the total equation. This means if you own three restaurants it counts as one large entity for the purposes of the FTE calculation. While there may be some interpretation here, it’s important for business owners to seek the advice of business and tax counsel to help determine their requirement for compliance. I would also recommend working with a health insurance provider or broker who is well versed in the ACA.
The Next Steps
The biggest challenge for the franchise industry is to have a concrete understanding as to how this impacts their business model. Unfortunately, the rising costs will likely require franchisors to adjust their business model to remain competitive. I’d expect to hear more discussion on this topic in the future.