M&A and ACA Compliance - What Employers Don’t Know Can Sometimes Hurt Them

This post helps reveal the impact that a Merger or Acquisition could have on your company’s Affordable Care Act obligations.

Affordable Care Act compliance usually doesn’t make the priority to-do-list for companies going through mergers and acquisitions (M&As). However, acquiring organizations need to be aware that an M&A can present serious risk factors when it comes to fulfilling their ACA responsibilities.

Applicable Large Employers (ALEs) – employers with 50+ full-time employees – should devise an ACA management and reporting strategy before making an acquisition. Failure to comply with the appropriate regulations can place even the most diligent companies at risk of expensive IRS fines.

Further, if a purchasing company isn’t an ALE before an M&A, and becomes one once the deal closes, then ACA compliance becomes a new – and critical – factor for future business success. Here are issues to keep in mind:


Eligibility management periods and safe harbor data

To create an ACA strategy, a buyer first needs to collect a great deal of data from the seller, including employee eligibility measurement periods and affordability safe harbors.

A buyer needs information about hours worked to determine if acquired employees averaged 30+ hours per week or 130 hours per month during their measurement period to qualify as full-time employees under the ACA. This data is vital because acquired employees who are part of a stock purchase and who meet eligibility qualifications, must be offered minimum essential health coverage as soon as they come on board with their new company. If the acquiring company makes these workers complete an initial measurement or waiting period (as you would with an actual new hire), the employer could face financial risk of what is known as Penalty “A.” For tax year 2022, that equates to a fine of $2,750 per full-time employee per year (minus the first 30 individuals), even when coverage was offered to some of those employees.

For measuring eligibility, it’s important to follow IRS regulations to align the acquired employees to their new measurement periods. It’s also critical to know how the acquired company classified the status of any furloughed or laid off employees and to determine if, in fact, those workers are part of the merger or acquisition.

Employers often struggle with collecting historical hours worked data from an acquired company because the two businesses' HR/benefits technology systems aren’t integrated. Compiling all that information manually is not only time consuming, but it’s also easy to make mistakes. Worse yet, an acquiring company’s HR/benefits department sometimes isn’t even informed that an acquisition was in the works until the deal was completed, so there could be little to no time to act in an ACA compliant manner. Working with a strong, knowledgeable ACA solutions provider can help avoid these ACA pitfalls and management challenges.

To further mitigate potential ACA “A” penalties stemming from an M&A, HR professionals should proactively educate their C-suite executives about what actions (or inactions) can result in potential fines, current penalty levels (they change from year to year), and the potential financial impact fines could have on the company’s bottom line.


Safe harbors

Buyers also must determine the correct affordability safe harbor for each acquired employee group. Not doing so can raise the risk of IRS Penalty “B,” a fine that is levied when an employer fails to offer affordable health coverage that meets minimum value requirements to eligible employees who receive a subsidy on a public healthcare exchange.

“Affordable” is a subjective term. When it comes to the ACA, it means that an employee’s required contribution for self-only coverage comes to no more than 9.61% (for Tax Year 2022) of their household income. Failure to meet this requirement results in a $4,060 penalty per full-time employee per year.

Since most employers don’t know their employees’ household incomes, the ACA allows for the use of three different safe harbors:

  • Federal Poverty Level (FPL)

  • Rate of Pay

  • Form W-2, Box 1

To learn more about how to calculate affordability under these safe harbors, read our quick guide

The purchase type affects who is responsible for what

There are two types of acquisitions: stock purchases and asset purchases, and each comes with important ACA considerations.

In a stock purchase, the company doing the buying assumes both current and historical liabilities of the selling company. For example, if the selling company hasn’t completed its federal ACA reporting duties for several years, the buying company is liable for that ACA infraction as soon as the deal closes, including any resulting fines the IRS levies. In an asset purchase, the buyer doesn’t own the seller’s liability for past compliance issues.

The type of purchase also affects which employees are required to wait for coverage offers and which aren’t. In a stock purchase, employees retain all their seniority, without a break in service, and must be offered health coverage immediately upon close of the sale. An asset purchase, on the other hand, can be completely different when more than one Employer Identification Number (EIN) is involved. If the buyer shuts down the seller’s EIN, employees from the selling company can be treated as new hires and can, therefore, be subject to a new waiting period before being offered health insurance.

Stock and asset purchases each come with a host of other ACA-related nuances. When your organization is considering an acquisition, it’s best to seek legal counsel to understand these distinctions, how they can affect your business and how to manage them.

If you're planning an acquisition, it’s vital to know that there are important considerations when it comes to the ACA. Contact us to learn more about our Affordable Care Act Management service to see how we can  work with you, step by step, to help ensure your ACA program management never misses a beat.

The information provided is intended as general guidance and is not intended to convey any tax, benefits, or legal advice. For information pertaining to your company and its specific facts and needs, please consult your own tax advisor or legal counsel. Links to sources may be to third party sites. We have no control over and assume no responsibility for the content, privacy policies or practices of any third party sites or services.

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