The quick-service restaurant industry has the highest quit rate of 5.6 percent, according to 2022 data issued by the U.S. Bureau of Labor Statistics. In other words, the foodservice sector experiences the highest number of quits in a given month as a percent of its total employment compared to other industries.
With new employees coming and going all the time, it can be especially difficult for restaurants to keep track of who is eligible for ACA health coverage and who isn’t. As such, this can create serious challenges for organizations managing their Affordable Care Act (ACA) Employer Mandate responsibilities.
For these reasons, it’s no wonder restaurants are one of the industries at greatest risk of receiving penalties from the IRS. In fact, many organizations within this space have been hit with million-dollar ACA penalties from the IRS.
Of course, organizations from other industries that experience high-turnover, such as construction, hospitality, manufacturing, and nonprofits – are also receiving IRS penalty notices. Due to the nature of the restaurant industry, however, it seems to be a repeat offender for ACA non-compliance, as far as the IRS is concerned.
In addition to difficulties with employee retention, here’s why the restaurant industry is at greater risk of receiving ACA penalties:
- HR systems are disjointed and data is inconsistent, making it difficult to collect necessary information for managing ACA compliance efforts
- Restaurant workers are often hourly with varying weekly schedules, making it difficult for employers to calculate ACA full-time status, and ultimately determine who requires an offer of health coverage
- Staff often decline healthcare offers, creating a heavier employer burden for tracking declinations and subsequently coding the information correctly each filing season
- Per diem piece work and multiple pay ranges for positions complicate ACA affordability calculations
- Outdated software solutions, such as payroll, are frequently used for collecting employee coverage data and submitting Forms 1094-C and 1095-C annually, but they typically fail to identify inaccurate data
Employers with operations in the restaurant sector should know that a good first step in preventing the previously mentioned reasons for ACA non-compliance, is to accurately classify your workforce. This includes accurately identifying full-time and part-time employees under the ACA, which will help with understanding the implications of the ACA’s Employer Mandate.
Under the ACA’s Employer Mandate, Applicable large employers (ALEs), or employers with 50 or more full-time employees and full-time equivalent employees are required to:
- Offer Minimum Essential Coverage to at least 95% of their full-time employees and their dependents whereby such coverage meets Minimum Value; and
- Ensure that the coverage for the full-time employee is affordable based on one of the IRS-approved methods for calculating affordability
Restaurant ALEs identified by the IRS as having failed to comply with these requirements can be subject to Internal Revenue Code (IRC) Section 4980H penalties, which the IRS issues via Letter 226J.
For example, let’s look at a fast-food franchise that incorrectly classified several employees as part-time, and as a result didn’t offer them health coverage. The employees go to a healthcare marketplace to purchase health insurance and receive a Premium Tax Credit (PTC) to help subsidize the cost of the coverage. The employees receiving the PTCs communicate to the IRS that their employer potentially failed to offer sufficient coverage. As a result, the tax agency issues a IRS Letter 226J penalty notice under IRC 4980H.
Despite the fast-food franchise only missing a few offers, the IRS penalty assessment will be applied to every full-time employee working for the restaurant during the course of the tax year, not just the employees who obtained the PTC. For the 2023 tax year, the penalty could be as high as $288,000 for just 100 employees.
Restaurant organizations can avoid situations like this by classifying, verifying, and tracking their full-time staff accurately. Best practices for determining full-time status require selecting an IRS-approved measurement method that suits your organization’s workforce.
Organizations made up primarily of variable-hour employees should implement the Look-Back Measurement Method, due to its ability to assess employees’ hours worked over time. If your workforce has mostly full-time employees, with non-varying schedules, the Monthly Measurement Method will be better.
Regardless of your organization’s composition, complying with the requirements of the ACA’s Employer Mandate can be challenging. Diligent employers can proactively assess their ACA compliance efforts by completing an eight-question quiz that evaluates an organization’s unique workforce and any complexities that may create compliance challenges.
A risk review can help you avoid significant penalties, particularly if you have not been filing ACA-required information annually with the IRS. You should file this information as soon as possible to avoid receiving an IRS penalty notice and to minimize potential penalties.
If you’re concerned about ACA compliance and subsequent penalty assessment from the IRS, download the ACA 101 Toolkit below. In addition to helpful tips for minimizing risk, the guide also provides pertinent reporting and furnishing deadlines.
Joanna Kim-Brunetti is chief legal officer and executive vice president of regulatory affairs for Trusaic, a purpose-driven technology company focused on pay equity, DEI and healthcare.