How Obamacare Impacts Small Business Transactions
Last week, I wrote about some of the ways Obamacare impacts small businesses, specifically five requirements Obamacare places on small businesses and five opportunities Obamacare affords small businesses. As discussed, while small businesses (i.e. companies with fewer than 50 employees) are exempt from many of the most rigorous requirements of the Affordable Care Act -- most notably, the Employer Mandate -- there are still some requirements and even some opportunities that small business owners should be aware of regarding Obamacare.
As an Obamacare attorney, I have observed that the factors a small business has to consider with respect to the Affordable Care Act can change quite dramatically if its workforce grows beyond 50 full-time employees. This can occur over time as a result of the natural growth of the business but can also happen rapidly and unexpectedly as a result of a business transaction.
Here are three tips that any small business owner considering a business transaction should keep in mind to ensure that there are no unexpected Obamacare surprises as a result of the transaction:
1. Count Hours, Not Just Employees
To determine how many full-time employees a business has for purposes of the Affordable Care Act, a business has to count not only its actual full-time employees (those work more than 30 hours per week) but also the number of hours worked by its part-time employees. The number of hours worked by part-time employees is aggregated to calculate a company's full-time equivalents. Therefore, as part of the due diligence process, the acquiring company should focus not only on the target company's full-time employees but also its full-time equivalents. If the target company's and acquiring company's full-time employees and full-time equivalents combine to total more than 50 employees, the new combined company will be subject to the Employer Mandate and other requirements of Obamacare.
2. Remember Controlled Groups
While the process above might seem obvious in the context of two related businesses that combine (i.e. a gardening business buys its competitor down the street to form a larger gardening business), it is less intuitive but still applicable in the context of unrelated businesses under common ownership.
The Affordable Care Act assesses liability with respect to the Employer Mandate on what the Tax Code calls a "controlled group" basis. Essentially, what this this means is that companies that are otherwise totally separate businesses are treated as one company for certain purposes if they are owned by the same or similar people (or corporations).
Therefore, when purchasing a business in an M&A transaction, the acquirer needs to consider the workforce not only of the business it is acquiring but also of other seemingly unrelated businesses it may own.
3. Beware of Successor Liability
Until now, we have been thinking about acquisitions of small businesses that prior to acquisition were exempt from the Employer Mandate. But what if the target business had more than 50 employees and was therefore subject to all of Obamacare?
While there is still some ambiguity that is awaiting further guidance from the IRS, the possibility of successor liability is important to keep in mind. This would mean that the purchaser could be on the hook for any liabilities of the previous owners if they failed to comply with the Affordable Care Act. Therefore, it is important to ask about and seek evidence of the company's compliance with the applicable provisions of Obamacare or the new owner could be left holding the bag for the previous owner's actions. Additionally, a purchaser should consider the possibility of post-closing liability in any transaction, and ensure that the transaction document contains the appropriate representations and allocates responsibility for any Affordable Care Act penalties accordingly.