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A Project of The Annenberg Public Policy Center

Rubio’s Shaky ACA Hypothetical

Sen. Marco Rubio described a hypothetical Detroit business owner with 10 employees as facing higher costs under the Affordable Care Act, saying the man was considering moving one employee to part time to “save … a significant amount under Obamacare.” But a business of that size isn’t subject to the law’s requirements to offer insurance to full-time workers or pay a penalty. And the fictional employee in question would likely qualify for Medicaid.

Rubio, a Republican presidential candidate, laid out his hypothetical example in an Aug. 20 speech to the Detroit Economic Club. He described two fictional Detroit workers — David, the owner of a franchise of a national automotive repair company, and Danielle, a receptionist and one of David’s 10 employees (starting around the 8-minute mark).

Rubio, Aug. 20: Let’s call our business owner David, from Detroit. And David owns and operates a franchise of a national automotive repair company. And he has 10 employees. … But lately his costs have been soaring and when he looks at his books, it’s clear to him why. …

It’s getting harder for David to meet payroll, for a number of reasons. One is the higher cost of health insurance under Obamacare.

Rubio went on to talk about his second hypothetical worker, Danielle, a single mother of two who is David’s receptionist. Rubio says of David: “He’s thought about shifting her to a part-time position, which would save him a significant amount under Obamacare.”

We have fact-checked several personal anecdotes about the Affordable Care Act, but with a hypothetical example, there are many details we simply can’t fill in. We reached out to the Rubio campaign to ask for clarification on David’s situation as it would relate to the Affordable Care Act, but we have not received a response. We will update this article if we do.

But we can say that an owner of one franchise business with 10 employees isn’t subject to the ACA’s employer requirements to provide insurance to full-time employees or pay a penalty. He isn’t required to face any increase in health insurance costs under the law.

David would have to employ 50 or more full-time equivalents to be considered a “large” employer and subject to the law’s insurance requirements. Such large businesses must offer affordable coverage (based on a percentage of family income) to full-time employees or pay a penalty. (For 2015, this applies only to businesses with 100 or more full-time equivalent workers; businesses with 50 or more face the requirements in 2016, when they must offer insurance to at least 95 percent of full-time employees and their dependent children.)

The penalties are based on the number of employees who get tax credits or cost-sharing subsidies for insurance plans offered through the state and federal marketplaces. And for 2016, the first 30 such full-time employees don’t count toward that penalty. A flowchart from the nonpartisan Kaiser Family Foundation explains the regulations.

It’s complicated, but these penalties aren’t something a business owner with 10 employees has to worry about.

If the fictional David did own other franchise locations with an aggregate workforce of 50 or more employees, he would be considered a large employer under the ACA. But Rubio didn’t say anything about David owning other franchise locations or businesses, or having more employees.

Franchise owners must count all of their employees to determine whether they are large or small employers under the ACA. A 2015 Congressional Research Service report explains that this follows IRS rules on “controlled groups.”

CRS, 2015: With regard to multiple franchises under a single owner, the ACA follows the Internal Revenue Service (IRS) aggregation rules governing “controlled groups” (26 U.S.C. §414). If one individual or entity owns (or has a substantial ownership interest in) several franchises, all those franchises are essentially considered one entity. In this case, for purposes of the 50-FTE-employee rule under the employer penalty, the employees in each of the franchises must be aggregated to determine the number of FTE employees.

“You can’t treat them as separate businesses” if you own multiple franchise locations, Paul Fronstin, director of the Health Research & Education Program at the Employee Benefit Research Institute, told us. “If you only have one location that you’re the owner of … that’s all you count. The other franchise owners would be responsible for their locations.” And then there’s the corporate company, which may own some franchise locations itself.

Perhaps the hypothetical David provided health insurance to his 10 employees anyway, even without being required to do so by the ACA. If so, it’s possible he could face a “higher cost” for health care under the law, as Rubio said. We’ll note that the average growth of employer-sponsored premiums has been slower in the years since the ACA was passed than it was for the early 2000s. But that’s only an average. Perhaps David offered a catastrophic health plan, and the health insurance company he had been using changed its plans to comply with minimum benefit requirements under the ACA. That could have raised his rates more significantly than the average growth rate.

David could, of course, decide to contribute less toward his workers’ premiums. Or it’s possible he could qualify for a small business tax credit to cover some of the cost of his premiums, since he employs fewer than 25 workers. The average salary would also have to be $50,000 a year or less to qualify, and we don’t know if that’s the case. David could only claim the credit for two consecutive years.

There are also some compliance requirements for small employers that take time — and therefore money — to meet. If David offered insurance to his employees, he would have to report the value of the insurance on his employees’ W-2s, according to the IRS. Also, small businesses are no longer allowed to reimburse employees for health insurance they purchase on their own elsewhere, without potentially facing excise tax penalties. The IRS had exempted small businesses (under 50 workers) from any possible penalties through July 1. David may also spend many working hours researching what exactly he is and is not required to do under the health care law.

But, he would not have to cut Danielle’s hours to part time in order to “save … a significant amount under Obamacare,” as Rubio said. Businesses with fewer than 50 employees who do offer insurance are not required to offer it to all full-time employees, at least not under current IRS regulations.

We could not fault David, or small-business owners like him, for not knowing this. We consulted the Kaiser Family Foundation for clarification on whether businesses with under 50 employees had to offer health insurance to all full-time workers, if they offered it at all. Gary Claxton, a vice president at the Kaiser Family Foundation, told us that “the IRS has not yet issued rules on nondiscrimination which would address the ability to offer different things to different workers.”

David also could ask his employees to get their own coverage through the federal marketplace, where individuals earning up to $46,680 would qualify for subsidies to cover part of the costs of their premiums. In fact, his receptionist would qualify for Medicaid.

Rubio said that Danielle had two children and earned $9.50 an hour, working about 40 hours a week. That comes to less than $20,000 a year, well under the $27,724 threshold for a family of three to qualify for Medicaid. She could work several hours of time-and-a-half overtime a week and still qualify for Medicaid coverage for her family. That would save David money, and may even save Danielle money, depending on what she had contributed to her premiums through David’s company.

Perhaps the hypothetical David doesn’t want to do that — or has other circumstances that we’re not aware of. But as described by Rubio, David has other options besides paying more for health care or cutting Danielle’s hours to part time.

— Lori Robertson