Despite legislative and legal challenges, now is the time to prepare for new requirements in 2016.
Although the Affordable Care Act (ACA) has been around since 2010, despite more than 50 Congressional attempts to repeal it, its shaky financial footing may do it in. The ACA’s sharply increasing health care costs were highlighted in the U.S. Supreme Court’s late June decision in King v. Burwell.
The case focused on the legality of the tax subsidies for health insurance provided by the federal government to citizens in the 34 states that have not established the health insurance marketplaces known as exchanges. The Supreme Court decided that the subsidies are legal. Those on small-business plans, small-business owners, self-employed professionals and early retirees who depend on those subsidies will, however, continue to see cost increases. According to a report from the Urban Institute, a Washington, D.C.-based think tank, small businesses are among those most vulnerable to steep health care cost increases affecting nearly 3.5 million people on small-business plans.
Regardless of any rate increases, the ACA continues to provide specialty fabrics professionals and their businesses with insurance options, cost assistance, increased buying power through the government-sponsored marketplace—and a considerable amount of paperwork and confusion.
The ACA today
For businesses, the first thing to consider about the ACA is that many of its taxes and tax credits are based not solely on the number of full-time employees, but rather on the number of full-time equivalent employees (FTE) and their average annual wages. In simple terms, FTE or “full-time equivalent” equals the total number of full-time employees plus the combined number of part-time employee hours divided by 30. (Seasonal employees, contractors and business owners don’t count toward the total.)
Other key provisions:
- Small businesses with fewer than 25 FTEs, paying average annual wages below $50,000, qualify for tax credits to help pay employee health care premiums. Employers with 10 or fewer full-time employees, paying annual average wages of $25,000 or less, qualify for the maximum credit. Today, the maximum tax credit has increased to 50 percent of premium expenses, although all coverage must be purchased from a state health insurance exchange.
- Form 8941, Credit for Small Employer Health Insurance Premiums, must be filed to claim the tax credit: tax credits can go all the way back to 2010, since the credit
- Every business with more than 100 FTEs must provide health coverage to at least 70 percent of full-time employees starting in 2015, and to 95 percent of full-time employees in 2016. Also starting in 2016, employers with 50-99 FTEs will have to insure their entire full-time workforce.
- Any business with 50 or more FTEs is required to file an annual information return, whether and whatever health insurance it offers to employees.
- The Small Business Health Options Program, or SHOP, was created as part of each state’s Health Insurance Marketplace. It’s where small businesses with 50 or fewer FTEs can shop for group health plans. After Nov. 15, 2015, businesses with 100 FTEs or fewer will be able to use the SHOP.
- Those who are self-employed (with no employees) can purchase health coverage through the Health Insurance Marketplace for individuals, but not through SHOP. Paper applications may be used instead of the Internet if preferred.
- All businesses with more than 50 FTEs are required to inform employees about their state’s Health Insurance Marketplace/Exchange.
- Effective for calendar year 2015, any business providing self-insured health coverage to employees must file an annual return to report certain information for each employee covered. (This rule was optional for 2014.)
- Retroactive to Jan. 1, 2014, and throughout 2015, 2 percent shareholders in a business operating as an S corporation can receive reimbursement from the S corporation for their individual health insurance premiums. Even better, an S corporation can escape the excise tax penalty by correctly including the health insurance premiums on the 2 percent shareholder’s W-2. The 2 percent shareholder must report the income as wages, but will be allowed to take a self-employed health insurance deduction.
The Employee Mandate’s “penalty fee,” officially called the “Employer Shared Responsibility Fee,” penalizes businesses that don’t cover their full-time workers at a whopping $2,000 per employee.
If at least one full-time employee receives a premium tax credit because coverage is either unaffordable or does not cover 60 percent of total costs, the employer will be required to pay the lesser of $3,000 for each of those employees receiving a credit, or $2,000 for each of their full-time employees. The first 30 workers are excluded from being counted toward the fee.
Often overlooked is the fact that a business with profits of more than $250,000 faces a .9 percent increase (from 2.9 percent to 3.8 percent) on the current Medicare Part A tax., which is paid both by employees and employers who earn more than a certain amount.
This tax is split between employer and employee, meaning that they will both see a .45 percent increase. Small businesses with earnings less than $250,000 are exempt from the tax. An employee making less than $200,000 as an individual, or $250,000 as a family, is also exempt.
Instead of shifting to the individual markets, some businesses have opted for a high-deductible group plan and set up a health reimbursement arrangement (HRA) to help offset employees’ medical expenses. The employer can dictate the expenses to be reimbursed in the plan document, limiting out-of-pocket exposure.
The advantage of an HRA over a Health Savings Account (HSA) is that the plan can be structured so that if an employee does not use the money in an HRA, the money will still belong to the company. An HSA is another option, but it gives employers less control over how the money in the account is spent; the funds remain with employees whether or not they incur any medical expenses in a particular calendar year.
An excise Tax on High-Cost Plans (also known as the “Cadillac Tax”) will be imposed on employers beginning in 2018. The bottom line is that unless many employers change their benefit offerings, they may have to pay these taxes if their group health plans exceed a certain dollar limit. The limit for 2018 is $10,200 for individual coverage and $27,500 for family coverage.
For self-insured plans that exceed these limits, the employer will pay a 40 percent nondeductible excise tax on every dollar above the limit. This penalty can be significant even for a plan that exceeds the limits by only a few hundred dollars per year.
2015 = preparing for 2016
As noted earlier, the Supreme Court’s decision might exacerbate the already skyrocketing cost of health insurance, but whether you agree or disagree with the politics behind the Affordable Care Act it’s the law, and unlikely to be fully repealed anytime soon. Now is the time to begin preparing for its continuing provisions for businesses.
Every business owner should begin tracking employees’ hours, absences and how much is spent on health insurance. Beginning in 2016, employers with more than 50 FTEs will be required to report on health coverage offered to employees.
And don’t forget the penalties. If, for example, a company sends incorrect or inadequate information to the IRS, it may be hit with penalties ranging from $100 per occurrence to a maximum of $1.5 million per filing. Although most businesses will not be subject to many of these penalties until 2016, timely professional advice and assistance is strongly recommended, if only to keep abreast of the ever-changing rules of the Affordable Care Act.
Mark E. Battersby, based in Ardmore, Pa., writes extensively on business, financial and tax-related topics.