Accounting for Obamacare

Tax Credits and Penalties

The structure of the ACA and its restrictions sets up the path the business owner must follow. The “mandate” is really a shared responsibility fee, or tax penalty, due on an employer's federal tax returns. The penalty for small businesses not covering their full-time workers is $2,000 per employee. If, however, at least one full-time employee receives a premium tax credit because coverage is either unaffordable or does not cover 60% of total costs, the employer must pay the lesser of $3,000 for each of those employees receiving a credit or $750 for each of their full-time employees total. The first 30 workers are excluded from being counted toward the penalty. The ACA penalty offsets the cost of the employees who will use the exchange or emergency room services in lieu of employer based insurance.

To determine the limitations there are a number of metrics:

• Taxes and tax credits are based off of the number of full-time equivalent employees (FTE) and their average annual wages, not solely on the number of full-time employees;
• Small businesses with fewer than 25 full-time equivalent employees with average annual wages below $50,000 can get tax credits (as adjusted for inflation beginning in 2014) to help pay for employee premiums;
• Small businesses with more than 50 full-time equivalent employees with average annual wages above $250,000 must provide health coverage to full-time employees beginning in 2015. This is sometimes called “the employer mandate”;
• Businesses making over $250,000 in profit must pay a .9% increase on the current Medicare Part A tax. The tax is split (.45% each) between the employer and employees making over $200,000 individual ($250,000 family); and
• All businesses with over 50 full-time equivalent employees have to let their employees know about their state's Health Insurance Marketplace/Exchange.

Small Businesses

In 2015, small businesses with over 50 full-time employees that choose not to provide insurance will have to pay a shared responsibility fee if they:

• Don't pay at least 60% of employee's premiums;
• Provide insurance that doesn't meet the minimum standards set forth by ACA (must provide the minimum benefits of a “bronze” plan bought on the ACA health insurance exchange); or
• Provide insurance that exceeds 9.5% of family income.

ACA counts the hours worked, not the number of full-time employees an employer has. If a business' employees worked an equivalent of 50 full-time employees' hours, the requirement kicks in. In other words, cutting employees' hours back won't save a company from being responsible for offering health insurance to full-time workers for larger firms. Franchises are counted as separate businesses so franchise owners with less than 50 full-time workers will not have to provide health coverage to their full-timers.

Starting in 2014, Small businesses with up to 100 full-time employees (50 or fewer in some states) are supposed to be able to compare and buy health insurance on the exchanges for their employees. The November 27th announcement of the website not being available until November 2014 may affect this opportunity. As of 2017, states can allow businesses with more than 100 employees to purchase coverage in the SHOP Exchange.

Ninety-six percent of employers won't pay additional taxes, however there is an increase to the current Medicare Part A tax paid by 3% of businesses and employees making over $200,000. There is also a requirement for employers with the equivalent of over 50 full-time equivalent employees to purchase health insurance for their workers or pay a penalty by 2015. ACA offers incentives, such as tax breaks and tax credits via the SHOP Exchange, (when it is available) to small businesses with the equivalent of less than 25 full-time workers to help them provide health benefits to employees.

Government Guidance

In order to provide clarity to provisions of ACA and the use of tax-favored arrangements to help employees pay for individual health insurance policies, the Department of Labor (DOL) and Department of the Treasury issued joint guidance on Sept. 13, 2013. The notice points out that many of these arrangements will not satisfy the ACA annual dollar limits and preventive health services “market reform” provisions:

• A health reimbursement arrangement (HRA) used to purchase health insurance in the individual market will not qualify;
• An HRA used to purchase individual health policy through a public or private exchange will not qualify; and
• A premium-only plan for individual coverage (POP) using a cafeteria plan to pay with pretax dolalrs will not qualify.

DOL Technical Release No. 2013-03.

The notice is designed to discourage employers from contributing pre-tax dollars toward the purchase of health coverage. However, premium reimbursement arrangements made on an after tax basis is still permitted. In line with this guidance, based on SHOP not being readily available and employers wanting to cap their costs, there are still avenues available to reach those goals. See, Employers ACA Action Plan below.

Conclusion

As can be seen the devil is in the details and there is no one right path to take. As business owners and as advisors to businesses, these new rules are important to understand and to implement in a timely fashion.

Part Two of this article will feature case studies of real-life situations.

Employers ACA Action Plan

• Step 1: Drop Group Health coverage beginning on Jan. 1, 2014
• Step 2: Have all employees (including the business owner) purchase individual coverage. Remember, no more preexisting conditions and no more limits on benefits. Workers who have household income between $23,500-$94,500 will qualify for tax subsidies.'
• Step 3: Individuals purchase Bronze-level coverage or above.'
• Step 4: The employer creates a medical expenses reimbursement plan (MERP) to cover out-of-pocket expenses not covered under the individual plan. A second medical card provided by the third-party administration company administering the MERP will pay medical providers directly for the employee. The employer will provide a uniform annual allowance to employees under the MERP that the employer determines. The payments are tax deductible to the employer and non-taxable to the employee. FICA and FUTA withholding do not apply.'
• Step 5, Option 1: The employer will bonus out an amount equal to the cost of the Bronze-level plan plus the tax on the bonus (double bonus). This permits the employee to pick up greater coverage if they wish. The employer will have capped their costs. This reduces increased cost to the employer in the future. To the extent the employee qualifies for a subsidy, it is to their benefit.

' OR

• Step 5, Option 2: The employer will establish a Sec. 125 cafeteria plan and pay the premiums directly to the various insurers for individual health plans on a pre-tax basis. The Department of Labor's (DOL) position is that a MERP that can qualify as a group plan must cover minimum essential benefits. The downside is coverage of the full deductible ($6,300 individual $12,700 family) is the responsibility of the employer.

'

Lawrence L. Bell, JD, LTM, CLU, ChFC, CFP', AEP, a member of this newsletter's Board of Editors, has served as Tax Bar liaison to the IRS for 10 years. He has received patents in actuarial product fields dealing with COLI, GASB, FASB, IASB and OPEB solutions. He authors articles and speaks nationally about Decision Trees on COLI Best Practices, 409A and Benefit Planning.

Part One of a Two-Part Article

The Affordable Care Act (ACA), aka Obamacare, created the Small Business Health Options Program (SHOP), a part of each state's Health Insurance Marketplace, where small businesses with under 50 full-time equivalent employees can purchase group health plans starting Oct. 1st, 2013. In 2016, those with 100 full-timers or less can use the SHOP. On Oct. 27, 2013 The White House announced the website would not be available and employers would be required to file on paper and/or work with a traditional broker.

The small business owner is continually being placed in an untenable position without the ability to do any planning. An article published on the Health Affairs website on Oct. 16, 2013 indicated:

• 60% of small firms offered health benefits in 2012 and 41% of employees were enrolled in plans;
• Among firms not offering coverage, 75% indicated costs as the most important reason;
• When asked what the monthly premium for individual coverage was they could afford, it was below the current market average of $502; and
• 56% of small business owners currently providing health care were interested in the ability to offer employees a choice of health plans while paying a fixed cost, with employees paying extra for choosing a more expensive plan.

HealthAffairs.org, http://bit.ly/1aRENub.

Tax Credits and Penalties

The structure of the ACA and its restrictions sets up the path the business owner must follow. The “mandate” is really a shared responsibility fee, or tax penalty, due on an employer's federal tax returns. The penalty for small businesses not covering their full-time workers is $2,000 per employee. If, however, at least one full-time employee receives a premium tax credit because coverage is either unaffordable or does not cover 60% of total costs, the employer must pay the lesser of $3,000 for each of those employees receiving a credit or $750 for each of their full-time employees total. The first 30 workers are excluded from being counted toward the penalty. The ACA penalty offsets the cost of the employees who will use the exchange or emergency room services in lieu of employer based insurance.

To determine the limitations there are a number of metrics:

• Taxes and tax credits are based off of the number of full-time equivalent employees (FTE) and their average annual wages, not solely on the number of full-time employees;
• Small businesses with fewer than 25 full-time equivalent employees with average annual wages below $50,000 can get tax credits (as adjusted for inflation beginning in 2014) to help pay for employee premiums;
• Small businesses with more than 50 full-time equivalent employees with average annual wages above $250,000 must provide health coverage to full-time employees beginning in 2015. This is sometimes called “the employer mandate”;
• Businesses making over $250,000 in profit must pay a .9% increase on the current Medicare Part A tax. The tax is split (.45% each) between the employer and employees making over $200,000 individual ($250,000 family); and
• All businesses with over 50 full-time equivalent employees have to let their employees know about their state's Health Insurance Marketplace/Exchange.

Small Businesses

In 2015, small businesses with over 50 full-time employees that choose not to provide insurance will have to pay a shared responsibility fee if they:

• Don't pay at least 60% of employee's premiums;
• Provide insurance that doesn't meet the minimum standards set forth by ACA (must provide the minimum benefits of a “bronze” plan bought on the ACA health insurance exchange); or
• Provide insurance that exceeds 9.5% of family income.

ACA counts the hours worked, not the number of full-time employees an employer has. If a business' employees worked an equivalent of 50 full-time employees' hours, the requirement kicks in. In other words, cutting employees' hours back won't save a company from being responsible for offering health insurance to full-time workers for larger firms. Franchises are counted as separate businesses so franchise owners with less than 50 full-time workers will not have to provide health coverage to their full-timers.

Starting in 2014, Small businesses with up to 100 full-time employees (50 or fewer in some states) are supposed to be able to compare and buy health insurance on the exchanges for their employees. The November 27th announcement of the website not being available until November 2014 may affect this opportunity. As of 2017, states can allow businesses with more than 100 employees to purchase coverage in the SHOP Exchange.

Ninety-six percent of employers won't pay additional taxes, however there is an increase to the current Medicare Part A tax paid by 3% of businesses and employees making over $200,000. There is also a requirement for employers with the equivalent of over 50 full-time equivalent employees to purchase health insurance for their workers or pay a penalty by 2015. ACA offers incentives, such as tax breaks and tax credits via the SHOP Exchange, (when it is available) to small businesses with the equivalent of less than 25 full-time workers to help them provide health benefits to employees.

Government Guidance

In order to provide clarity to provisions of ACA and the use of tax-favored arrangements to help employees pay for individual health insurance policies, the Department of Labor (DOL) and Department of the Treasury issued joint guidance on Sept. 13, 2013. The notice points out that many of these arrangements will not satisfy the ACA annual dollar limits and preventive health services “market reform” provisions:

• A health reimbursement arrangement (HRA) used to purchase health insurance in the individual market will not qualify;
• An HRA used to purchase individual health policy through a public or private exchange will not qualify; and
• A premium-only plan for individual coverage (POP) using a cafeteria plan to pay with pretax dolalrs will not qualify.

DOL Technical Release No. 2013-03.

The notice is designed to discourage employers from contributing pre-tax dollars toward the purchase of health coverage. However, premium reimbursement arrangements made on an after tax basis is still permitted. In line with this guidance, based on SHOP not being readily available and employers wanting to cap their costs, there are still avenues available to reach those goals. See, Employers ACA Action Plan below.

Conclusion

As can be seen the devil is in the details and there is no one right path to take. As business owners and as advisors to businesses, these new rules are important to understand and to implement in a timely fashion.

Part Two of this article will feature case studies of real-life situations.

Employers ACA Action Plan

• Step 1: Drop Group Health coverage beginning on Jan. 1, 2014
• Step 2: Have all employees (including the business owner) purchase individual coverage. Remember, no more preexisting conditions and no more limits on benefits. Workers who have household income between $23,500-$94,500 will qualify for tax subsidies.'
• Step 3: Individuals purchase Bronze-level coverage or above.'
• Step 4: The employer creates a medical expenses reimbursement plan (MERP) to cover out-of-pocket expenses not covered under the individual plan. A second medical card provided by the third-party administration company administering the MERP will pay medical providers directly for the employee. The employer will provide a uniform annual allowance to employees under the MERP that the employer determines. The payments are tax deductible to the employer and non-taxable to the employee. FICA and FUTA withholding do not apply.'
• Step 5, Option 1: The employer will bonus out an amount equal to the cost of the Bronze-level plan plus the tax on the bonus (double bonus). This permits the employee to pick up greater coverage if they wish. The employer will have capped their costs. This reduces increased cost to the employer in the future. To the extent the employee qualifies for a subsidy, it is to their benefit.

' OR

• Step 5, Option 2: The employer will establish a Sec. 125 cafeteria plan and pay the premiums directly to the various insurers for individual health plans on a pre-tax basis. The Department of Labor's (DOL) position is that a MERP that can qualify as a group plan must cover minimum essential benefits. The downside is coverage of the full deductible ($6,300 individual $12,700 family) is the responsibility of the employer.

'

Lawrence L. Bell, JD, LTM, CLU, ChFC, CFP', AEP, a member of this newsletter's Board of Editors, has served as Tax Bar liaison to the IRS for 10 years. He has received patents in actuarial product fields dealing with COLI, GASB, FASB, IASB and OPEB solutions. He authors articles and speaks nationally about Decision Trees on COLI Best Practices, 409A and Benefit Planning.