What Healthcare Reform Means for Small Businesses
UPDATE: The requirement that all companies with at least 50 full-time employees provide health insurance–or face a penalty–was originally scheduled to go into effect on January 1, 2014. But on July 2, 2013, the Obama administration announced that this employer mandate was being pushed back to 2015. The individual mandate and the healthcare exchanges, however, will still go into effect in 2014.
Many small-business owners and executives have a lot of questions about what healthcare reform means for their companies—and for good reason. The landmark Patient Protection and Affordable Care Act (ACA), which was signed into law in 2010, is a 2,400-page labyrinth of wide-ranging changes to the way health insurance is offered, paid for, and administered in the United States.
Many of the most important provisions of ACA are set to take effect in January 2014, so it is important for small business owners to understand how their companies will—and in many cases won’t—be affected by the landmark reforms. Although the rule requiring companies with at least 50 full-time employees to provide health insurance does not go into effect until January 1, 2015, there are several other aspects of healthcare reform going into effect in 2014 that will affect companies of all sizes.
Let’s take a look at some of the most important changes going into effect in 2014 and 2015 and what they mean for small businesses.
The coverage requirement only applies to companies with more than 50 full-time employees.
Beginning in 2015, companies with more than 50 full-time employees will face a fine of $2,000 per employee if they don’t offer coverage to employees who average at least 30 hours per week. There is no penalty for not offering coverage to employees who work less than 30 hours a week.
The coverage has to be “affordable,” which, according to ACA, means that the employee’s portion of the premium cannot exceed 9.5% of his or her household income. Furthermore, the employer must cover at least 60% of the cost of the coverage.
Small businesses will be able to participate in healthcare exchanges.
One of the most notable aspects of ACA is the creation of healthcare exchanges in every state starting in 2014. These online marketplaces (think Expedia.com or Priceline.com, but for health insurance instead of airfare and hotels) are intended to make it easier for individuals who don’t have insurance through their employer to shop for the best available private coverage.
Companies with 100 or fewer full-time employees will be able to use these exchanges to shop for coverage for their employees through the Small Business Health Options Program (SHOP) Exchange. These exchanges should make it easier for small businesses to navigate the wide range of health insurance plans that are available and find one that is tailored to the needs of the company’s workforce.
Even if a company choses not to participate in the SHOP Exchange, the creation of the exchanges could be beneficial for small business owners. If the owner doesn’t have insurance through his or her company, the owner might be eligible to purchase individual coverage through the exchange.
It will be interesting to see what impact the exchanges have on employees’ decisions to participate in the plans offered by their—or their spouse’s—employers. If the exchanges are effective in making it easier for people to get affordable individual coverage on their own, some people many choose to eschew company-sponsored plans and shop for coverage on their own.
Companies may find that employees actually leave the company-sponsored plan for a lower-cost alternative through the SHOP exchange. This could actually end up reducing your expenses, but we will have to wait and see.
Tax credit for providing employee coverage increases to 50% in 2014 and 2015.
In 2013, companies with less than 25 full-time employees can receive a tax credit of up to 35% of the company’s contribution to employees’ coverage. In 2014 and 2015, the credit increases to 50% for coverage purchased through the SHOP Exchange. (After 2015, the credit goes back to 35%. If you’re thinking that this sounds like a short-term bribe to encourage businesses to try out the exchanges with the hope that companies will continue using the exchanges after the credit decreases, you probably wouldn’t be too off-base.)
This credit is designed to help small businesses and small tax-exempt organizations afford the cost of providing health insurance for their employees; it is specifically designed for employers with low- and moderate-income workers.
To be eligible the company must have fewer than 25 full-time employees and cover at least 50 percent of the cost of single (not family) healthcare coverage for each employee. The employees must have average wages of less than $50,000 a year. If you think you might fit this criteria, let us know and we can run the numbers to see if you are eligible for the full credit.
New Medicare taxes for high-income individuals instituted in 2013.
Many small business owners and other taxpayers will be subject to the new Medicare taxes this year that are intended to help pay for the provisions of ACA. Individuals earning more than $200,000 and couples earning more than $250,000 face a 0.9% Medicare tax on “earned” income, such as wages and bonuses, above those thresholds. High-income taxpayers will also face a 3.8% Medicare surtax on investment income.
Both of these taxes are for Medicare. Historically, for W-2 employees Medicare taxes are withheld from the employee’s paycheck. The remittance of these two new Medicare taxes, however, it is not withheld from the paycheck; the taxpayer will calculate and pay the tax with the 2013 income tax return.
For a couple earning $450,000, the new 0.9% tax on earned income will create an additional tax liability of $1,800. For an individual who earns more than $200,000 and has investment income, the additional 3.8% surtax on investment income could also create a significant additional tax burden. Given these new taxes, you might want to consider having us run a projection of your 2013 taxes in the fall to anticipate what you will owe in April 2014.
Reporting Employer-Provided Health Coverage in Form W-2
The ACA requires employers to report the cost of coverage under an employer-sponsored group health plan on an employee’s Form W-2, Wage and Tax Statement, in Box 12, using Code DD. To make this filing go smoothly, please be sure your health insurance expenses are organized so that you can provide your accountant or your payroll service the proper information in December 2013. Note that the amount reported does not affect the employee’s tax liability, as the value of the employer excludible contribution to health coverage continues to be excludible from an employee’s income. This reporting is for informational purposes only, to show employees the value of their health care benefits.
Making sense of it all
Regardless of how you feel politically about healthcare reform, there’s no doubt that ACA makes some major changes to the landscape for health insurance. But unless your company has more than 50 full-time employees, the changes that affect your company won’t be too drastic.
Fast-growing start-ups and other companies that are approaching the 50-employee level, however, need to understand what hiring that 50th employee will mean for their employee-benefits expenses.
At Eilts & Associates, we have extensive experience helping small businesses understand the financial and tax implications of their hiring and employee-benefits decisions. As 2014 approaches, we encourage you to contact us (email@example.com or 773.525.6171) to set up a time to talk with us about what healthcare reform means for you and your company.