The massive and controversial “Patient Protection and Affordable Care Act” and the “Health Care and Education Reconciliation Act of 2010,” the two recently enacted health care reform bills, included more than $400 billion in so-called “revenue raisers” and new taxes on employers and individuals. The centerpiece in these health reform laws is the mandate for most Americans to obtain health insurance.
The laws contain a number of new rules, such as new penalties for individuals who choose to remain uninsured, tax credits and other sweeteners for employers participating in new insurance pools, new penalties for larger employers that don’t provide insurance (or provide insurance deemed inadequate or unaffordable) and a voucher system for certain lower-income employees who choose not to be covered by their employer’s health plan.
What impact will this massive overhaul of health care have on your business?
The small business health tax credit (2010)
The new law provides $40 billion in tax credits, direct reductions of an operation’s tax bill, for small businesses to help them offer employee health insurance coverage—if they choose to do so. According to our lawmakers, more than 60 percent of small employers, or more than 4 million firms, will be eligible for these credits.
Effective Jan. 1, 2010, small businesses offering health insurance to employees as part of their compensation and contributing at least half of the total premium cost will qualify for the tax credit. Your business must have no more than 25 full-time “equivalent” employees (FTEs), and the employees must have annual FTE wages that average no more than $50,000.
The new, temporary sliding-scale small employer tax credit is worth up to 35 percent of a small fabric products manufacturer’s premium costs in 2010. On Jan. 1, 2014, this rate increases to 50 percent. Again, a small employer is one with no more than 25 employees and average annual wages of less than $50,000.
However, the full amount of the credit would be available only to an employer with 10 or fewer full-time equivalent employees (FTEs) and whose employees have average annual full-time equivalent wages from the employer of less than $25,000. These wage limits would be indexed to the Consumer Price Index for All Urban Consumers for years beginning in 2014.
Self-employed specialty fabric professionals, including partners and sole proprietors, two percent shareholders of an S corporation, and five percent owners of the employer, are not treated as employees for the purposes of the Small Employer Health Insurance Credit. In fact, a special rule prevents sole proprietors from receiving the credit for the owners and their family members.
Employer responsibilities (2014)
Beginning in 2014, the new law will require nearly all Americans to have health insurance through an employer, a government program or by buying it directly. New insurance markets will open for business, health plans will be required to accept all applicants, and tax credits will start flowing to millions of people, helping them pay the premiums.
Until now, there has been no federal requirement that employers offer health insurance coverage to employees or to their families. The new law imposes penalties on certain businesses for not providing coverage to their employees (so-called “pay or play”).
Fortunately, most specialty fabric products businesses will not have to worry about the provision because employers with fewer than 50 employees aren’t subject to the “pay or play” penalty. The new law exempts all small firms with fewer than 50 employees from the employer responsibility requirements that begin in 2014. This means, according to our lawmakers, that 96 percent of all firms in the United States, or 5.8 million out of 6 million total businesses, will be exempt from the requirement to provide health coverage for employees.
“Free Choice” vouchers. After 2013, employers offering minimum essential coverage through an eligible employer-sponsored plan and paying a portion of that coverage would be required to provide qualified employees with a voucher whose value could be applied to the purchase of a health plan through the Insurance Exchange. The value of the voucher would be equal to the dollar value of the employer contribution to the employer-offered health plan.
Health Insurance Exchanges. In 2014, the new law creates state-based Health Insurance Exchanges to make health insurance affordable and accessible for small businesses and the self-employed. With the option of joining a large “pool,” small marine fabrication businesses will have access to the same type of quality, affordable coverage that only large firms currently have. Those who are employed by small businesses but who do not receive insurance through their employer and are on the Exchange will have access to sliding-scale tax credits to help pay their premiums.
New limits on contributions. The owners and operators of many businesses, as well as their employees, have long utilized both flexible spending accounts (FSAs) and health savings accounts (HSAs) to pay for medical expenses with pretax dollars. An HSA goes along with a high-deductible insurance policy and gives individuals a tax deduction for money saved that can be used for health care expenses. An FSA has similar tax advantages, but contributions to it are deducted from an employee’s salary, and money in the account must be used by the end of the year.
The new law modifies the definition of qualified medical expenses for FSAs and HSAs to conform them to the definition used for the medical expense itemized deduction (excluding over-the-counter medicines unless prescribed by a health care professional) beginning in 2011. The law also caps health FSA contributions at $2,500 per year after 2012, which is indexed annually for inflation after 2013.
New reporting responsibilities. For tax years beginning after Dec. 31, 2010, employers will have to disclose the value of the benefit provided by them for each employee’s health insurance coverage on the employee’s annual W-2 form. Also, any business paying an amount greater than $600 during the year to any provider of property and services will have to file an information report with each provider and with the Internal Revenue Service, effective for payments made after Dec. 31, 2011.
To help pay for making health insurance affordable for small businesses and the middle class, the new law includes an increase in taxes for high earners. Specifically, for tax years beginning after Dec. 31, 2012, the hospital insurance or “HI” tax rate will be increased by 0.9 percentage points on an individual taxpayer earning more than $200,000 ($250,000 for married couples filing jointly); these figures are not indexed for inflation.
Also added is a hospital insurance tax on unearned income. Beginning in 2013, a 3.8 percent surtax called an “Unearned Income Medicare Contribution” will be placed on the net investment income of anyone earning more than $200,000 ($250,000 for a joint return). Net investment income includes interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property (other than property held in a trade or business). Income “actively” earned by anyone running a small, closely held business is exempt from the unearned income surtax.
In 2014, businesses employing more than 50 workers will be required to provide health coverage, and most people will be required to have health insurance. The tax on high-cost “Cadillac” policies will not go into effect until 2018; the increase in Medicare payroll taxes begins in 2013; and the tax credits available to small employers for health-care related expenses start in 2010.
Overall, the $940 billion overhaul subsidizes coverage for uninsured Americans, financed by Medicare cuts to hospitals and fees or taxes on insurers, drug makers, medical-device companies, those earning more than $200,000 a year and employers.
Many of the changes in the new law’s more than 2,400 pages, such as requiring most people to have health insurance and employers to provide coverage, will take at least two years to go into effect. Don’t wait until then, however, to start planning your health care strategy for your business and your employees.
Mark E. Battersby, based in Ardmore, Pa., writes regularly on business, financial and tax-related topics. E-mail him at firstname.lastname@example.org..