In a series of blog posts, we will be addressing a pretty ‘meaty’ subject – the Affordable Care Act. As a small business, we needed to understand it. Our goal is to share what we learned as we navigated through the details.
The Affordable Care Act (ACA) became law three and a half years ago. Only last month (October 2013), did substantive provisions specifically affecting small businesses became effective. However, many provisions tangentially affecting small businesses have been in effect since the ACA became law. I will be discussing these provisions in a series of blog posts. Below is a partial introduction and overview.
According to the National Federation of Independent Business, since 1986 the NUMBER ONE concern for Small Businesses every year has been access to AFFORDABLE HEALTH CARE.
The health care law is already having positive impact on both premiums and medical costs. Additionally, certain consumer protections such as the prohibition against denying insurance for those with preexisting conditions have been placed in effect. As most of us know, there have been major implementation setbacks of the sections affecting small businesses. Provisions designed to help small business have not been given the strength necessary to have real effect. For example, the tax credits to help small businesses defray the cost of covering employees may be too small to induce employers to obtain medical coverage. More concerning is the complexity and difficulty in understanding the law and applying for the credits. Moreover, the IRS has been slow to write rules governing the law. The implementation of the Federal version of SHOP (see below) has been stricken by a defective web implementation (partially caused by private development delays due to their reluctance to go full bore due to the law’s constitutionality being challenged in the courts and the House of Representatives). I do not intend to debate the pros and cons of the law but to provide an overview of the key components affecting small businesses.
The ACA defines a small business as having fewer than 50 Full Time Equivalent Employees. The ACA does not impose new substantive requirements on small businesses (but see: notice to employee requirements, below), but provides new health insurance alternatives to them through state-based Small Business Health Options Program (SHOP) exchanges. Although somewhat cumbersome, as a result, small businesses will tend to be unaffected or experience savings under reform depending on whether they provide insurance to their employees and take advantage of some of the provisions.
Important Requirement for an Employer: Notice to employee
Under the ACA those employers who have at least one employee and at least $500,000 in annual dollar volume of business, must:
- notify their employees about the new Health Insurance Marketplace;
- inform employees that they may be eligible for a premium tax credit if they purchase coverage through the Marketplace;
- and advise employees that if they purchase a plan through the Marketplace, they may lose the employer contribution (if any) to any health benefits plan offered by the employer.
Employers were required to provide this notice to all current employees by October 1, 2013, and are required to notify each new employee at the time of hire beginning October 1, 2013, regardless of whether the employee is employed full or part-time of part-time. The Department of Labor (DOL) has provided employers with two sample notices they may use to comply with this rule, one for employers who do not offer a health plan and another for employers who offer a health plan for some or all employees. For more information visit the DOL’s Guidance on the Notice to Employees. The notice must be provided in writing in a manner calculated to be understood by the average employee. It may be provided by first-class mail. Alternatively, it may be provided electronically if the requirements of the Department of Labor’s electronic disclosure safe harbor at 29 CFR 2520.104b-1(c) are met.
Employer Incentive: Tax credit
The ACA offers a tax credit to small businesses for employers of 25 or fewer full-time equivalent employees (FTE’s) as an incentive for employers to obtain insurance for their employees. An employer’s tax credit depend ons:
- the number of FTE’s,
- the average annual wages of all employees employed and;
- the amount spent on insurance premiums.
Tax credits (which have been available since 2010) become more generous starting in 2014. Section 45R(e)(2) of the IRS code provides that for taxable years beginning in or after 2014, the credit will be allowed for a two consecutive taxable year period beginning with the first taxable year in which the employer offers coverage to its employees through a state health exchange (“SHOP”). In tax year 2014, the maximum tax credit increases to 50 percent of premium expenses and coverage must be purchased from a state health insurance exchange.
Employers with 25 or fewer FTEs are technically eligible for tax credits if all other criteria are met. However, at 25 FTEs, the tax credit is completely phased out.
Employee Incentive: Individual tax credit
The ACA provides a generous tax credit for those who qualify and purchase medical insurance through the exchanges. Although this is not specifically a small business benefit, it does enter into the equation of whether or not to obtain coverage for employees, as many employees may be entitled to subsidies of their privately obtained health coverage, where coverage is not provided by the employer.
The ACA provides “sliding scale” subsidies based on income for individuals and families earning between 138 and 400 percent of the federal poverty level and are designed to make health coverage more affordable. These subsidies will be provided in the form of tax credits that can be advanced and applied toward premiums for qualified health plans purchased through the Exchange, as well as subsidies to help cover cost-sharing of plans in the Exchange. The subsidies are only available through the Exchange.
What is: SHOP
The Small Business Health Options Program (SHOP) addresses the process of buying health insurance for small businesses. For 2014, the SHOP Marketplace is open to employers with 50 or fewer FTE’s. The government asserts that the advantages of using SHOP include:
- The small business owner controls the coverage offered employees and how much the business pays toward employee premiums.
- The small business owner can compare health plans online on an apples-to-apples basis, which helps you make a decision that’s right for your business.
- The small business owner may qualify for a small business health care tax credit worth up to 50% of your premium costs. You can still deduct from your taxes the rest of your premium costs not covered by the tax credit. Beginning 2014 the tax credit is available only for plans purchased through SHOP.
There are 4 categories of plans in the SHOP Marketplace. They offer similar benefits, but differ based on how enrollees and the plan share the costs of care.
The categories describe the way your employees and the plan can expect to share costs for health care. The category has nothing to do with the quality of care a plan provides. What your employees can expect to pay for things like deductibles and copayments – and the total amount they spend out-of-pocket for the year if they need a lot of care – depends on which plan category you choose.
Comparing plans: Bronze, Silver, Gold, Platinum
As with all health plans, you and your employees have to pay a monthly premium. You can decide up front exactly how much you can afford to contribute towards your employees’ premium costs, so you have more control over your company’s health coverage spending.
When comparing plans, just as important as the premium cost is how much your employees have to pay out-of-pocket for covered services. The plan with the lowest premium may not provide you or your employees with the best overall value.
Balancing premiums and out-of-pocket costs
- Premiums are usually lower for plans that pay a smaller share of medical costs when your employees get care. For example, with a Bronze plan, your employees will probably pay a lower premium than they would for a Gold plan. But they’ll probably pay more when they go to the doctor.
- Platinum plans generally have the highest monthly premiums and lowest out-of-pocket costs for services. They will likely provide better financial protection if your employees use a lot of services or have a major health crisis.
In general, when choosing health coverage for your business, keep this in mind: The lower the premium, the higher the out-of-pocket costs. The higher the premium, the lower the out-of-pocket costs. It is a balancing act.
We will be discussing, in more detail each of the significant provisions affecting small businesses in future posts. In the interim, for more detail on ACA, visit the U.S. Small Business Administration website. The SBA site points to privately developed and provided Webinars on the ACA for small businesses on the following upcoming dates:
- Thursday, November 14 at 2:00 PM ET: Click to Register
- Thursday, November 21 at 2:00 PM ET: Click to Register
- Thursday, December 5 at 2:00 PM ET: Click to Register
- Thursday, December 12 at 2:00 PM ET: Click to Register
- Thursday, December 19 at 2:00 PM ET: Click to Register
Note: This post is to alert you to some requirements and benefits of the ACA and is not intended as legal or tax advice. You should consult your legal or tax professional to determine how these matters relate to your business.