Business and the Affordable Care Act

The Patient Protection and Affordable Care Act (the Affordable Care Act) had some key provisions that apply to businesses. Perhaps the item of most interest to employers is that beginning in 2015, many businesses that do not offer affordable health insurance coverage that provides a certain minimum value to at least 95% (70% for 2015) of their full-time employees (and their dependents) may be subject to an excise tax (i.e. penalty).

Businesses that already offer health insurance coverage for employees must carefully evaluate the coverage their health plan provides. Many provisions of the law do not apply to plans that were in existence on March 23, 2010 (i.e., grandfathered plans), as long as the plan maintains its grandfathered status. However, some provisions apply to these grandfathered plans.

Additional reporting requirements relating to employees are also required. However, along with these additional requirements are some incentives, including tax credits for certain small businesses.

Many of the health care legislation’s provisions that affect employers were effective in either 2010 or 2011. Others are not effective until later. Undoubtedly, additional legislation or guidance will affect provisions that have a delayed effective date. Businesses should be diligent about taking the proper steps to identify any changes in processes and procedures that are needed to comply with the law. This letter provides a brief overview of the key provisions affecting businesses.

Grandfathered Health Plans. We will start with information on health plans that were in existence on March 23, 2010 (i.e., the enactment date of the Affordable Care Act). These grandfathered plans are exempt from many of the legislation’s provisions affecting a plan’s health insurance coverage as long as they do not do anything that causes them to lose their grandfathered status. However, the following key provisions do apply:

No Annual or Lifetime Dollar Limits. No lifetime limits on the dollar value of certain benefits i.e., essential health benefits) can be established.
Prohibition of Rescission of Coverage. An individual’s coverage cannot be rescinded once the individual is enrolled in the plan unless he or she commits a fraudulent act or intentionally misrepresents a material fact, as prohibited by the terms of the plan or coverage.
Extension of Dependent Coverage. A health care plan that offers coverage for dependent children must continue to offer the coverage until the child reaches age 26. The child, if otherwise qualifying, must continue to be offered coverage by the parent’s health plan even if he or she does not qualify as the parent’s dependent for income tax purposes.
Prohibition of Pre-existing Condition Exclusions. No exclusions for a pre-existing condition can be imposed on an individual.
No Excessive Waiting Periods. For group health plans and group coverage, no waiting period (i.e., the period before an individual is eligible to be covered for benefits under a plan) can exceed 90 calendar days.
New Reporting Requirements. Plans must provide applicants, enrollees, and policyholders or certificate holders a summary of benefits and coverage (SBC) that conforms to standards set by the Department of Health and Human Services (HHS)
Grandfathered plans are limited in the modifications they can make while maintaining their grandfathered status. Before a current plan makes any changes in benefits offered or increases premiums, the plan sponsor should obtain guidance to ensure the plan does not lose its grandfathered status unintentionally. Our firm has the knowledge to assist you in updating the plan documents for required changes under the law, and to help your business make adjustments in the coverage that will maintain the grandfathered status of the plan.

New Health Plans. Businesses that did not have health insurance coverage for employees in place by March 23, 2010, are subject to not only the provisions listed that apply to grandfathered plans, but to a host of other provisions, including meeting nondiscrimination requirements, first dollar coverage (i.e., no deductible or cost sharing) for certain preventative care, and premium limitations. Our firm can provide information on the legislation’s provisions that apply to new health care plans and plans that lose their grandfathered status. We are available to assist your business in evaluating and comparing the costs of various health insurance plans from a financial and tax perspective.

Small Employer Health Insurance Tax Credit. The Affordable Care Act provides a tax credit for small employers that pay a portion of the health insurance premiums for their employees. To qualify for this credit, an employer must employ less than 25 full-time equivalent (FTE) employees during the tax year (not including the owner and certain other related parties), pay average annual FTE wages of less than $50,800 per employee (in 2014), and pay a uniform percentage of the health insurance premiums (that is at least 50%) for employees who enroll in the employer-sponsored health insurance plan through the small business health options program (SHOP) of a state insurance marketplace. The credit is a percentage of the nonelective employer-paid premiums.

The full credit amount (50% for businesses; 35% for tax-exempt entities) is available beginning in 2014 for up to two tax years to employers that have 10 or fewer FTEs with average wages of $25,400 (in 2014) or less. As the number of employees and the average wage amount increases, the credit decreases. The small employer health insurance credit is claimed on the employer’s income tax return as an offset to both regular income taxes and alternative minimum tax (AMT). Generally, any unused credit can be carried back for one year and forward 20 years to offset income taxes.

For tax years beginning before 2014, eligible small employers that met certain requirements were eligible for a tax credit of up to 35% (25% for tax-exempt entities) of the employer-paid premiums for health insurance.

If you pay any portion of your employees’ health insurance premiums, we encourage you to contact us to see if you meet the uniform percentage payment criteria (which is very confusing) to qualify for the credit. Additionally, employers with large employee turnover, or with part-time workers, may find calculating the number of FTE employees and the FTE average annual wages daunting. Our firm is available to assist in calculating the credit. We can quickly help you determine if you may qualify for the credit and give you an estimate of the credit amount to which your business may be entitled, using some general payroll information provided by you. We can also determine if you were eligible for the credit in a prior tax year and file an amended tax return so the credit can be claimed.

Dependent Coverage in Employer Health Plans. The general exclusion from income for employer-provided health care coverage and reimbursements is expanded to apply to employees’ children who have not attained age 27 as of the end of the employee’s tax year (i.e., generally the calendar year). To qualify for this tax break, the child must be the individual’s son, daughter, stepson, stepdaughter, or eligible foster child. The child does not have to qualify as the employee’s dependent for income tax purposes. Similarly, self-employed individuals can deduct, as a self-employed health insurance deduction on page one of Form 1040, the cost of insurance coverage for their children who have not attained age 27 as of the end of the tax year.

Automatic Enrollment of Employees in Employer Health Plans. The Act required employers with more than 200 full-time employees to automatically enroll new employees, and continue enrollment for current employees, in the employer’s health benefit plan. Additionally, employers must provide adequate notice to employees of their ability to opt out of coverage in which they are not automatically enrolled. However, compliance with this provision has been delayed until additional guidance is issued.

Cost of Employer-sponsored Health Coverage Included on Form W-2. Most employers must report the aggregate cost of employer-sponsored health insurance coverage on the employee’s Form W-2. The IRS has provided relief from the reporting for certain small employers.

Penalty for Employers not Offering Affordable or Adequate Health Insurance Coverage. Beginning in 2015, certain applicable large employers that do not offer health insurance coverage to at least 95% (70% in 2015) of their full-time employees (and their dependents), or offer health insurance coverage that is unaffordable or does not provide a certain minimum value, must pay a penalty if the employer is notified that any full-time employee is allowed or paid either a premium assistance credit to purchase health insurance in the individual market through a state insurance marketplace or a cost-sharing-reduction subsidy to help with out-of-pocket expenses. Any penalty paid under this provision is not deductible as a business expense for federal income tax purposes. Although only full-time employees must be given the opportunity to enroll in affordable health insurance coverage, to determine if an employer is an applicable large employer (i.e., has on average at least 50 full-time employees), the full-time status can be confusing for certain variable-hour employees. We can explain this new provision and assist you in determining if your business meets the threshold, or based on projections, may meet the threshold in a later year. We can also help you estimate the penalty and compare it to the cost of offering health insurance to your employees and their dependents.

Annual Certification of Coverage to the IRS and Covered Employees. After 2014, employers that provide health insurance coverage through an employer-sponsored plan must provide information statements on new Form 1095-C regarding certain health insurance coverage to the IRS and the covered employees. The IRS is encouraging employers to voluntarily comply with the certification of coverage in 2014. Our staff can assist you in gathering the information and preparing the information statements.

Excise Tax on High-cost Employer-sponsored Health Coverage (Cadillac Plans). Beginning in 2018, a nondeductible 40% excise tax will be levied on so-called Cadillac plans. These plans are employer-sponsored health plans with annual premiums (i.e., excess benefits) exceeding $10,200 for self-only coverage and $27,500 for any other coverage. Slightly higher premium thresholds apply for retired individuals age 55 and older who are not eligible for enrollment in Medicare or entitled to Medicare benefits, and for plans that cover employees engaged in high-risk professions. For coverage under a group health plans, the 40% excise tax will be imposed on insurance companies, but it is expected that employers (and their employees) will ultimately bear this tax in the form of higher premiums passed on by insurers. Employers will be responsible for the tax if coverage is provided by employer contributions to HSAs or Archer MSAs. Employers will be responsible for calculating the excess benefit amounts and reporting those amounts to the applicable insurer. Employers that currently offer generous health benefits (especially if the benefits are to the owners and related persons) should carefully analyze their plans to see if changes are needed to avoid having plans that will be subject to this tax. Additional guidance will be issued on this excise tax (and in fact, additional legislation may change some of these provisions). We will keep you informed of any new information as it becomes available.

As noted above, some of the Affordable Care Act provisions apply to all businesses, while other provisions only apply to employers once a certain employee threshold (generally, 50 full-time employees) is met. Please give us a call if you have any questions or would like to discuss the impact of the legislation on your business.