Preparing Your Business for the Affordable Care Act
By: Melissa Sprinkle - Vice President, Owner Resource Group
Regardless of your political affiliation, there is no disputing the significant impact the Affordable Care Act, more commonly known as Obamacare, will have on small to mid-sized businesses. According to a recent Forbes.com survey, 67% of small businesses say that complying with government regulations is their greatest legal concern. This divisive topic will continue to spur debate among politicians well beyond November 6th, but what does it mean, practically, for small business owners trying to make a profit in an economy that remains perilous?
Entrepreneurs, managers and investors tend to look for certainty and transparency when evaluating any new business venture. Once the Supreme Court upheld the Patient Protection and Affordable Care Act in June 2012, healthcare reform was no longer an issue of if, but how. As the rules continue to be written, a lack of transparency still seems to plague business leaders across the country. Whether you are employee-owned or a family held business, manufacturer or distributor – all stakeholders should be well versed in the changes slated to occur in 2013 and beyond.
Size Matters – Depending on the size of your company, the rules differ pretty dramatically. Companies with fewer than 50 full-time employees do not have to provide insurance, but the new law will make it easier and cheaper if they do. The law offers tax credits of up to 35% to small businesses (defined as <50 employees) that provide health insurance to their employees and pay at least 50 percent of the cost of that insurance. After January 1, 2014, the credit increases to 50% and will be available for any two consecutive years.
Businesses with 50 or more employees must provide health insurance or pay a penalty. If the business fails to comply, the penalty is $2,000 for each full-time employee (with a 30-employee deduction).
Excise Taxes – Taxes will come in different shapes and sizes under the new law and it’s important to know where your company stands. There are roughly 20 new tax laws that accompany the Affordable Care Act. The following excise taxes may have a direct impact on your company, depending on your current coverage offering.
Medicare Payroll Excise Tax - A provision of the health care law imposes a Medicare tax on investment income for Americans classified as high income, those earning an individual gross income of $200,000 or joint income of $250,000. Beginning in 2013, those who qualify will have to pay an additional 3.8% Medicare tax on any investment income (unearned income) they might have. Additionally, according to Medicare Part D Subsidy, employers who provide qualified prescription drug coverage for Medicare Part D eligible retirees, which is subsidized by the Department of Health and Human Services, will have to reduce their deduction for the coverage by the amount of the excludable subsidy. This new tax, in conjunction with the 2013 scheduled tax rate increases for ordinary income and long-term capital gains, provides tax planning opportunities which you should discuss with your individual or company tax advisor.
The Cadillac Health Insurance Excise Tax - Beginning in 2018, employer-sponsored health plans that provide coverage in excess of a threshold amount, "Cadillac” health plans, will be subject to a 40% excise tax. Additionally, the non-discrimination provision in the new law will prohibit businesses who continue to offer top-tier "Cadillac” plans to some employees while offering others more basic coverage. Offering the same coverage to all employees can be a problematic proposition for many business owners, who may fear senior talent will look elsewhere for positions with better coverage.
Medical Device Excise Tax – Manufacturers, producers and importers of medical devices will be subject to a 2.3% excise tax on gross sales. The tax will not be charged on drugs, eyeglasses and contact lenses, and any other device purchased by the general public at retail for individual use.
Health Flexible Spending Account Limit - Another provision that may not necessarily affect your company’s bottom line but may have an impact on your employees is the limit on flexible spending accounts, which have been a valuable tool for budget conscious consumers. A flexible spending account, which lets you use pretax dollars to pay for eligible out-of-pocket health care expenses, will now be capped at $2500 per year (reduced from $5,000).
Clearly, the new law has both benefits and disadvantages that will affect all Americans – employees and business owners alike. It’s difficult to forecast with any certainty how the small to mid-sized business community will be affected and how the market will respond accordingly. The only thing we know is that every business has unique needs, so the best advice we can give is that business leaders learnthe implications for their specific situation, plan with a qualified tax advisor and execute the changes in a timely manner. Additionally, because the bill is highly complex, we encourage you to educate your employees on topics that may affect their coverage and well-being.