A look at Business Tax Implications of PPACA
In our last entry, we discussed the individual tax components of the health care legislation. There are a number of provisions included in the Patient Protection and Affordable Care Act that will impact individuals, and you can read some highlights of those here. There are also several important provisions that will impact small business owners that are worth discussing and planning for as well.
Beginning in 2014, “large” employers are potentially subject to two separate penalties regarding health insurance. First, a couple of important definitions need to be discussed. Large employers are those defined as employing 50 or more full time employees. And full time means someone that generally works 30 or more hours per week. The law also refers to full time equivalents. Two part time people working 15 hours per week each would be considered 1 full time equivalent (FTE). For purposes of this article, full time employees also include FTEs. So, for those employers who have less than 50, the following provisions do not apply.
The first penalty is the No Coverage Penalty. If a large employer does not offer coverage and a qualifying employee qualifies for government subsidies to pay for individual coverage, the employer can be subject to a $2,000 per employee penalty (with the first 30 employees exempted). Large employers can avoid this penalty by offering health insurance. However, the unaffordable penalty may still apply.
Example: Employer A has 60 full time employees and does not offer health insurance. One of A’s employees gets insurance through a health exchange and qualifies for an income subsidy from the government. A penalty would be calculated at $60,000 ((60-30) x $2,000). In the same scenario, an Employer with 49 full time employees would have no penalty.
The second is the Unaffordable Coverage penalty. If a large employer does offer coverage, but an employee can still get government subsidies because the coverage is considered unaffordable or low-value, the employer can be charged $3,000 for each employee that qualifies for subsidy. This penalty is different than the no coverage penalty in that it only applies to specific qualifying employees, not all full time employees.
Example: Employer A has 60 full time employees, and offers health insurance. However, the insurance does not meet the requirements for affordability. Three employees independently get insurance through an exchange and qualify for a government subsidy. Their penalty is $9,000 (3 x $3,000). Again, the same Employer with 49 employees would owe no penalties.
For large employers, planning should be done now to evaluate the cost of offering insurance and ensuring the coverage is at a level that is considered affordable, compared to the potential penalties for noncompliance. For small employers that may be approaching the 50 full time employee threshold, an analysis will need to be conducted on compliance costs. Other options such as outsourcing or utilizing part time employees may need to be considered if the compliance costs of crossing that threshold are too high.
Small Employer Health Insurance Tax Credit
This credit is actually already in place. It provides a tax credit for qualifying small businesses that pay at least 50% of employees’ health insurance coverage. To qualify, a business must have less than 25 full time equivalent employees and must pay less than average annual wages of $50,000. For qualifying health insurance premiums, the credit is up to 35% of premiums paid in 2010-2013. The credit jumps to 50% in 2014-2015 if other requirements are met. Sole proprietors, partners, 2% S Corporation shareholders, and family members of all of the above are not counted as employees for purpose of the credit.
It’s worth noting that the Government Accountability Office (GAO) reports this credit has been severely underutilized. Only 170,300 small employers claimed the credit in 2010 out of an estimated pool of between 1.4 million and 4 million businesses.
Form W-2 Insurance Reporting
Beginning in 2012, employers are required to report the cost of employer provided health care on Form W-2. This reporting is purely for informational purposes. It does not make any portion of properly paid insurance premiums taxable. In Notice 2012-9, the IRS issued transitional relief to small businesses. For purposes of this notice, small businesses are defined as any business that issued fewer than 250 W-2s the preceding year. Notice 2012-9 suspends the requirement until further guidance is issued for employers issuing less than 250 W-2s. However, employers that issue more than 250 W-2s need to make sure their accounting software is updated to track and report these premiums.
It’s important to consider what portions of the above may impact your business, and to take steps now to plan for them and be ready when they roll around. In some cases, it may simply be a matter of adjusting your bookkeeping to track the appropriate information and make sure you’re taking advantage of all of the credits to which you are entitled. Planning regarding the employer mandate will come in time, as we’re still waiting on guidance from IRS and in many cases the establishment of the health exchanges themselves. But it’s important at this point to at least be aware of the thresholds. If your business will be affected by these laws, or potentially growing to that point, the time for action is now.