Obamacare – how will it change the way we do business?

The passage and implementation of the Patient Protection and Affordable Healthcare Act, otherwise known as Obamacare, is one of the most politically charged issues that has divided the country in generations. Its proponents say it’s good for the country providing all citizens of the United States health insurance. However, its opponents say it will bankrupt the federal government leaving a legacy of unmanageable government debt for generations. So how did we get here? And as business people how do we comply with the law?
 

Problem: 37 Million Americans don’t have Health Insurance

Obamacare solution: Require all Americans to be covered. The pros and cons of this law are debatable, but the obvious list includes:

Pros of the law:

• Gives many American access to healthcare that didn’t have it prior
• Insurance companies can’t exclude people with pre-existing conditions
• Policies will be easier to compare
• Over time, healthcare costs will be reined in (the jury is still out one this one)

Cons of the law:

• Compels people to participate in something they may not want
• Penalizes people for non-compliance
• Requires standard insurance when that may not be necessary for certain people
• Will cause healthcare professionals to decide if they want to participate in Medicare or Medicaid
• Raises taxes
• Will almost assuredly add to the federal debt
   

How does the law get implemented? And what are the mechanics that individuals and business people should be aware of? It can be broken down into two requirements. The individual mandate and the employer mandate.

• The individual mandate requires all Americans to have health insurance. If you don’t work for a company that provides the required coverage, you can purchase it from an insurance exchange set up by the government. Individuals with preexisting conditions are not precluded from purchasing insurance and for the most part rates are based strictly on age and tobacco usage or non-usage. Depending on your income level you may be entitled to full coverage paid for by the government through Medicaid or other programs as well as help in the form of tax credits.
• The employer mandate requires that beginning in 2015 employers with more than 50 full-time equivalent employees (FTEs) (the calculation of FTEs is not simple) to pay for at least 60 percent of the cost of health insurance for the employee and his or her children.
   

The employee contribution cannot exceed 9.5 percent of the employee’s income. Employers with less than 50 FTEs are not required to provide insurance but may receive tax benefits if they do.

The law uses a carrot-and-stick approach to ensure compliance. There are tax penalties for non-compliance (the stick) and tax credits for compliance (the carrot).

At the heart of the law, all U.S. citizens (with some exemptions) are required to carry health insurance that meets minimum requirements in terms of coverage or pay a penalty.
 

Non compliance for individuals - Individuals without coverage will be subject to penalties as follows:

• 2014: Penalty is $95 per adult and $47.50 per child (up to $285 for a family) or 1.0 percent of family income, whichever is greater.
• 2015: Penalty is $325 per adult and $162.50 per child (up to $975 for a family) or 2.0 percent of family income, whichever is greater.
• 2016 and beyond: Penalty is $695 per adult and $347.50 per child (up to $2,085 for a family) or 2.5 percent of family income, whichever is greater.

However, anyone who thought they had insurance lined up in compliance with the law that received a cancellation notice from their carrier late in 2013 may qualify for a hardship exemption from the penalty. This information was included in a letter to several senators from the Secretary of Health and Human Services in late December 2013.

Non compliance for businesses with greater than 50 FTEs:

• If health insurance is not provided, there is a $2,000 penalty for each FTE, with the first 30 FTEs subtracted from the equation.
• If health insurance is provided but it does not meet minimum standards, or less than 60 percent of the cost is paid by the employer or the employee’s contribution is greater than 9.5 percent of his income; than the employer is subject to the lessor of $3,000 per employee receiving a tax credit or $2,000 per FTE minus the first 30 FTEs. How will this change the way business’s think about adding headcount? For many larger businesses that already provide health coverage, it’s just a matter of “tweaking” to make sure the policy and the employee contributions comply.
   

The problem is with businesses that hire lower-paid labor. The health insurance could act as a significant tax on businesses, in some cases raising the cost of an employee by 50 percent or more of his wage. Employers need to decide if it is more cost effective to pay the penalty or provide the insurance. In addition the law does not require that spouses be covered, so many companies have already made arrangements to cut healthcare for spouses.

The carrot (tax credits) is offered to smaller businesses, which while not required to provide health insurance for their employees, in cases when they do, they may receive tax credits. These credits while not refundable (if no tax is due, no credit can be taken) can be carried back one year, so if a small business owed taxes in a prior year, an amended return can be filed in order to receive the credit in the form of a refund, or carried forward for 20 years. The credit is available to companies who pay at least 50 percent of their employee’s premiums who employ less than 25 FTEs, and whose employees earn on average less than $50,000. Sounds workable right? Well, actually, the credit gets phased out from 10 employees to 25 employees.

So those employers with 10 or less employees get the full advantage of the credit if and only if they have a tax liability to offset it with. IRS form 8941 is used to calculate FTEs as well as the amount of the credit.

Be prepared to spend some time completing this form as there is a lot of information with respect to number of hours employees worked, health premiums, etc. As the era of Obmacare phases in there are several items that we as individuals will be changing as it relates to our personal taxes.

One such deduction is the medical deduction that is available as an itemized deduction which was calculated on medical expenditures in excess of 7.5 percent of adjusted gross income. The law has changed that to 10 percent (for those under 65 years of age). Individual tax increases include:

Hospital Insurance Portion of FICA – Increases by .9 percent (employee only) on those with earnings exceeding:

• Singles – $200,000
• Married filing joint – $250,000
• Married filing single – $125,000 Net Investment Income subject to 3.8 percent surtax (prior only wages subject):
• Singles – $200,000
• Married filing joint – $250,000
• Married filing single – $125,000
   

Small business owners who are subject to the surtax should speak to their accountant as currently income from an S Corp. owned by shareholders who are actively involved in running the business are not subject to the surtax on those earnings.
 

Bottom line. The law does not seem to be going away anytime soon, so the prudent business owner needs to get out in front of it and understand the components of the law and how it affects his or her business.

The author is a New Jersey-based CPA. He runs Turfbooks, an accounting firm that serves landscapers. Email him at dgordon@giemedia.com.