A Heads-Up on Health Care Reform

How it could affect your business

Like most business owners, you probably followed the health care reform debate closely, waiting for some kind of resolution. Well, as you undoubtedly know, on March 23 that resolution arrived (in a manner of speaking) as the president signed into law the Patient Protection and Affordable Care Act (PPACA).

Of course, precisely how this law will affect your company, as well as other businesses large and small, remains to be seen. PPACA is a massive law with many provisions — and a large portion of those provisions don’t take effect until future years. So here’s a heads-up on a few of the act’s highlights that could change how you approach health care benefits for your employees.

A credit and a fee

There were many myths and much misinformation about what health care reform would look like until it finally arrived. One example: The new law would require every company to provide health care coverage. That’s not the case, though PPACA does seek to incentivize businesses — by carrot or by stick — to provide medical benefits to employees.

Specifically, the act offers certain small businesses a carrot: Starting in 2010, eligible small businesses may qualify for a tax credit for buying group health coverage. For tax years 2010 to 2013, the maximum credit is 35%, provided your company contributes at least 50% of the total premium or 50% of a benchmark premium. In 2014, a maximum credit of 50% will be available for two years for eligible employers that buy coverage through a state exchange (more on these below) and contribute at least 50% of the total premium cost.

There are a variety of rules governing what businesses qualify as “small” and whether a business is eligible for the maximum credit or a partial credit.

But with midsize and large businesses, PPACA uses a stick. Beginning in 2014, PPACA imposes tax penalties on certain employers that don’t provide health care coverage.

Specifically, employers with 50 or more “full-time-equivalent workers” (FTEs) that don’t offer coverage and have at least one full-time employee who receives a health care premium tax credit (a new break under PPACA for certain individuals who purchase coverage themselves) will be subject to an annual fee of $2,000 per FTE (not including the first 30 FTEs).

Exchanges and vouchers

Turning to those exchanges we just mentioned, multistate health exchanges are programs that will enable both individuals and companies to form groups to more effectively negotiate benefits and costs with insurers. The exchanges will be overseen by the federal Office of Personnel Management, and the first ones will become available in 2014.

Only companies with 100 or fewer employees will be able to participate in those initial exchanges. But, starting in 2017, states may voluntarily offer exchanges to larger businesses.

Another interesting provision of PPACA requires employers to provide “free choice vouchers” to certain low-income workers that are equal to the value of the company’s insurance plan benefits. Eligible employees must: 1) earn income below 400% of the federal poverty level, 2) pay more than 8% of their income for the employer’s coverage, and 3) choose a plan within the health exchange program.

Other changes to know

A few other PPACA provisions to be aware of include:

• No more coverage of over-the-counter medications. Beginning in 2011, nonprescription medicine will no longer be eligible for reimbursement under a health Flexible Spending Account (FSA), Health Savings Account (HSA) or health reimbursement account. Additionally, the penalty for nonqualified withdrawals from an HSA will increase from 10% to 20%.
  
  
• New “simple” cafeteria plans to be available. Effective for taxable years beginning after Dec. 31, 2010, small businesses may adopt simplified cafeteria plans that offer employees a variety of benefits to choose from with a relatively low administrative burden on their employers. An employer is eligible if during either of the preceding two years the business employed 100 or fewer employees. In addition, the employer’s health plan must provide certain minimum employer contributions.
  
  
• Restrictions on limits, exclusions and cancellations. PPACA cracks down on various restrictions that have become commonplace in many employer-provided insurance plans. Effective immediately, plans won’t be allowed to impose a lifetime dollar limit on essential health benefits. Essential benefits include immunizations, women’s preventive care, and screening for certain high risk diseases, including high blood pressure and cardiovascular issues.
  
  In addition, plans may not exclude children under the age of 19 because of a pre-existing condition. (In 2014, plans won’t be able to impose a pre-existing exclusion at all, regardless of age.) The law also prohibits plans from canceling coverage except in cases of fraud or an intentional misrepresentation of a material fact.
  
  
• Excise tax on high-cost plans. Starting in 2018, the most expensive forms of health care insurance (so called “Cadillac plans”) will face a 40% excise tax imposed on the insurer, who could then be expected to try to pass this cost along to employers. The penalty generally will be applicable for plans with premiums exceeding $10,200 for individual coverage and $27,500 for family coverage.
  
  

Just a few

These are just a few of the changes PPACA brings to the health care landscape. As mentioned, the law is a complex one that phases in slowly over the next several years. Thus, to avoid problems in the future, work with your tax and benefits advisors to determine how it will affect your business.

Health care reform also brings reporting changes

The Patient Protection and Affordable Care Act (PPACA) doesn’t affect only how you offer health care benefits to your employees; it also affects IRS reporting requirements. For starters, effective immediately, employers must disclose the aggregate cost of employer-sponsored group health coverage on each employee’s W-2.

Also, beginning in 2012, businesses must report to the IRS, on a Form 1099, all payments exceeding $600 for services or merchandise. But what’s more concerning is that companies must also send 1099s to other companies with which they do business. This is a provision of PPACA that hasn’t gotten much press and could put a significant administrative strain on businesses.

If you have any questions, please contact Feeley & Driscoll's Boston Accounting team, Email us or call 1 (888) 875-9770.

related links