What you need to know about: Obamacare Part 2
Author: Lew Wessel | Photographer: photography by Anne
Last month’s article on the Patient Protection & Affordable Care Act (ACA) or “ObamaCare” focused on what individual Americans need to know about the ACA and the new mandate for individuals to obtain health insurance that begins on January 1, 2014. This month’s article will cover ACA issues affecting employers and will also cover the new ACA-related taxes and tax credits affecting both employers and individuals. Here’s what you need to know:
Small Employers and Self-Employed Individuals: Under the ACA, a “small employer” is defined as an employer with fewer than 50 full-time employees or equivalents. Pay attention to the following statement, because it is really important:
The ACA does not require small employers to offer their employees health insurance, and small employers are not subject to any penalties under the ACA if they do not offer their employees health insurance. Period…end of story!
I shout this out, because in conversations over the past year or so, it is very clear to me that local business owners are becoming befuddled by political rants and misinformation campaigns and are not getting the actual facts that will lead them to make good decisions.
So, accepting the fact that the ACA doesn’t make small employers do anything, what should small employers do? At a very basic level, they should keep doing whatever they have been doing to date. Some small employers currently offer health care plans out of the goodness of their hearts or because of competition in the workplace; others do not. I would encourage the latter owners to take a hard look at the small employer health insurance premium tax credits that have been available under the ACA since 2010 and are set to increase substantially in 2014 and 2015 (see below). Regardless, there is nothing in the ACA that requires any small employer to change their current behavior.
Small Employer Health Insurance Credit Table 1 below lays out the amount of credit small employers have been able to earn since 2010 based on the amount of health insurance premiums the company pays for its employees. In addition to size and salary requirements, the employers must pay at least 50 percent of single coverage premiums to qualify for the credit.
Example: ABC property management firm has eight full-time employees earning an average wage of $30,000 and pays 100 percent of the single coverage health care premiums for these employees. The premiums total $25,000 per 2012. ABC is entitled to a credit of $7,000 (28% X $25,000).
In 2014 and 2015, the maximum credit goes to 50 percent, but the company must purchase its insurance through one of the insurance exchanges or “Marketplaces.”
If you neglected to claim the credit for 2010, 2011 and 2012, there is still time to claim it by filing an amended tax return. In addition, although the credit is non-refundable, it can still be carried back or forward to profitable years. Contact your tax professional.
But are you really a small business?
Of course, one thing all businesses must do is determine whether they are indeed “small.” The ACA considers a full-time employee to be one working at least 30 hours per week or 130 per month; 50 of these and a business is now an “applicable employer” under ACA and subject to ACA “play or pay” provisions (see below). However, in addition to full-time employees, the ACA also counts full-time equivalents (FTE’s) which is essentially the total number of hours of part-time employees divided by 30. Thus, if an employer has 46 full-time employees and six part-time employees who work 20 hours each per week (6 × 20= 120 hours/ 30= 4 FTE’s), the company will reach the 50 employee threshold. The ACA also uses time-honored tax law to combine business entities that are under common ownership; i.e. breaking up a larger business into smaller parts to avoid the ACA rules will generally not work.
A large employer is defined by the ACA as one that has 50 or more employees or FTE’s. This applies to non-profits and governmental entities as well. A little perspective is in order: Nationally, 99.8 percent (that’s 998 out of 1,000) of large employers already provide their full-time employees with health insurance. Furthermore, the federal HHS Department, one of the key administrators of the ACA, has determined that 98 percent of individuals covered by all employer-sponsored health plans are in plans that meet the minimum requirements of ACA. So, even though the penalties under ACA for non-compliance can be quite significant, the number of large employers who will need to alter their current practices is quite small.
Interestingly, the ACA does not actually require large employers to offer health insurance policies to its employees. What ACA does, beginning January 1, 2015, is assess non-deductible penalties on the large employer if even just one of its employees obtains a premium credit or cost-sharing subsidy from the Marketplace. (As mentioned in last month’s ACA article, an individual is not entitled to a credit or subsidy if they are covered by their employer with a MEHC policy at an affordable price; i.e.; the employee’s contribution is not more than 9.5 percent of his/her paycheck).
A large employer can be penalized in two possible ways:
1) If a large employer does not offer a MEHC to its employees, and one of its employees goes to the Marketplace and obtains a premium credit and/or subsidy, then the employer will be penalized $2,000 annually for every full-time employee in excess of 30.
2) If the large employer does offer a MEHC to its employees, but an employee receives a subsidy in the Marketplace because the plan is not “affordable” to him/her, then the employer is fined $3,000 for every employee who receives a premium and/or a subsidy.
Example 1: ABC Landscaping, which has 100 full-time employees, does not offer health insurance to its employees. One or more of its employees goes to the Marketplace and receives a premium credit. ABC will be penalized $140,000 per year (100 less 30= 70 x $2,000).
Example 2: DEF Landscaping does offer an MEHC policy to its employees, but three of its employees received premium credits on the Marketplace because their premiums under the company’s plan cost them more than 9.5 percent of their paychecks. DEF will be penalized $9,000 (3 x $3000).
What should an employer do to get ready for ACA?
Even though the penalty phase of the ACA for businesses has been delayed until January 1, 2015, I advise every business, small or large, to consult with their insurance professional now, without delay. Planning for, not reacting to the ACA just makes good business sense. In addition, data from 2014 (and maybe 2013) will need to be collected and analyzed if a company is anywhere near the 50-employee threshold or above.
A lot of good advice and even more really bad advice has been proffered to employers about what they should do in anticipation of the January 1, 2015 “pay or play” rules. As mentioned, most large businesses—the only businesses that fall under the penalty provisions of the ACA—are already doing what the ACA will require of them. Nevertheless, here are some of the issues employers are dealing with:
• Stay small? The ACA may be just one more reason a small business may want to stay small, and that is an unfortunate unintended consequence of the law. On the positive side, Forbes magazine noted that only one-fourth of small business owners currently have health insurance for themselves. The ACA will guarantee these small business owners and sole practitioners access to the insurance Marketplace and will provide many of them with premium credits and cost-sharing subsidies.
• Cut employee hours? Although part-time hours count toward the determination of whether a company is considered small or large, penalties under the ACA are based solely on actual full-time employees—those working an average of 30 hours per week. For instance, a restaurant with 100 FTE’s but only 30 employees working 30 hours or more per week or more, would not be subject to any ACA penalties, even if they offered no health plan at all. This has already led to strict management of hours to keep part-time employees under 30 hours a week. This is certainly not a positive result for these workers, and a fix is in order.
• Offer minimal plans? Discussion in business publications suggests dealing with the law by offering “skinny plans” (the minimum amount of benefits to still be considered an MEHC policy) and setting employee contributions at the maximum allowable level (9.5 percent of an employee’s gross income). With this strategy, an employee would not be eligible for any credit or subsidy in the Marketplace, and the employer would not be subject to any penalty, even if the employee went to the Marketplace for insurance. This Machiavellian strategy works under current ACA rules, but, again, some sort of fix is in order as the result will be a continuation of large numbers of uninsured Americans.
Stay Calm. Don’t Panic. As stated above, business owners should consult their insurance professional before making any significant changes to current employee health benefits. Ultimately, the decision will come down to dollars and cents, including the need to retain quality staff.
The ACA law was designed to be at least revenue neutral, and according to the Congressional Budget Office, it is actually revenue positive over the long run. In order to pay for premium tax credits and cost subsidies, expansion of Medicaid, and other goodies, new taxes and cost-saving measures have been imposed on the health care industry, insurance companies and individuals. Since the focus of these articles is on personal financial planning and taxation, I’ll deal here only with the new ACA-related taxes as they apply to individuals.
If you make less than $200,000 per year as an individual or $250,000 per year as a couple, you will owe no new taxes due to the ACA. Actually, this is not quite as black and white as the issue of Small Business vs. Large Business. An argument can be made that all individual are affected by the 10 percent excise tax on tanning salons, the increase in the medical deduction threshold to 10 percent, and new limits on FSA deductions. In addition, new premium taxes on insurance companies will be most likely be passed on to the consumer. Finally, while it is strictly voluntary and avoidable, the “shared responsibility payment” that individuals will incur if they do not have an MEHC policy was deemed to be a tax by Supreme Court Chief Justice John Roberts. Nevertheless, here’s the deal on the significant new taxes:
Medicare payroll tax surcharge
Beginning January 1, 2013 (this year), there is a .9 percent additional Medicare tax for individuals making over $200,000 per year and couples making over $250,000 per year. Unlike other payroll taxes, this payroll tax surcharge does not apply to the employer.
Example: Tiger Balsam is single and has a W-2 income of $450,000 per year. He will pay an additional ACA-mandated payroll tax of $2,250 ($450,000 less $200,000= $250,000 x .009).
Medicare investment income tax surcharge
Also beginning January 1, 2013, there will be a 3.8 percent Medicare tax on investment income amounts for taxpayers earning more than $200,000 adjusted gross income (AGI) on a single tax return or $250,000 AGI on a joint tax return. The 3.8 percent is assessed on the smaller of investment income or the amount AGI exceeds the threshold amount.
Example 1: Steven Works, who files a joint tax return with his wife, makes all of his income from investments and his AGI is $270,000. Steven will pay an additional Medicare tax of $760 ($270,000- $250,000= $20,000 x .038).
Example 2: Billy Fence is single. His AGI is $240,000, with $25,000 coming from investments. Billy will pay an additional Medicare tax of $950 ($25,000 x .038). Note: If Billy’s other AGI came from a W-2 ($215,000), he might also end up paying the Medicare payroll tax surcharge of .9 percent on $15,000 in excess of $200,000 threshold—a tax of $135.
What is investment income?
Investment income is gross income from: interest, dividends, royalties, annuities, rents (unless derived from a bona fide active business activity), “passive” investments, and capital gains. It’s the last item, capital gains, that seems to be causing people fits, particularly as it applies to the sale of their homes. It’s important to remember that it is the taxable capital gain (not the sale price) from the sale of one’s residence, after exclusion of $250,000 of gain for an individual and $500,000 for a couple, that is a considered “investment income” for purposes of this tax. Clearly, this will impact very few homeowners in Beaufort County.
Investment income does not include payouts from an IRA or 401K or other pension plan, income from an active trade or business, municipal bonds, tax-deferred annuities, life insurance, veterans benefits, or social security.
Strategies for dealing with the investment income Medicare tax
Since the tax is already in effect, many advance planning techniques are obviously unavailable. Nevertheless, here are a few ideas to consider.
Be aware of the AGI threshold when rebalancing or repositioning a portfolio. You never want the tax tail to wag the investment dog; but all things being equal, it may make sense to spread out sales from year to year to avoid going over the $250,000 AGI limit (for married couples).
Consider using the installment sale method. With an installment sale, capital gains are recognized in the tax year money is actually collected, not in one lump sum at the time of the transaction. This technique could effectively spread out your gain so that the AGI threshold is not exceeded. Consult a tax professional before you try this one.
1231 Exchange. This tax technique can defer all or part of the gain of the sale of an investment or business property. Again, consult a tax professional long before you try this; a 1231 Exchange will not work after the transaction is completed.
Beware the Roth conversion. While the income you recognize in a Roth conversion is not “investment income.” it still can put you over the AGI threshold and subject other investment income to the additional 3.8 percent tax.
A final word
The ACA, or “ObamaCare” is here. It’s been here since 2010, and its full impact will be felt in 2014 and 2015 when the individual mandate kicks in, medical underwriting ends, and large businesses come under the “pay or play” rules. It is a big, complex, transformative law that will affect all Americans. I urge you to ignore the rants of radicals and learn as much as possible about this new law in order to make good decisions concerning the health care of your family, employees and friends. A lot of good, solid information is available to help you in your research. Here is a list of websites I encourage to visit:
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