Financial: As The Affordable Care Act Stands After SCOTUS

by Mark E. Battersby / Published August 2015

 

The U.S. Supreme Court in King v. Burwell has ruled the tax subsidies for health insurance provided by the federal government to citizens in the 34 states that have not established the health insurance marketplaces or exchanges were legal. That means some six million people, including the nearly 3.5 million people in small-business plans and small business owners, self-employed professionals, and early retirees who depend on subsidized health care costs, will continue to receive the tax subsidies.

Unfortunately, despite those subsidies and other tax incentives, healthcare costs continue to skyrocket. And, according to a report from the Urban Institute, a Washington, DC-based think tank, small businesses are among those most vulnerable to the steep healthcare cost increases.

The ACA Today

Admittedly, the Affordable Care Act (ACA) provides those in the pressure cleaning industry with insurance options, increased buying power via the government-sponsored marketplace—and an overwhelming amount of confusion and paperwork. What can a pressure cleaning business owner or manager do to keep healthcare costs manageable while complying with the ACA’s updated and ever-changing rules?

First, it should be understood that the ACA’s taxes and tax credits are based on the number of full-time equivalent employees (FTE) and their average annual wages, not solely on the number of full-time employees. In simple terms, FTE or “full-time equivalent” equals (the total number of full-time employees) plus (the combined number of part-time employee hours divided by 30). Seasonal employees, contractors, and business owners don’t count toward the total.

The Downside

Other than the sharply escalating costs, every contractor and business owner should be aware of the ACA’s downside. Much of the negative impact of the looming “Employer Mandate,” stemmed from employers reportedly cutting hours. Although the negative side effects of the ACA are very real for some pressure cleaning businesses, many of the earlier, radical claims were overdramatized and used as a talking point.

Of those that are required to comply, only truly large businesses that don’t currently offer benefits and employ many low-wage, full-time workers face truly hard decisions. Those businesses offering higher wages typically already provide benefits, while smaller businesses (with between 100 and 50 FTE) will benefit greatly from not owing the fee on the first 30 employees. So, a business with 100 FTE and 60 full-time workers will only owe the fee for 30 employees, assuming, of course, that they currently insure no full-time employees.

The Upside

It’s safe to say the smaller the businesses the better the tax breaks. After all, the ACA provides small pressure cleaning businesses with affordable insurance options, cost assistance, and increased buying power via the Small Business Health Options Program (SHOP). Small businesses with fewer than 50 FTE employees can use the SHOP to get better deals on employee insurance but aren’t mandated to do so.

Consider a few of the ACA’s other and applicable rules:

• Small pressure cleaning businesses can see up to a 50 percent reduction in their share of the cost of employee premiums. Employers with fewer than 25 FTEs, paying average annual wages below $50,000, qualify for tax credits to help pay employee healthcare premiums. Employers with 10 or fewer full-time employees, paying annual average wages of $25,000 or less, qualify for the maximum credit of 50 percent. The amount employers do pay is tax deductible and can be carried forward or backward.
• Form 8941, Credit for Small Employer Health Insurance Premiums, must be filed to claim the tax credit—all the way back to 2010 since the credit is retroactive.
• Thanks to the ACA, employers can offer more and better quality benefits. In fact, because small businesses are able to shop for group health plans on their State’s Health Insurance Marketplace via the SHOP, a pressure cleaning business now has the same buying power as larger businesses. Along with tax credits and increased buying power, many contractors, dealers, and businesses may now be able to provide benefits to their employees.
• The self-employed with no employees can get health coverage through the Health Insurance Marketplace for individuals, but not through SHOP. And, everyone can use paper applications in lieu of the Internet.
• Retroactive to January 1, 2014, and through at least 2015, two percent shareholders in a pressure cleaning business operating as an S corporation can receive reimbursement for their individual health insurance premiums. Even better, the S corporation will not be subject to the excise tax penalty if it correctly includes the health insurance premiums on the two percent shareholders’ W-2. The two percent shareholder must report the income as wages, but will be allowed to take a self-employed health insurance deduction.
• Effective for 2015, every pressure cleaning business providing self-insured health coverage to employees must file an annual return reporting certain information for each employee covered. This rule was optional for 2014.
• Last year, many small employers were shocked to learn that employee payment plans, plans under which they reimbursed employees for the cost of obtaining individual health insurance, violated the ACA rules, and they risked a $100-per-day-per-affected-employee excise tax if they continued using the arrangements. The IRS recently provided guidance that clears up some of the earlier confusion.
• Don’t forget there is an additional cost for some small businesses—a $63 pre-existing conditions fee. That’s right, for some employers purchasing insurance, there is an annual $63 fee. The ACA small business fee decreases each year until 2017 when pre-existing conditions are phased out.

The Medicare Tax Hike

The Medicare Part A tax is paid by both employees and employers. Often overlooked, however, is the fact that a pressure cleaning business with profits greater than $250,000 faces a .9 percent increase (from 2.9 percent to 3.8 percent), on the current Medicare part A tax.

Since this tax is split between the employer and employee, they will both see a .45 percent increase. Small businesses making less than $250,000 are exempt from the tax. Employees making less than $200,000 as an individual, or $250,000 as a family, are also exempt.

Optional Strategies

Instead of shifting to the individual markets, some pressure cleaning businesses have opted for a high-deductible group plan and set up a health reimbursement arrangement (HRA) to help offset employees’ medical expenses. An employer can dictate the expenses they will reimburse, thus limiting their out-of-pocket exposure.

The advantage of an HRA over a Health Savings Account (HSA) is that the plan can be structured so that if an employee does not use the money in an
HRA, the money will still belong to the pressure cleaning business. An HSA is another option, but it gives employers less control over how the money in an account is spent; the funds are made available to employees whether or not they incur any medical expenses.

2015, 2016, And Later

On the horizon is an excise Tax on High-Cost Plans (also known as the “Cadillac Tax”) that kicks in for employers starting in 2018. Employers may have to pay up if their group health plans exceed a certain dollar limit. The limit for 2018 is $10,200 for individual coverage and $27,500 for family coverage.

For self-insured plans that exceed these limits, the employer will pay a 40 percent, non-deductible excise tax on every dollar above the limit. This penalty can be significant even for a plan that exceeds the limits by only a few hundred dollars per year, making now the time to think about changing an existing plan.

The Subsidies

Before the ACA became fully effective in late 2013, small businesses were much less likely to offer health insurance plans to workers than larger companies. In 2013, more than 93 percent of companies with 100 to 999 workers offered health coverage to employees, compared with just 32.3 percent with fewer than 25 workers.

The self-employed and workers in small businesses have, at least since late 2013, been able to buy subsidized individual health insurance plans on government-run exchanges. This has reduced the uninsured rate among nonelderly workers at businesses with fewer than 50 employees from 23.5 percent in June 2013 to 13.2 percent currently. The uninsured rate among self-employed workers fell from 30.4 percent in mid-2013 to 19.6 percent.

The subsidies, available to anyone who earns between 100 and 400 percent of the poverty level, have helped reduce the cost of insurance—at least until recently. Escalating insurance costs have already begun impacting pressure cleaning businesses and others who do not qualify for subsidies.

While supporters of the ACA tout its success in providing insurance to millions of Americans, recent rate filings from large insurers reveal the law may have been built on a shaky foundation. In recent weeks, large insurers selling coverage under the ACA have proposed massive rate increases for 2016—some exceeding 40 percent—because they haven’t been able to sign up enough young and healthy customers.

Skyrocketing healthcare costs are not, however, the only reason every pressure cleaning business—and its owners—should seek professional assistance. Keeping abreast of the many benefits and potential pitfalls of the ACA are also extremely important.