Affordable Care Act--Where Does it Stand and What to Do Now?
by Josh Weiss, Partner, Lutz & Company CPA
The Affordable Care Act aka Obamacare is one of the largest pieces of legislation ever created. The volumes of paper and text dedicated to the law and changes are tremendous. Along with that volume comes a variety of provisions and rules based on the size of your company, the type of insurance you currently provide, what happens if you do not provide health insurance and so forth. There are certain provisions already in place as well as some that are set to go into place in 2014 and finally certain requirements that have been deferred until 2015. This article will focus on some of the higher level provisions that are in effect or will go into effect over the next few years. It is not comprehensive, but should highlight some of the major issues as they stand today.
Items that are already in place include:
• Additional excise taxes on tanning services and medical device manufacturers.
• Small Employer Health Insurance Tax Credit. Companies with fewer than 25 employees full-time equivalent employees, pay average annual wages below $50,000 and contribute more than at least 50% of the cost toward employees’ self-only health insurance premiums may qualify for a tax credit of up to 35% to help offset those costs. This will increase to 50% in 2014. However, employers must use the exchange to buy coverage to be eligible for the credit starting in 2014. The goal of this credit is to encourage small business to continue to provide insurance and offers direct tax incentives to do so.
• Additional 0.9% Medicare tax on higher income individuals (those individuals making more than $200,000 and married filing joint over $250,000)
• Additional 3.8% tax imposed on taxpayer’s unearned or Passive Income for Higher Income Individuals (those individuals making more than $200,000 and married filing joint over $250,000). The key here is this applies to passive income such as investments or rentals for which the individual is not actively involved.
• Business are required to withhold and remit an additional 0.9% Medicare tax on wages over $200,000 paid to any one individual during a calendar year.
So in summary, there are certain taxes in place already on individuals with higher incomes. These individuals may be business owners so it is important to understand the character of your income and make sure procedures are in place to administer these provisions.
January 1, 2014, the Individual Mandate goes into effect. The Individual Mandate requires individuals to carry insurance or run the risk of being penalized. The calculation for the penalty or tax for not being insured is the responsibility of the individual and is the greater of a flat dollar amount or a calculation based on the percentage of household income.
The penalty may be a flat dollar amount ranging from $95 per individual to $695 in future years. The flat dollar amount is capped at 300% of the individual penalty, even if the individual has dependents. The household income calculation is a little more complicated, but for 2014 will be 1% of household income, as defined by the Act, from the current year’s income tax return. There is a cap on the household income calculation that is yet to be determined.
There are insurance marketplaces or exchanges that will be made available to the individuals that are not offered insurance by their employer. Also available will be premium assistance tax credits for individuals that obtain insurance through an exchange and have income between 100% and 400% of the poverty limits. The 100% to 400% poverty level is adjusted based on number of dependents in the household. These credits are the responsibility of the individual and will be claimed on the individual’s tax return or the individual can elect to have the credits paid directly to the insurance provider rather than receiving on their return. These credits will be verified upon review of the individual’s income tax return. There is some delay in the verification process due to the delay in the employer mandate portion until 2015.
The employer mandate portion of the law has been delayed until 2015 and addresses the requirements impressed upon employers to provide health insurance to their employees. The employer mandate applies to large employers, which is defined as having more than 50 full-time equivalents that work on average of 30 hours per week. A penalty is imposed on the employer if an employee receives a premium assistance credit because the employer is not offering minimum essential coverage insurance or is offering unaffordable coverage to their employees. Unaffordable coverage is defined as the employee portion of premiums for insurance being greater than 9.5% of an employee’s wages.
If health coverage is not offered to full-time employees and the employee receives a premium assistance credit, the penalty per employee is $2,000 less the first 30 employees. The penalty may increase to $3,000 if coverage is offered, but the full time employee still receives a premium assistance credit. Many people may feel that accepting and paying the penalty will be less costly than offering the coverage. It would be worth discussing with your insurance carrier and accountant to make sure that is in fact a less costly approach. It is also important to note that the penalties are not tax deductible. There may be more efficient ways to avoid the penalty and provide coverage. Remember, these penalties apply to large employers of 50 or more employees.
The IRS and the government are not ready for the employer mandate, hence the deferral until January 1, 2015. However, individuals must be prepared for the individual mandate to go into effect by January 1, 2014. A delay in planning for the Affordable Care Act may still cause issues and confusion as the overall administration of the Act will be complex. The complexities apply to both employers and employees so use the deferral to your advantage and make sure you are as prepared as possible for each of the upcoming phases of the act.