Hands down, the research I did on the impact of the Affordable Care Act for the individual for my last column was the most confusing to date. Researching the impact on businesses for this one was equally confusing. It’s difficult to keep the ins and outs, requirements, exceptions and penalties straight, so I hope this will help you follow the bouncing ball.
Let’s start with a recap of the “employer mandate,” which goes into effect Jan. 1, 2014. The Affordable Care Act requires companies with 50 or more full-time equivalent employees (to be defined below) to provide qualified (as defined by the act) health insurance coverage for their employees working 30 hours or more per week. Employers also must contribute at least 60 percent of the employee’s premium (but not the rest of the family’s) which also has to be enough to make it affordable. It has to be a cost to the employee of not more than 9.5 percent of his or her income. Should the employer decide not to comply, the company will be subject to a non-tax deductible penalty.
There are two penalty options: For employers that do not offer any qualified insurance plan and at least one employee purchases insurance on the exchange, the penalty is $2,000 times the number of full time equivalent employees minus 30. For those who offer a qualified plan that is not deemed affordable, the penalty is the lesser of that $2,000 calculation, or $3,000 times the number of employees who get a subsidy to buy their own insurance.
Doing the math
Let’s say an employer of 60 full time equivalent employees offers a plan, but the cost to an employee is more than 9.5 percent of their income, so the plan fails the affordability requirement. Fifteen employees go out on the exchange to buy insurance and each gets a subsidy to help pay for it due to income level and family size. That employer’s penalty would be the lesser of:
60 (number of FTE’s) — 30 = 30 x $2,000 = $60,000 or
15 (who got subsidies) x $3,000 = $45,000
This employer would pay a $45,000 penalty.
Who counts as a full time equivalent? To determine the number of FTEs working in a business, total up the number of hours worked in a year by all employees, excluding owners, owners’ family members and certain seasonal workers (but capped at 40 hours per week per employee) and divide by 2080. Two employees working 20 hours a week each for instance, count as one FTE. To help you calculate how many FTEs you have, click here (The IRS is involved; you didn’t think it would be simple, did you?). So you can see that your penalty is not necessarily based on the number of full-time employees covered or not covered, but rather your full-time equivalents.
The employees that businesses are actually required to cover are those working 30 hours or more per week. Employers will choose a three- to 12-month look back to see which employees worked 30 hours or more per week, which is why we saw some employers begin to cut hours now, even though the mandate does not begin until Jan. 1.
Very small employers (25 FTEs or fewer) may find a perk rather than a mandate in Obamacare; there is a tax credit available to help pay for an employee health plan. Companies paying average wages of $50,000 or less and who contribute at least 50 percent of the single employee premium may be eligible for a tax credit of up to 35 percent in 2013 (25 percent for nonprofits). That rises to up to 50 percent (35 percent for nonprofits) in 2014 and 2015, but only for businesses that purchase insurance on the SHOP exchange.
Companies with the fewest employees and the lowest wages qualify for the biggest credit. This can be a nice help for cash strapped employers who wish to offer insurance, if only subsidized for a few years. The credit is nonrefundable, meaning it can only be used against tax and not money refunded to you, but it can be carried forward. The credit is also capped at the employer contribution amount customary for your area. Pass through companies like S Corps that don’t actually pay tax themselves can pass the credits through to their owners. Unfortunately, coverage for owners and family members doesn’t count for the credit.
SHOP exchange option
Where will business go to buy insurance after this year? Large employers will continue to purchase the same way (directly through brokers or insurance companies), but small employers (up to 100 employees; 50 in some states) will be able to go the SHOP exchange (small business health option program) instead. The idea behind the SHOP is that by entering certain parameters, various plans will be generated for side-by-side comparisons, like you would find on expedia.com for example. The eventual goal is that an employer will specify a level of coverage — bronze, silver, gold or platinum — and how much it will contribute, and employees can go from there to choose a plan from among various carriers. The employer is billed in one sum rather than billings from several carriers.
While state SHOPS will be open in 2014, the option to choose among carriers and plans for employees in the 33 states whose exchanges will be run by the federal government (including Pennsylvania) has been delayed to 2015. So for 2014, employers in those states will offer a single plan for all employees, as many do now. In 2017 the SHOP exchanges will be open to large employers as well.
Interestingly, I found a new fee in Obamacare that I had not heard of before. Beginning in 2014, there will be a new annual “preexisting conditions fee” assessed on all major medical plans (individual- and employer-based). The funds will go to a stabilization fund, designed to offset the cost of insuring those with preexisting conditions. It will start at $63 in 2014, and go down each year through 2017, when the anticipated $25 billion will be raised.
Because the requirement to cover preexisting conditions will not be implemented until 2014, the Affordable Care Act also established a Preexisting Condition Insurance Program (PCIP). Unfortunately the $5 billion assigned to it was not enough and in March of this year the program closed to new participants, leaving many with medical illnesses to purchase expensive private insurance or go without, and the federal government looking to the states to pick up some of the slack. Looks like their math was off; imagine that.