Bill of Health

It’s been several months since President Barack Obama signed the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act into law. The intent of the two bills is to expand health care coverage to 32 million currently-uninsured Americans through a combination of cost controls, subsidies and mandates. The Congressional Budget Office estimates the cost of the plan at $940 billion over a 10-year period. However, it is designed to have its costs be fully offset by new taxes and revenues, and would actually, according to the Obama Administration, reduce the deficit by $143 billion over the same period.

Regardless of your political beliefs, every small-business owner should be aware of the implications and available tax credits stemming from the health care reform plan in order to make the most informed decisions for their enterprise. For simplicity’s sake and because the lion’s share of readers of this column operate what the U.S. Government considers a “small business,” I would like to share information from the plan that pertains mostly to Small Employers.

How small is small?

Generally speaking, a company that can be described as a sole proprietorship with anywhere from no employees all the way up to any business entity with less than 25 employees is considered a small business. Most people won’t argue the value of employer-sponsored health care and its effects on employee morale and retention, but it can be a very challenging proposition for small business owners.

The really large companies don’t even buy health insurance for their employees. Instead, they opt to be ‘self-insured’ and only engage health insurance companies to administer their plan and/or take out policies for catastrophic circumstances. Small businesses don’t have that kind of clout in the insurance marketplace.

The Affordable Care Act provides tax credits, beginning this tax year, for small business with less than 25 full-time employees (or some combination of part-timers equaling 25 full-time equivalent workers), and an average annual wage of $50,000 per full-time employee equivalent and the employer pays at least half of the insurance premiums. The tax credit is up to 35 percent in 2010 and goes up to 50 percent starting in 2014. The IRS even has a YouTube video explaining the tax credit criteria (enter “Small Business Tax Credit” in the search field at www.YouTube.com).

The Affordable Care Act also gives small businesses the opportunity to shop for insurance in Exchanges that would help close the 18 percent gap between the buying power of small and large employers. The Exchange is a new marketplace where individuals and small businesses can buy affordable health benefit plans that meet certain benefit and cost standards. Starting in 2014, members of Congress will be getting their health care insurance through Exchanges and businesses with fewer than 100 employees will be able to shop there as well.

The Exchanges will be state-based, which means you won’t be able to shop for insurance at a competitive rate from a company based in another state unless they have a branch in yours. The option of crossing state lines to buy health care coverage was considered during the discussion of the Bill in Congress, but wasn’t included in the final version. Separate Exchanges will be created for small businesses to purchase coverage, but not until 2014.

Health care is taxing

As you might be able to detect, much of the money needed to fund the new health care plan will be collected over the next three years and before many of the benefits kick in or are doled out. The controversial ‘everyone-must-have-health-insurance’ part of the Bill doesn’t begin taking effect until 2014, though taxpayers will start seeing boxes on their W-2s next year listing the costs of their health insurance. For now, the IRS says they will use that box for informational purposes only, but will eventually be used to tax health insurance plans that offer expensive benefits.

In 2012, the Medicare Payroll Tax will be expanded to include unearned income. There will be a 3.8 percent tax on investment income for families making more than $250,000 per year ($200,000 for individuals). There will be disallowed deductions for certain retiree prescription drug plans and changes to the deductions allowed for medical expenses. In addition, there will be a 10 percent excise tax on indoor tanning services. (George Hamilton has to be fuming over that little caveat.)

Starting in 2014, taxpayers who aren’t covered by a health care policy will be subject to a tax called the “shared responsibility penalty.” The fine starts out at 1 percent of income, then 2 percent or $325 per person, whichever is larger, in 2015 (although there are some exceptions for low-income people). In 2016, the fine is $695 per person and the tax slides up to 6.5 percent of income throughout the several years that follow. Illegal immigrants will not be allowed to buy health insurance in the Exchanges—even if they pay the full amount with their own money.

However, there is some relief. Individuals and families who make between the Federal poverty level—that income level for a family of four is $22,050 today—and four times the poverty level who want to purchase their own health insurance from an Exchange are eligible for subsidy, provided they aren’t eligible for Medicare, Medicaid or covered by an employer.

Technically, there is no employer mandate to provide its workers health insurance. But, if a company with more than 50 employees doesn’t provide health insurance to everyone, it will be subject to a $2,000 fine per worker each year if even one worker receives federal subsidies to purchase health insurance—and the fine is calculated by the entire number of employees minus some allowances.

As a business owner, it is important to be current on the legislation that impacts that business. Periodically visit websites that have the most up-to-date information about the health care reform bill, such as www.healthcare.gov, www.opencongress.org, www.nfib.com, www.sba.gov and www.irs.gov, to name a few. Good luck.

Broad Strokes

This month’s broad strokes include:

The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act were signed into law for the purpose of ensuring that all Americans have access to quality, affordable health care and significantly reduce long-term health care costs.

Small-business owners should remain aware of the implications and available tax credits stemming from the health care reform plan in order to make the most informed decisions for their enterprise.

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