President Obama’s Patient Protection and Affordable Care Act, otherwise known as “Obamacare” – once the fodder of pundits and presidential hopefuls – is now a reality for millions of small businesses across the country.
In June 2012, the U.S. Supreme Court ruled in favor of the constitutionality of the law, paving way for major provisions of health reform and the associated tax, accounting, and penalty implications for individuals and businesses. Although some aspects of the law do not take effect until 2018, small businesses need to begin preparing for changes that are taking effect in 2013 and 2014.
Before we dive into a couple of the major tax implications for small business, let’s set some context.
A small business can range from 1 to 500 employees, and in some industries a small businesses can have up to 1,500 employees. Obamacare will provide subsidized healthcare to 83% of small business owners who are currently uninsured. Note, however, that some larger small businesses and their employees may be affected by some of the new taxes as well as the mandate to buy insurance for full-timers. We’ll get into that below.
Beginning in 2010, business with fewer than 25 full time employees and average annual wages of less than $50,000 that also pay at least half of the cost of health insurance for their employees are eligible for a tax credit. The full credit is available to employers with 10 or fewer employees and average annual wages of less than $25,000.
By 2014, small businesses with up to 100 employees (50 or fewer in some states) will be able to compare and buy health insurance on the SHOP Exchange for their employees. This is expected to extend to businesses with more than 100 employees in 2017. (Note: An exchange is a set of government-regulated and standardized health care plans, from which individuals may purchase health insurance eligible for federal subsidies.)
Beginning in 2014, small businesses with over 50 employees that (1) do not provide insurance, (2) provide insurance that is too expensive, or (3) insurance that doesn’t meet the minimum standards set forth by Obama Care will have to pay an “employer responsibility requirement” penalty. The annual penalty is equal to $2,000 per full-time employee who chooses to purchase insurance (as an individual) on the exchange and receive a subsidy. (These penalties, however, exclude the first 30 employees from the fee assessment). Small businesses with less than 50 full-time employees will not be subject to these penalties.
Given the complexities of the law’s requirements, employers should adopt an insurance plan that meets all of the requirements, and of course discuss any decisions with a CPA and maintain ongoing management with their bookkeeping firm.
Small Business Tax Credits
Open enrollment for individual and small business health insurance exchanges begins Oct. 1, 2013. Small businesses can apply for tax breaks of up to 35% (25% for non-profits) of the cost of their employees’ premiums if they have fewer than 25 full-time employees and their insurance is purchased on the Affordable Insurance Exchange for at least two years.
To qualify, businesses must pay for at least 50 percent of their employees’ premiums and their workers average annual wages must not exceed $50k. This tax credit amount will be increased to 50% (35% for non-profit) in 2014. Smaller businesses – those with 10 or fewer employees and average annual wages of $20k or less – are eligible for the full 35% credit dating back to 2010 and 2013 and then a 50% tax credit beginning in 2014.
According to accounting firm BKD, these tax credits can help offset the cost of employer-provided insurance. A couple of caveats:
- The calculation is complex and subject to phase-out limits, causing many small employers to receive smaller credits.
- Additional time commitments are necessary for employers to obtain information to calculate the credit and for tax return preparers to complete the required forms.
An additional area of tax implications is Medicare. Small businesses are set to face a .9% increase on the current Medicare tax – though small businesses making under $250k in taxable profit are not subject to this tax increase. (To get an idea of the impact of the breadth of this Medicare tax, small businesses making over $250k in taxable income account for only 3% of small businesses in the US).
At an individual level, beginning in 2013, an additional Medicare tax of 0.9% applies to compensation over $200,000 for married taxpayers, $250,000 for marrieds filing jointly, and $125,000 for marrieds filing separately.
The Road Ahead
It is estimated that some 96% of all firms in the United States (5.8 million out of 6 million firms total) have less than 50 employees and thus will not be affected by choosing not to provide health coverage to their employees. However, in many states, these businesses can still choose to participate in government-sponsored health insurance exchanges beginning Oct. 1, 2013 (and get accompanying tax credits). These exchanges will be an integral piece in increasing competitive pricing and coverage of health plans – and promising a healthier workforce moving forward.
Remember to talk to your CPA and your bookkeeper to prepare for these upcoming changes.
For more information, visit the Kaiser Family Foundation’s website devoted to heath care reform.