Employer Tax Changes Triggered By Health Care Reform
June 22 2011 by Vishal S. Petigara
On March 23, 2010, the President signed into law the Patient Protection and Affordable Care Act, and together with the Health Care and Education Reconciliation Act of 2010 (collectively, the “Act”) signed into law on March 30, 2010, will significantly reform the entire health care system and impact most employers. Much of the reform to the health care system does not occur in a stand alone fashion, but rather through the encouragement of certain behavior through the Internal Revenue Code.
While this article focuses on the effects of the Act on employers, it is worth noting that one of the key features of the Act (necessary to make the whole system work) is the requirement that all individuals maintain “minimum essential coverage,” and that failure to do so could result in penalties applicable to the individual. This individual mandate is an important background element because of its relationship to the employer requirements – if the individual is not covered by certain types of employers, then the employer may be subject to a fine. With the requirement that all non-exempt U.S. citizens and legal residents be insured in mind, the most salient features of the Act applicable to employers are as follows:
Beginning in 2014 businesses with at least 50 full–time equivalent employees who do not offer full time employees minimum essential coverage, or provide minimum essential coverage that is unaffordable to cover less than 60 percent of the cost of such coverage, must pay a penalty if any of those full time employees are certified as having obtained health insurance through a state exchange where the employee receives a tax credit or participates in a cost sharing reduction.
The penalty for any month is an excise tax equal to the number of full time employees over a 30-employee threshold multiplied by one-twelfth of $2,000. Essentially, an excise tax penalty for the year would be $2,000 for every employee over 30-employees that is not covered and is receiving subsidized insurance through an exchange.
The penalty also applies to employers of 50 or more employees who offer their employees and dependents the opportunity to enroll in an employer sponsored plan, and those employees receive subsidized coverage through a state exchange. By way of example, the penalty to a noncompliant employer with 50 employees, would be 20 employees (the excess over 30 employees) multiplied by $2,000 for an annual penalty. The penalty is calculated on a monthly basis, so total potential liability of $40,000 is divided by 12, and payable for the months that the employees were not adequately covered.
“Free Choice Voucher”
After 2013, if an employer offers minimum essential coverage through an employer sponsored plan and pays a portion of the coverage, the employer must provide the qualified employee with a voucher applied towards the purchase of a health plan through an exchange. A qualified employee is one that does not participate in the employer sponsored plan, and whose required contribution exceeds 9.5 percent of their household income and whose household income does not exceed 400 percent of the poverty line for the family ($88,200 for a family of 4). The value of the voucher is equal to the employer contribution to the employer sponsored plan.
Small Business Tax Credits
Starting this year, business which employ 25 full-time equivalent employees or less which earn less than $50,000 per year may receive a tax credit to facilitate the purchase of health insurance for those employees. A large tax credit is available to employers with less than 10 full-time equivalent employees who make less than $25,000 per year.
These wage limits are indexed for inflation.
The tax credit is 35 percent of the employer’s contribution to the plan, and in 2014 and later, those small businesses who purchase insurance through an exchange may take a credit for two years up to 50 percent of their contribution.
Starting this year, all health plans, including employer sponsored health plans, must cover dependent children through age 27.
Cadillac Plan Tax
Beginning in 2018, a 40 percent nondeductible excise tax on insurance companies and plan administrators for any health plan to the extent that the annual premiums exceed $10,200 for single coverage and $27,500 for family coverage. This tax applies to self-insured plans and plans sold in the group market.
It should be noted that the dollar value of the tax threshold only increases if the inflation rate for medical group premiums between 2010 and 2018 is more than what the Congressional Budge Office has estimated.
This excise tax would be payable by self-insured employers and to the insurance companies. It is unclear the effect that this tax will have on the benefits provided by employers though it may be logical to conclude that there could be a reduction in high value plans being offered.
Beginning in 2011, employers will have to report the value of the employees’ insurance coverage on their W-2s.
Surtax on Unearned Income
Though not strictly applicable to businesses, this new tax most likely be felt by many business owners. Beginning in 2013, a 3.8 percent surtax called the Unearned Income Medicare Contribution will apply to the net investment income of taxpayers earning over $200,000 individually ($250,000 if married filing jointly). The tax is applicable to interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net income from the gain from disposition of property (other than property held in a trade or business). Especially, if a business has net investment income subject to this tax and the shareholders, members or principals of that business pay the business taxes in a pass through manner, then this tax would apply to them.