Plan Now for ACA's 2014 Penalties
Jan 23, 2013 | Mark Baker, CPA
Many employers, including physician practices, have been reluctant to measure the impact that the Patient Protection and Affordable Care Act (ACA) may have on their business simply because there was so much uncertainty as to whether or not the law would actually ever be implemented.
Health care reform will impact all employers, regardless of size, in some way or another. Here’s what you need to be aware of now.
You may be surprised to know that anyone with over 50 full-time equivalent employees (FTEs) is considered a “large” employer under ACA. Any person working 30 or more hours per week is considered full time. Furthermore, two part-time employees each working 15 hours per week is the equivalent of one full-time employee.
Large employers can face penalties in a number of ways. First, if the employer doesn’t offer health insurance coverage to all full-time employees and their dependents, it will pay a $2,000 penalty per year for each full-time employee. However, ACA does exclude the first 30 full-time employees from penalties under the no coverage offered scenario.
Large employers may also be penalized even though coverage is offered if it is either unaffordable or doesn’t provide minimal value. Coverage provides minimal value if it covers at least 60% of the total allowed cost of benefits (i.e. coverage pays at least 60% of the claim).
So how do you know if the coverage you currently provide is unaffordable to your employees? Basically, coverage is considered unaffordable if it costs the employee more than 9.5% of their household income.
How, you may ask, am I supposed to determine my employee’s household income? That’s a very good question — one still yet to be answered by regulators.
For now, the Internal Revenue Service has specified that you may use wages as shown in Box 1 of the employee’s Form W2. Just keep in mind you may be subject to a penalty using the W2 whereas you might not if you had an employee’s total household income. In addition, affordability is based on the self-only or single coverage premium. For instance, even though an employee may have elected family coverage, you only use the self-only premium portion paid by the employee to determine affordability.
Under each of scenarios above employers will face a $3,000 penalty for each employee, who as a result of the coverage not providing minimal value or being unaffordable, purchases coverage through a state or federal health insurance exchange AND receives a government subsidy to help cover a portion of the cost. Individuals earning up to 400% of the federal poverty limit could qualify for these subsidies (ex – a family of four could earn up to $92,200 and qualify for some amount of subsidy).
Keep in mind these penalties are assessed annually and are not tax deductible. Also, although the penalty doesn’t start until January 1, 2014, the average number of FTEs is based on the previous 12 months - calendar year 2013.
But none of this applies to me, I’m grandfathered…
Well, not exactly so. Large employers are not exempt from the above penalties simply because they may have a grandfathered plan. Grandfathered plans are those plans that were in existence when the law was signed on March 23, 2010 and have remained in effect with few, if any modifications, since then. Primarily, grandfathered status provides two benefits.
First, grandfathered plans are exempt from a few requirements of ACA otherwise required by all group health insurance plans. Examples include benefits with first-dollar coverage (no co-pay/deductibles) for certain preventive health care services. By exempting these provisions, employers have greater control over increasing premium cost.
Second, grandfathered plans do not have to meet new non-discrimination laws regarding the provision of health insurance. Prior to health care reform, group insurance plans could generally cherry pick which employees were offered what coverage and varied the employer-paid portion of the premium among employees. However, after passage of ACA, employers can no longer discriminate as to the eligibility to participate in the group insurance plan or the benefits provided under the plan.
Talk with your insurance agent if you are unsure whether or not your plan is grandfathered. Always discuss any plan modifications, such as increasing co-pays/deductibles or eliminating benefits, with your agent to determine the potential impact if your plan is currently grandfathered.
Better news for the small employer
For those employers with fewer than 25 employees with average wages of less than $50,000, you may be eligible for a tax credit to help offset the cost of health insurance coverage currently provided.
To qualify for the full 35% tax credit, employers must have no more than 10 employees and average wages up to $25,000. After that point, the credit begins to phase-out up to the max of 25 employees and $50,000 in average wages. Employers must pay at least 50% of the premium cost to qualify for the credit. Owners and their family members are excluded when determining the number of employees and average wages.
Beginning in 2014, the credit increases to 50% if coverage is purchased through a federal or state health insurance exchange. Discuss this with your CPA during tax preparation to determine if you may qualify.
Although 2013 just began, now is the time to plan. Penalties assessed in 2014 will be based on the number of employees employed this year. By working with professionals well versed in health care reform, you can project the impact health care reform will have on your business and make any necessary adjustments to minimize the impact.
Mark Baker, CPA, is a principal in the accounting and consulting firm of Jackson Thornton, head-quartered in Montgomery, Alabama with offices in Alabama, Mississippi and Tennessee. Mark specializes in services to healthcare providers including physician practices. Mark can be contacted at firstname.lastname@example.org or (334)-834-7660.
Jackson Thornton is also a proud member of the National CPA Health Care Advisors Association (HCAA). HCAA is a nationwide network of CPA firms devoted to serving the health care industry. Members provide proactive solutions to the accounting needs of physicians and physician groups. For more information contact HCAA at info@HCAA.com.