The Patient Protection and Affordable Care Act, also known as Obamacare or the Affordable Care Act, was signed into law on March 23, 2010. For brevity’s sake we will refer to it as the ACA. While a number of provisions have already gone into effect, there are a number of key provisions that will take effect on January 1, 2014, that you need to be aware of regardless of whether you are an employee or employer. Since the Supreme Court has upheld the legality of the ACA these changes are coming whether you like it or not so it’s time to start preparing for it if you haven’t already.
By January 1, 2014, most Americans will be required to have health insurance whether it’s provided through an employer, purchased individually or purchased through one of the state run Health Insurance Marketplaces, also known as Affordable Insurance Exchanges. Per the ACA, all employers covered by the Fair Labor Standards Act are required to inform all employees of insurance coverage options available through the exchanges by October 1, 2013 at the latest and to all new employees at the time they are hired after this date. This information must be provided to all employees, both full-time and part-time, regardless of whether the employer provides employee coverage benefits or not. Employers are also required to provide employees with a Summary of Benefits and Coverage that outlines the coverage and costs of their insurance plan.
Companies with More Than 50 Employees
Some of the biggest changes coming are part of the Employer Shared Responsibility provisions. Beginning on January 1, 2014 all large employers will have to either provide affordable health care coverage that meets a minimum value to its full-time employees or risk paying a tax a penalty. A large employer is one with more than 50 full-time or full-time equivalent employees. Full-time employees are employees who work 30 or more hours a week during the month. Full-time equivalent employees are part-time employees whose work hours are combined to the amount for a full-time employee. To determine the number of full-time equivalent employees take the total number of hours worked by all part time employees and divide by 120 (30 hours X 4 weeks) to determine the number of full-time equivalents. For example, if you have three part time employees who all work 10 hours a week their hours are added up and equal one full-time employee. A company’s status as a large employer is determined by employment numbers from the previous year. Also, if two or more companies have a common owner then all employees from those companies are combined to determine whether it is a large employer or not.
One key provision that was removed from the legislation before it was enacted would have required all construction companies with five or more full-time employees with an annual payroll of $250,000 or greater to be treated the same as a large employer. Again, due to heavy lobbying by the construction industry, the determination of whether a construction company is a large employer or not is determined the same way as any other type of business and not by the five employees/$250,000 payroll provision that was originally in the bill.
Per the ACA provisions, affordable coverage of minimum value must cost the employee less than 9.5% of annual household income and covers at least 60% of health care expenses. The penalty for large employers who choose not to provide coverage or provides coverage to less than 95% of full-time employees and has at least one full-time employee receiving a tax credit to purchase coverage through an exchange is $2,000 per full-time employee excluding the first 30 full-time employees. Full-time equivalents are not calculated when determining the tax penalty.
Example: Let’s say your construction company has 40 full-time employees and the total number of hours your part-time employees work a month is 1,320. To determine your full-time equivalents divide 1,320 by 120 giving you 11 full-time equivalents. This puts you at 51 full-time employees/full-time equivalents. If you choose not to provide insurance coverage and at least one full-time employee receives a tax credit then you would have to pay a tax penalty. To determine this you would take the number of full-time employees minus 30 times $2,000. 40 – 30 = 10. 10 x $2,000 = $20,000. You would owe $20,000 a year which you would pay monthly at $1,666.67.
If a large employer offers insurance coverage to 95% of its full-time employees and at least one full-time employee receives a tax credit to purchase insurance through an exchange then it will pay the lesser of $3,000 per employee receiving a tax credit or the $2,000 for each full-time employee minus the first 30. Starting in 2015, coverage offered to employees must also extend to their dependents. Spouses are not counted as dependents.
Example: We’ll use the same number as before of 40 full-time employees and 11 full-time equivalents. You provide coverage to 95% of your full time employees but one or more receives tax credits to purchase coverage through an exchange. If you only had one full-time employee received a tax credit your tax penalty would be $3,000, two employees receiving tax credit would be $6,000 and so on. If you had six employees receiving tax credits you would pay 6 X $3,000 or $18,000 in tax penalties since it is less than the $20,000 you would pay if you didn’t offer coverage to your employees. If you had seven or more employees receiving tax credits then you would pay $20,000 in tax penalties since it is less than what you would pay at the $3,000 per employee rate.
Employees are eligible for tax credits if they are between 100 – 400% of the federal poverty level, enroll in coverage through an exchange, and are not eligible for government-sponsored coverage and not offered coverage by an employer or if the coverage offered is not affordable or doesn’t provide the minimum value of coverage.
Note: Premium insurance payments made by employers are tax deductible whereas ACA penalties are not.
Another key provision states that large employers with more than 200 full-time employees must automatically enroll all current and new full-time employees into a company sponsored health coverage plan. This will not go into effect until regulations are released by the Secretary of Labor. Those guidelines are not expected to be finalized until sometime in 2014 so they will not be part of the provisions going into effect on January 1, 2014.
Companies with Less Than 50 Employees
Companies with less than 50 full-time/full-time equivalent employees are not subject to the Employer Shared Responsibility provisions. These companies have no obligations in regards to offering employees health care coverage and will not face any tax penalties regardless of whether they offer insurance or not. Employers with less than 50 employees will have the opportunity to purchase lower cost insurance through the Small Business Health Option Program offered by the exchanges. To be eligible, employers must offer the program coverage to all full-time employees and have an office located within the program’s service area.
Companies with less than 25 full-time/full-time equivalent employees that offer coverage to their employees have been eligible for a tax credit up to 35% since 2010. In order to be eligible the company’s annual wages must be under $50,000 and the company must pay at least 50% of their employees’ insurance premiums. Starting in 2014, this credit will go up to 50% provided they participate in the Small Business Health Option Program and can be claimed two consecutive years.
Information for Individuals
The individual tax penalty for not having health insurance in 2014 is $95 for an individual, $285 for a family or 1% of income, whichever is greater. These penalties would increase in 2015 and again in 2016. This tax penalty will be assessed monthly at a rate of 1/12 of the annual penalty for each month without coverage and could be deducted from your tax returns starting in 2015. You will also be allowed a one-time only grace period of up to three consecutive months without being assessed a penalty.
If you already have health insurance you won’t face a tax penalty assuming your policy covers at least 60% of your health care costs. Others exempt from having to have health insurance coverage includes people whose income is small enough not to require filing federal tax returns, people who are incarcerated, people with religious objections, illegal immigrants and members of Native American Indian tribes just to name a few.
Other Provisions Taking Effect on January 1, 2014
There are a number of other provisions taking effect on January 1, 2014 that you should be aware of. Group health plans and insurers are prohibited from imposing a waiting period of enrollment for eligible employees that exceeds 90 days. Insurers can no longer deny coverage based on pre-existing conditions or charge higher premiums based on gender or existing health issues. Insurers are also prohibited from dropping coverage for people who participate in clinical trials to treat cancer or other life-threatening illnesses. Also, annual and lifetime limits on the dollar amount of coverage provided by insurance plans will be eliminated.
The above was intended to provide some basic information on the upcoming provisions of the ACA taking effect at the beginning of next year so that you as an employee or employer can be better informed. If you would like more information on any of the upcoming provisions or the current provisions already in place you can check out the following websites: http://www.healthcare.gov/, http://www.dol.gov/ebsa/healthreform/ and http://www.irs.gov/uac/Affordable-Care-Act-Tax-Provisions.