The U.S. Supreme Court ruling has drawn attention to the far-reaching provisions of the Patient Protection and Affordable Care Act of 2010. Since 2010, various provisions have trickled into effect. But the waters of change are gaining speed, with several particularly significant provisions scheduled to take effect over the next 18 months, barring congressional action.
Businesses face a variety of compliance requirements under the act, though certain small businesses may be eligible for a tax-saving opportunity. What all businesses need to do now is prepare.
Medicare tax withholding
Starting in 2013, employers must withhold an extra 0.9% in Medicare taxes on employee earnings over $200,000 ($250,000 for joint filers). Employers aren’t, however, required to match that extra payment; they need pay only 1.45% on all earnings.
The IRS has indicated that employers aren’t required to break out the additional withholding amounts on employees’ W-2 forms. So, to avoid penalties, employers are required to do little more than arrange to withhold the additional amounts. Nonetheless, it’s a good idea to alert affected employees that, upon reaching the threshold amount, they’ll see a drop in their paychecks.
Health care coverage reporting requirements
Employers that filed 250 or more 2011 W-2 forms must begin reporting the cost of employer-provided health care coverage on the forms beginning with the 2012 tax year. For more information on these requirements, please view this article “IRS revises guidance on W-2 reporting of group health insurance costs.”
More urgently, group health plans must provide an annual uniform summary of benefits and coverage (along with a list of definitions) to employees for plan renewals and plan years beginning on or after Sept. 23 of this year. While insurers must prepare the documents, employers must ensure they’re properly prepared and mailed by the applicable deadline dates. And self-insured employers must prepare the documents themselves.
Medicare subsidy payment
As of Jan. 1, 2013, employers can no longer claim an income tax deduction for the Medicare Part D retiree drug subsidy payments they receive from the federal government. Employers should take the loss of the deduction into account in their tax planning.
Currently, employers that offer Flexible Spending Accounts (FSAs) can set the employee contribution limits for them. But starting in 2013 the health care act applies a $2,500 limit to employee contributions.
According to the IRS, the $2,500 limit on pretax employee FSA contributions applies on a plan year basis. Thus, non-calendar-year plans must comply for the plan year that starts in 2013. Employers will need to amend their plans and summary plan descriptions to reflect the $2,500 limit (or a lower one, if they wish) by Dec. 31, 2014, and institute measures to ensure employees don’t elect contributions that exceed the limit.
Also be aware that there will continue to be no limit on employer contributions to FSAs.
Pay or play provision
The so-called employer mandate provision is scheduled to take effect Jan. 1, 2014. Although the health care act doesn’t require employers to provide health care coverage, in some cases it imposes penalties on larger employers that don’t offer coverage or that provide coverage that doesn’t qualify as “affordable.”
Employers with 50 or more full-time employees (those working 30 hours or more per week) that don’t provide their employees with health coverage will be assessed a penalty if just one of their workers receives a premium tax credit when buying insurance in a health insurance exchange. The annual penalty is $2,000 per full-time employee in excess of 30 workers. For example, if the employer has 53 full-time employees, the penalty would be $46,000 (23 x $2,000).
Employers that do provide coverage could also face penalties if it isn’t deemed affordable. Penalties will be triggered if 1) the coverage doesn’t cover at least 60% of covered health care expenses for a “typical population,” or 2) the premium for the coverage exceeds 9.5% of a worker’s income. In such cases, the worker can opt to obtain coverage in an exchange and qualify for a tax credit. For each worker receiving the credit, the employer must annually pay the lesser of $3,000 per employee for each employee receiving a premium credit or $2,000 for each full-time employee beyond the first 30 employees.
Some employers may opt to simply pay the penalties because the increased costs to be expected due to the broader scope of coverage now required (for example, coverage of dependents up to age 26) will be greater than the penalties. These employers could incur other costs, though, such as lost tax benefits (unlike health care benefits, penalties aren’t deductible) and the costs to remain competitive in the labor market.
Small business tax credits
The health care act provision providing tax credits to qualifying small businesses took effect in 2010. Businesses with fewer than 25 full-time equivalent employees and average annual wages of less than $50,000 that pay at least half of the cost of health insurance for their employees may qualify.
For 2014 and later, small businesses must purchase coverage through their state exchanges to qualify. But the amount of the credit may be higher — as much as 50% (up from 35%) of their contributions toward the health insurance premiums.
Also be aware that, after 2013, businesses can take the credit for only two years — although, interestingly, there is no requirement for which two years must be chosen. Thus, some planning should be involved in determining when to claim the credit. That is, if the credit will be reduced in a particular year due to one or more of the various limits that apply, the business may be better off waiting until the next year to see if the credit will be more valuable.
Businesses that qualify for the tax credit also will need to determine whether the costs of providing health care coverage are offset by the credit and other benefits of providing coverage to employees.
Many of the health care act’s provisions will require businesses to take action this year and next. We’d be pleased to help you determine how the act affects your business and what you need to do to prepare.