Affordable Care Act: What Does it Mean for Business?

18 Nov 2013 by STWAdmin, No Comments »

By: Chris C. Owens

Whether you love it or hate it, supported it or didn’t, the Affordable Care Act is here to stay….at least for now. So what does that mean for employers; what do you need to know about the ACA? Well, there are a lot of answers to that little question; so, let’s begin at our present point on the timeline and look at it piece by piece. In 2014, we can expect several points of the ACA to come into effect.  Not every point will result in a direct compliance obligation for every employer, but will have some effect on each one, either directly or indirectly. The ACA is very much a numbers game and understanding the numbers is the only way to win.

So where to begin? Well, a good place to start would be employer size. Because the ACA mandates that all large employers provide fair and affordable coverage to its employees, a determination of size must be made in order to determine whether or not this mandate is applicable to you. The ACA defines a “large” employer as any employer who employed an average of 50 or more full time equivalent employees on business days during the preceding calendar year. So how do we determine whether or not we have 50 employees? Well, for the purposes of this calculation, the key word is equivalent. The ACA says that any employee who works an average of 30 hours per week is considered full time. But the law isn’t just looking for what is traditionally considered full time employees; but rather, it’s looking for full time equivalent employees. The ACA requires an employer to add together the total monthly hours of all part time employees and divide by 120. This formula will give an employer his number of monthly full time equivalent employees. Add this number together with the total number of regular full time employees, and an employer will arrive at his total number of full time employees. This is the number used to determine employer size under the ACA. If you get to 50 after these calculations, then the mandate applies to you and, under the law, you will have to provide fair and affordable coverage to your employees or be penalized. One thing to note, the employer mandate has been postponed to take effect until January 1, 2015; however, it’s a good idea to begin these calculations now as these numbers will be used for determination in 2015.

Now that we know our numbers, we can do some extrapolation based on what we know. If you have reached the magic number of 50 full time equivalent employees then you must comply with the employer mandate. Fair and affordable coverage must be offered to all of your full time employees. Sounds easy, right? Well, maybe, but compliance doesn’t stop here. Now we need to look at the type of coverage offered; meaning, the actual benefits within the plan. Beginning in 2014, ACA regulations require all individual and group health plans to provide an essential health benefits package. Compliant plans must include a list of ten comprehensive benefits, to include maternity and newborn care and pediatric oral and vision care. Keep in mind, the essential benefits package is non-negotiable; it must be included in every plan offered, whether it’s needed and wanted or not. Making sure your plan includes this will keep you within the letter of the law. Next, your new plan must meet the mandated minimum of a 60% actuarial value. Simply put, your plan must pay for at least 60% of covered medical expenses incurred within the plan. Finally, the plan offered must be deemed affordable. And what constitutes affordable? Well, the employee only portion of the yearly premium cannot exceed 9.5% of his or her modified adjusted gross income. Because there is no way for the employer to truly know what an employee’s total household income is, the employee’s income, alone, may be used for the purposes of calculating the affordability of a plan. Here are a few considerations to remember. As an employer that doesn’t comply with the mandate, you will be fined $2000 per employee, minus the first 30, per year. For example, you have 50 employees and you don’t comply, you will pay $40,000 per year in fines (50-30=20, 20 x $2,000=$40,000). On the other hand, if you do offer a plan but it doesn’t meet the criteria set forth within the ACA, you will be fined $3000 per employee, minus the first 30, per year. Back to our example, you still have 50 employees but your plan doesn’t comply then you will be fined $60,000 per year (50-30=20, 20x$3,000=$60,000). Remember, it’s a numbers game.

But what if you didn’t reach the magic number of 50 full time equivalent employees? What will you have to do in this situation? Well, the short answer is nothing. There are no requirements with which to comply. However, the ACA, to some degree, does incentivize small employers to offer qualified health coverage to its employees. For tax years 2014 and beyond, employers who purchase coverage through the state exchange will be able to claim a tax credit of up to 50% of the employer’s contribution toward the employee’s health insurance premium, provided the employer contributes at least 50% of the total premium cost. This credit is available to businesses employing less than 25 people, have average annual wages of less than $50,000 per employee, and will be available for two years. Businesses with 10 or fewer full time employees and have average annual wages of less than $25,000 per employee may claim the full credit. The credit will phase out as firm size and average wages increase; therefore, it won’t always be available.

So far we’ve covered the direct effects from the ACA that businesses can expect in 2014, but what about the indirect effects? These are a little more subjective, but sound arguments, nevertheless. Beginning in 2014, the ACA imposes an “annual fee” on the fully insured market that serves most small business employers and those who purchase individual policies. You and I would call this a “tax”, and, for the purposes of this discussion, we should keep in mind who really pays taxes imposed on business. In 2014 the amount of that fee will be 8 billion dollars, distributed across health insurers. 2015-16 will see a fee of 11.3 billion dollars, 13.9 billion in 2017, and 14.3 billion in 2018. After 2018 the fee will increase according to an index based on net premium growth. This fee (tax) will almost certainly be passed through to the consumer in the form of higher premiums, creating a perpetual increase in premiums year after year. After all, as premiums increase, the fee increases…and as the fee increases, premiums increase. According to the CBO, self-insured plans will be mostly exempt from the fee, leaving the burden to be primarily borne by small business and the self-employed. And that’s just one way premiums will likely increase as a result of this fee. Another is from a likely move by insurers to offset an increased liability in corporate income taxes incurred as a result of  increased premiums collected.  Let’s look at an example.  Douglas Holtz-Eakin explains it this way: an insurer responds to a $1,000,000 fee by raising premiums by $1,000,000, thereby incurring $350,000 in corporate income taxes (35% x $1,000,000). In turn, the after tax profits of the insurer will drop by $350,000. If, instead, the insurer raises premiums by $1,538,462, it will incur a corporate tax liability of $538,462 (35% x $1,538,462), completely offsetting the tax. The corporate tax will likely amplify the total impact of this annual fee by approximately 54%, according to Holtz-Eakin. $87.4 billion in first decade taxes could result in $134.6 billion in premium increases. The law of unintended consequences is in full force!

This has been a short summary of what businesses can expect for 2014. What I’ve written is only an abbreviated version of what the ACA has planned for the immediate future. Further guidance and closer examination concerning the ACA and your business is available by contacting Cravens&Co, LLC.

 

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