Originally signed in 2010, the Patient Protection and Affordable Care Act (Act) is composed of two separate legislations (HR3590 and HR4827). Together they make up “Obamacare.” Provisions began to take effect in 2011 and will continue to be phased-in through 2018. But in 2014, some primary provisions of the Act will become fully in-force. Make no mistake. The law is as complicated as the Tax Code.
To compound the issue, on March 22, 2013, The Wall Street Journal reported medical premium increases are expected in 2014 – UnitedHealth Group projects +25% to +50% for small businesses vs. Aetna Inc. projects +29% for small businesses (“Health Insurers Warn on Premiums”).
In 2014 there will be approximately twelve phase-ins, most of which will be handled by the insurance industry and states. Businesses need to be aware of the following four provisions – Small Business Tax Credit; Automatic Enrollment; Premium Variation for Participation in Employer Sponsored Wellness Programs; and, Reporting on Minimal Essential Coverage, relating to the Employer Mandate.
The “Employer Mandate” – if an employer has 50 or more full-time “common law” employees, they may be required to offer health insurance coverage to all employees.
Full-time is defined as working 30 or more hours per week, on average. While a common law employee is defined by the IRS as, “Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.” Individuals that are not employees include leased employees; a sole proprietor, a partner in a partnership or a 2% S-Corp shareholder.
The penalty for non-compliance may be as much as $2,000 per full-time employee, for every full-time employee over a 30-employee threshold.
So understanding medical costs are increasing and you may be required to offer health insurance coverage or pay a penalty, what will be your healthcare strategy?
Following are some options for your consideration –
-Do nothing. Assume based on the economy Congress will either delay or amend the legislation.
-Reduce the number of full-time employees and replace them with part-time and seasonal employees – the Act anticipated this reaction and has a formula that will calculate “full-time employee equivalents” to identify businesses subject to the Employer Mandate.
Full Time Equivalents = (Total # of monthly PT Employee Hours/120)
-Outsource employees/lease –This option should be considered very seriously. PEO companies are great at addressing all tax, payroll and reporting processes. For more information, please review the following blog post – “A PEO is not a “Set it and Forget it Process” located http://cfotips.com/?p=97;
-Pay Penalty – Of course if after a cost benefit analysis you discover that it is cheaper to pay the penalty, that may be an option. Do not forget to consider within your calculations the tax implications of this option, i.e. health insurance expenses are deductible vs. penalties which are not;
-Cap company contribution and allow employees to choose coverage through an on-line marketplace. If the employee wishes a richer plan, the employee would be able to pay more each month. This approach was used by Aon Hewitt, Darden Restaurants Inc. and Sears Holding Corp, in 2013. Details can be found in the Wall Street Journal, March 17, 2013, “To Save, Workers Take on Health-Cost Risk.”
Whatever option you choose, please consider the impact it may have on your recruiting efforts. For example – choosing to not offer health insurance and pay the penalty may cause a retention issue for your company that is not easily corrected through your standard recruiting efforts. You will automatically exclude applicants looking for benefits as possible employees.
Studies show, in the long-run costs will be controlled and more individuals will be covered. However at the individual company level and in the short-run confusion is imminent and in business, confusion leads to mistakes which can be costly. Not addressing this issue and developing a plan is a very large mistake.
Update – On July 9th, a delay in the reporting requirements of the PPACA, required a delay in assessing the employer shared responsibility penalty until January 1, 2015.© Copyright 2013 Regis Quirin, All rights Reserved. Written For: CFO Tips - What you need to know, to be a CFO TODAY!