Affordable Health Care and Taxes
What every print service provider needs to know: the employer mandate, the individual mandate, the exchanges, and much more.
Whether you agree with the decision or not, the US Supreme Court has ruled and the “Affordable Care Act” (ACA) is now the law of the land – and the Tax Code. Soon, every individual must have health insurance or face a tax penalty. Print service providers and other businesses must offer their employees health insurance or face penalties.
Not quite hitting home as of yet is the full impact the ACA’s 20-plus tax adjustments will have, not only on print providers, but on all businesses, their owners, the self-employed, and every individual. Some of the new taxes and credits are already in play.
The employer mandate
The tax most likely to affect print shops – at least those with more than 50 employees – is the “employer mandate.” Under ACA, businesses with more than 50 employees are required to provide employees with health insurance or face an “assessable payment.” That means a business must be in compliance or face the fine beginning after December 31, 2013.
Already on the books is the “Small Employer Health Insurance Tax Credit.” Employers with fewer than 25 employees can enjoy a tax credit (a direct reduction of the tax bill, as opposed to a deduction that reduces the income upon which the tax bill is computed) of as much as 35 percent of the health-insurance premiums they pay for employees.
To take advantage of this credit, however, the average annual wages of a shop’s fulltime (“fulltime-equivalent”) employees must be less than $50,000. And, it’s important to note that only those digital print operations that have fewer than 10 fulltime-equivalent employees and average salaries of $25,000 or less are eligible for the full credit. That full credit is 35 percent of the employer’s contribution toward an employee's insurance premium. As the size of the business and the average wage amount goes up, though, the tax credit goes down. Once the business hits 25 fulltime-equivalent employees or $50,000 in average salaries, the credit is completely phased out.
This tax credit is scheduled to increase to 50 percent for small-business employers after 2013. After 2013, small-business employers will be required to participate in an insurance exchange in order to claim the credit.
Already in effect, the Small Employer Health Insurance Tax Credit appears to be under-utilized. The Government Accountability Office (GAO) recently reported that only 176,300 of the 1.4 to 4 million small businesses eligible actually claimed the credit in 2010. One reason, according to the GAO: the perceived complexity of computing the tax credit.
The individual mandate
The impact for sole proprietors and others with no employees will be much like the impact on individuals. For people in this group, the crux of the 2014 rollout is the individual mandate, which requires all US citizens and legal residents to have health coverage or pay a penalty.
There are some exemptions, however, such as those from certain religious backgrounds and those who are eligible for the so-called “hardship exemption” if the cost of the annual premium exceeds 8 percent of household income.
Penalties have been established to ensure compliance. Once fully phased in, the top penalty for individuals for not having insurance is $695 or 2.5 percent of income – whichever is greater.
Minimal qualified insurance
Regardless of size, no print shop can purchase just any insurance to avoid the penalties. The operation must provide “minimum essential” and “affordable” coverage.
“Minimum essential” coverage means covering 60 percent of the actuarial value of the cost of the benefits. And “affordable” means the premium for the coverage of the individual employee cannot exceed 9.5 percent of the employee’s household income.
If the coverage offered by a large employer is unaffordable, qualifying employees can obtain subsidized coverage through the state exchanges (which I address later). In these cases, the employer will have to pay the lesser of $3000 per subsidized fulltime employee, or the $2000-per-employee penalty after the first 30 fulltime employees.
So the mandate is adding an expense for sole proprietors and owners of small businesses – especially those with no employees – who must now buy health insurance for themselves or pay a fine. But sole proprietors and small-business owners also get the new option to buy insurance on state exchanges, which are intended to lower costs for everyone by expanding the pool of insured and spreading out risk.
The ACA requires each state to establish both an American Health Benefit Exchange and a Small Business Health Options Program (SHOP Exchange), to provide qualified individuals and qualified small-business employers access to health plans.
Beginning in 2014, sole proprietors, owners, and small businesses can shop for less-expensive insurance through exchanges in each state. One-person businesses can turn to exchanges for individuals. Companies with up to 100 workers can look into the SHOP Exchanges. Both programs have a similar approach to bringing down costs: increasing the size of the insured pool to spread the risk.
Although no exchange is up and running as of this writing, a dozen states have already begun establishing these. In theory, they will give small print businesses the long-awaited ability to buy insurance at rates that once only belonged to larger companies.
Lower deductibles, more out-of-pocket
Individuals with incomes between 100- and 400-percent of the poverty level will enjoy reductions to their out-of-pocket healthcare expenses by two-thirds, one-half, or one-third, depending on their income. These tax breaks go into effect after December 31, 2013.
On the other hand, any business that rewards its owners, shareholders, or employees with health-insurance coverage that exceeds a threshold amount established by lawmakers will face a 40-percent excise tax beginning in 2018. Although the IRS has yet to weigh in, the dollar limit for determining the tax threshholds are $10,200 (for 2018) multiplied by the health-cost-adjustment percentage for an employee with self-only coverage, and $27,500 (for 2018) for employees with coverage other than self-only coverage.
In addition to a hike in the Medicare Payroll Tax on self-employment income (from 2.9 to 3.8 percent), an“unearned income Medicare contribution” tax will impose the new 3.8-percent rate on so-called “net investment income.” This includes interest, dividends, annuities, royalties, certain rents, and other “passive” business income. However, only individuals with incomes in excess of $200,000, and married couples with incomes greater than $250,000 will be subject to the 3.8-percent tax.
There are also a number of new rules for the healthcare programs currently used by many small-business owners and their workers. For instance: Effective last year, sole proprietors and owners of small businesses are no longer able to use a health savings account (HSA), flexible spending account (FSA), or health reimbursement (HRA) pre-tax dollars to purchase non-prescription, over-the-counter medicines (except insulin). Also going into effect last year: an increased tax on non-medical early withdrawals from an HSA – from 10 to 20 percent – which puts them at a disadvantage with IRAs and other tax-advantaged accounts (which remained at 10 percent).
While there is no cap under current law, beginning January 1, 2013, employees will face a $2500 cap on the amount of pre-tax salary deferrals made into a healthcare flexible spending account. And, thanks to the FSA “use-it-or-lose-it rule,” employees forfeit unused funds in their accounts at the end of the plan year.
Premiums might drop
Many are already claiming that the ACA gives employers a financial incentive to stop providing health insurance because the fines for not offering insurance are much less than the actual cost of insurance.While it’s true that a print business might initially save money in doing so, the law provides for penalties that will rise as insurance premiums do. In addition, a print-business owner must consider the fact that not providing insurance can hurt the company in terms of employee morale, and in its ability to attract good workers. What they save in money may cost them in terms of productivity and reputation as an employer.
And employers need to also keep in mind the following:
• The ACA limits how much premiums can go up each year – premiums for some print businesses might actually drop under the law compared with what they're paying now.
• The law eliminates the surcharges that insurers impose on employers who have workers with serious medical conditions.
• The exchanges are expected to offer small businesses lower rates than insurance companies charge. And businesses will also get tax credits for six years for providing coverage.
• Because the law requires every individual to have health insurance, the smallest businesses – those with fewer than 50 employees – will be able to lure good workers away from larger companies without healthcare benefits being a major factor.
While there is the possibility that lawmakers will strive to completely or partially repeal the ACA, planning to cope with the tax adjustments already-in place, as well as those scheduled in the years ahead, is strongly advised.
Mark Battersby is a freelance writer who has specialized in taxes and finance for the last 25 years.