Small Business Guide to Obamacare
The Affordable Care Act (short for “Patient Protection and Affordable Care Act” and commonly referred to as “Obamacare”) is a piece of legislation mired in controversy, complexity and misunderstanding amongst small business owners. While much of Obamacare has already rolled out since its passage in March 2010, some parts of the Act that apply directly to businesses, such those detailed below, will go into effect on the 1st of January, 2014.
“Part II—Small Business Tax Credit” of the Affordable Care Act is the most relevant chapter for small business owners, and it covers small business tax credits as well as general business health-insurance requirements.
This is a breakdown of what exactly this section says and how it might affect your business depending on the number of employees in your company. Here are the facts, simplified:
25 Employees or Less…
Businesses with 25 employees or fewer may be eligible for a small business healthcare tax credit if they provide adequate coverage to their employees.
This credit is already in effect and was specifically designed for small businesses with lower-income workers. Here’s how to determine if you qualify:
- Determine the number of full time equivalent (FTE) employees you have. Calculate FTE by adding up the total hours for which you paid employees during the course of a year and dividing that number by 2,080. Round the resulting number down (for example 15.7 employees would be 15 FTEs). If your FTE adds up to 25 employees or less, you may qualify if your business also meets the requirements of numbers 2 and 3 below. Note that independent contractors and seasonal workers do not count as employees, and part-time employees are counted as a percentage of a full-time employee.
- The average annual wages of your employees must be below $50,000 a year.
- You cover at least 50% of healthcare insurance costs for employees, based on the single-person rate.
- If you meet these three requirements, you must file Form 8941 along with your business tax return.
Note: in January 2014, the small business tax credit will increase from 35% of your business costs to 50%.
50 Employees or More…
Businesses with 50 employees or more must provide health insurance or pay a penalty.
While employers in this situation are not legally required to provide insurance, if they have over 50 employees, they will be financially penalized if they fail to provide adequate healthcare. Here are the facts:
- If you have the FTE of 50 full-time employees (and remember that part-time employee hours are included), you must provide “affordable” insurance to workers by January 2014. “Affordable” means the employer covers at least 60% of healthcare insurance expenses.
- If you want to avoid penalties, your employees cannot be required to spend more than 9.5% of their pre-tax income on the healthcare coverage you provide.
- If you fail to provide coverage deemed “affordable” by the federal government, you will be required to pay an assessment; this fee is to offset the cost of the premium tax credits employees will receive from the government to pay for their own health insurance.
- The first 30 employees are excluded from the assessment, but the annual penalty beyond that threshold will be $2,000 per additional employee. For some small businesses, however, this may be a more affordable option than providing coverage.
More than 200 Employees…
Employers with over 200 employees are absolutely required to enroll eligible employees in their healthcare plans.
Unlike smaller businesses, companies over 200 employees don’t have the option to pay a penalty rather than provide coverage. An employee who doesn’t want coverage can choose to opt out, but otherwise all employees must be enrolled.
What are the minimum requirements for adequate health insurance?
Whether you’re a very small business seeking a tax credit or a larger business trying to maintain compliance with healthcare coverage laws, your coverage must meet certain criteria to qualify. The minimum requirements for adequate health insurance include what the U.S. Department of Health deems to be “essential health benefits.” These fall under the following categories:
- emergency services
- prescription drugs
- maternity care
- behavioral treatment
- mental health services
- drug and substance rehabilitation
- rehabilitative services
- preventative care
- pediatric care (including vision and dental)
- laboratory services
There is no doubt that these changes will be quite an adjustment for some small businesses. There is no way to tell the actual cost of these changes until they are implemented; some fear expenses for small businesses will skyrocket, while others are assured that the cost of healthcare will actually drop when more individuals are enrolled in plans.
Whether you’re afraid of Obamacare or you see it as a welcomed change, the reality is that it’s coming. Knowing the facts laid out here will help you prepare; take time to budget these expenses in the coming fiscal year, and be better prepared for your business’ future.
Article written by Rochelle Bailis.