How does the Affordable Care Act (popularly known as Obamacare) impact your small business? If you’re like most small business owners, most of the health law’s provisions, such as the employer mandate, do not apply to you. However, Obamacare may make it easier and more affordable for you to voluntarily provide your employees with health insurance coverage.
Most of Obamacare’s requirements apply only to businesses that are large employers (also called “applicable large employers,” or ALEs, by the IRS). Large employers are subject to the employer mandate and must satisfy IRS reporting requirements regarding the coverage they provide. For 2016 and later, large employers must provide affordable health insurance coverage to at least 95% of their employees and dependents or face hefty penalties from the IRS. Small employers are not subject to the mandate or reporting requirements.
For 2016 and later, a business is an applicable large employer only if it employed, on average, a combination of 50 or more full-time and full-time equivalent employees during the previous year. Thus, any employer with 50 or more employees in 2015 is a large employer subject to the mandate in 2016.
This means you need to keep track of the number of full-time and full-time equivalent employees you have each year. “Full-time” denotes an employee who works on average at least 30 hours per week in a given month. The number of full-time equivalent employees is determined by combining all the hours worked by part-time employees. For example, two part-time employees, each of whom works 15 hours per week (60 hours per month), are the equivalent of one full-time employee. You don’t have to count seasonal employees who work six months or less during the year.
Only slightly over 3% of all businesses in the United States—approximately 200,000 out of six million—are large employers subject to the employer mandate.
Small businesses are not required by Obamacare to help pay for health insurance coverage for their employees, but they are encouraged to do so voluntarily. One way Obamacare does this is through the Small Business Health Options Program (SHOP) exchanges. SHOP exchanges are health insurance exchanges (also called marketplaces) specifically designed for employers with 50 or fewer full-time employees (in some states, employers with 50 to 100 employees may also participate). Before Obamacare , small businesses paid on average 18% more in premiums than their larger competitors for the same benefits. The SHOP Exchanges are intended to help reduce these costs by allowing small employers to be part of a much larger risk pool and help spur competition among health insurers. A variety of plans are available at varying price and benefit levels, and you can obtain dental as well as medical coverage.
If you have fewer than 50 full-time employees, including your spouse (or yourself if you’ve formed a corporation), you can obtain coverage through the SHOP exchange. However, you must offer coverage to all of your full-time employees. Moreover, in many states, at least 70% of your full-time employees must enroll in your SHOP plan, unless you enroll during November 15 through December 15.
An employer can enroll anytime during the year. You can use your current agent or broker to help you enroll, find a new agent or broker in your area familiar with SHOP plans, or handle your enrollment yourself online. You can find more information and links to your state SHOP exchange at healthcare.gov/small-businesses/employers/.
If you elect to provide your employees with health coverage through your SHOP exchange, you can qualify for substantial tax credits. These tax credits are available for a total of two consecutive years. Thus, you can obtain the credit for 2016 if you obtained it in 2015.
To get the credit, you must have fewer than 25 full-time-equivalent employees who are paid an average annual salary of less than $50,000. You can use the online SHOP Full-time Equivalent Employee (FTE) Calculator to determine how many full-time employees you have. Moreover, you, the employer, must pay at least 50% of your employees’ health insurance premiums.
The amount of the tax credit you receive depends on various factors, including the number of full-time-equivalent employees and the amount you contribute to their insurance premiums. Employers with 10 or fewer full-time-equivalent employees paying an annual wage of $25,000 or less qualify for the maximum credit—50% of the amount the employer pays for employee health insurance. For example, if such an employer paid $10,000 for health insurance, it would qualify for a $5,000 credit. You can use the online SHOP Tax Credit Calculator to see how big a tax credit you qualify for.
This credit is not refundable—that is, you can use it only up to the amount of your tax liability for the year. However, If you do not owe tax for the year, you can carry the credit back or forward to other tax years. Also, you can take the credit and still claim a business expense deduction for the health care premiums you paid in excess of the credit. That’s both a credit and a deduction for employee premium payments.
All employers who are subject to the Federal Fair Labor Standards Act (FLSA) must notify their new hires about the Obamacare health insurance exchanges. (Almost all businesses with gross annual sales over $500,000 are covered by the FLSA.) However, there is no fine or penalty for failing to provide such notice. The Department of Labor has preparedsample notices you can use.
If you offer your employees health insurance, you may not require new hires to wait more than 90 days to begin their coverage. For more details, see IRS Notice 2012-59.
In the past, instead of obtaining health insurance on their employees’ behalf, many small employers had their employees obtain their own individual coverage and agreed to reimburse them for all or part of the cost. However, the IRS has determined that such arrangements do not comply with Obamacare’s complex rules intended to reform the health insurance market. Employers who use them are subject to a $100 per day excise tax per employee (which is $36,500 per year, per employee). The IRS gave small employers with less than 50 employees relief from this tax through June 30, 2015; but this relief is no longer available.
There are a couple of exceptions to this rule. First, it does not apply to a plan that covers only one employee—for example, where you hire your spouse as the only employee of your business. One-employee plans are exempt from most of Obamacare’s rules and regulations. Also exempt are S corporations that provide such reimbursements for employees who own at least 2% of the corporation’s stock. However, the S corporation exemption can change at any time. For more details, see the Employer Health Care Arrangements FAQ at the IRS website.
Some employers give their employees an option to have money taken out of their salaries and placed in a healthcare flexible spending account (healthcare FSA). These healthcare FSAs are often referred to as cafeteria plans, because they allow employees to pick and choose among various items for which account funds can be used. Obamacare rules limit the annual amount that an employee can have deducted from his or her salary and placed in a cafeteria plan to $2,500, subject to cost-of-living adjustments. The limit only applies to elective employee contributions and does not extend to employer contributions.
Health plan sponsors must pay an annual fee to the Patient Centered Outcomes Research Trust Fund. This fee is used to fund the Patient Centered Outcomes Research Institute (PCORI). The Institute’s mission is to fund research advancing the quality and relevance of evidence-based medicine. The PCORI fee is $2.08 per employee. You pay this fee by filing IRS Form 720, Quarterly Federal Excise Tax Return. The Form 720 is due on July 31 of each year. Electronic filing is available but not required. You can include your payment with the form. Deposits are not required for the PCORI fee. This fee is scheduled to end October 1, 2019.
Obamacare requires larger employers to report the cost of health coverage they provide their employees on each employee’s Form W-2, Wage and Tax Statement. However, this reporting is optional for employers required to file fewer than 250 W-2s the preceding year. This reporting requirement is for informational purposes only. It does not affect the employer or employee’s tax liability, since health coverage is not taxable.