The Supreme Court Upholds President Obama's Healthcare Law: Is Your Small Business Ready for the Consequences?
On June 28, 2012, the Supreme Court issued a landmark constitutional decision in National Federation of Independent Business v. Sebelius, upholding the constitutionality of the Patient Protection and Affordable Care Act ("ACA"). Dialogue and confusion abound over the Court's
ruling, but what does it mean for your business?
This article will help you determine whether your business qualifies as a small or large business under the ACA. Then, it will provide an overview of the potential changes to available health plans, the consequences of not providing required insurance, and the basic requirements in the immediate term.
1) Is My Business Mandated to Provide Employee Health Insurance?
The ACA has two primary "play or pay" mandates. The first is the "individual mandate," which requires most individuals to purchase health insurance, or else pay a penalty tax.
Correspondingly, most "large employers" are required to provide health insurance to their full-time employees, or else pay a penalty tax.
For purposes of the ACA, a "large employer" is defined as any business with 50 or more full-time equivalent employees ("FTE") during the preceding calendar year. The definition of FTE includes those working 30 or more hours per week, but excludes seasonal employees who work fewer than 120 days per year. In addition, hours worked by part-time employees must be included in your calculation to determine the number of FTEs. This is important because some businesses that do not employ significant numbers of full-time workers may nevertheless be subject to the employer mandate. To determine the full-time equivalency of a part-time workforce, divide all of the part-time hours worked per month by 120.
For example, if you have 10 employees who worked 24 hours per week last month, you multiply 10 employees x 24 hours x 4 weeks to get a total number of part-time hours (960). You then divide this by 120 to get 8 FTEs. An easy way to approximate the full-time equivalency of a part-time employee is to divide the average weekly hours worked by that employee by 30. Note that this calculation only applies to part-time employees; full-time employees' time is not aggregated to determine their FTEs so long as they work more than 30 hours per week on average.
If your business falls under the "large employer" definition, you will be required to provide health coverage for your full-time employees. However, if your business does not fall under the "large employer" definition, you are considered a "small employer," and will not be required to provide insurance.
2) My Business Already Offers Health Insurance. Will I Have to Provide Different or Additional Insurance?
Fully-insured health plans established under the ACA must feature a basket of "essential benefits," which includes the most common types of care (e.g., emergency, hospitalization, and preventive care). Although there are provisions in the ACA for preserving existing plans as "grandfathered plans," most of these will be quickly phased out and replaced with conforming health plans. Generally, plans offered by insurers will comply with applicable ACA requirements. Self-insured group plans are exempt from certain provisions of the ACA. As most self-insured businesses tend to be larger, provisions affecting self-insured plans will not concern most small employers.
As with most of the ACA, determining what sorts of requirements apply to your health plan starts with the size of your business. Small employers (i.e., those with fewer than 50 FTEs) are not required to provide health insurance. In contrast, employers with 50 or more FTEs must offer qualified, affordable health insurance.
3) Can I Buy Group Coverage from a State Healthcare Exchange?
By 2014, states are required to create online healthcare exchanges where consumers can compare costs of different health plans and choose one. If a state does not establish the exchange, the federal government will step in and do so.
While the focus of the exchanges is on individual access to health plans, small businesses may also purchase their group health plans from an exchange. Initially, a "small employer" for this purpose is one that has 50 or fewer employees. Beginning in 2016, a state can increase the threshold to 100 employees (which Oregon has committed to do). If your business qualifies, you may select a level of coverage from the small group exchange market and make it available, with financial assistance, to your employees.
4) Is Government Assistance Available for Small Businesses that Want to Provide Health Insurance?
Recognizing that health plans are often unaffordable for small businesses, the ACA offers a small business tax credit that is available to businesses with fewer than 25 FTEs and an average annual employee wage less than $50,000. Calculating the FTEs here is much simpler than it is for the insurance requirement: simply total the annual hours of service for which you pay wages, divide by 2,080, and round to the next lowest number. Employer contributions must also be made in a "qualifying arrangement," meaning that employers must pay at least 50% of the premiums of a plan to qualify. While any employer fitting the qualifications above can get some credit, the maximum credit is only available to businesses with 10 or fewer FTEs and an average annual wage no higher than $25,000.
The credit currently pays up to 35% of an employer's premium payments (or a small-group market equivalent). Beginning in 2014, the credit will increase to 50%, but will be available for only two consecutive years after it is claimed. If you are a tax-exempt employer, the credit is available through Medicare tax withholding and pays for 25% of your premium payments. The tax-exempt credit will also increase in 2014, but only to 35%. Finally, note that employee contributions are not considered for the purpose of determining the credit's value.
The tax credit is reduced by a certain formula if a business's FTEs exceed 10 or by a different formula its annual average wages exceed $25,000. If an employer exceeds both 10 FTEs and $25,000 in average wages, the credit will be reduced by the sum of the reductions imposed for both FTEs and average wages. In some cases, this may reduce the credit to zero.
Unfortunately, the small business tax credit phases out in two ways. First, beginning in 2014 it is only available for two consecutive years from the date a business claims it. Second, qualifying post-2014 policies must be purchased through an insurance exchange.
5) What Happens if I Do Not Provide Health Insurance?
Businesses with fewer than 50 FTEs are not required to provide health insurance. However, there are general business reasons, such as employee recruitment and retention, that you should consider when deciding whether to provide employee health insurance.
Of course, a business with 50 or more FTEs may incur a penalty for failing to provide affordable health insurance. Also, depending on the growth of your business, the mandate may apply one year but not the following year. Under these circumstances, you can choose whether to provide health insurance or accept the penalty. An option exists for a business at or near 50 FTEs, which is to structure its workforce to ensure that it does not meet the threshold. This may not be as drastic a prospect as it sounds. For example, for a business with 40 full-time employees and 10 part-time employees, each of whom is working just shy of 30 hours, it may make sense to convert some of them to full-time and reduce the hours of the others in order to avoid reaching 50 FTEs.
6) What Is Required in the Immediate Term?
The most important administrative requirements coming into effect in the next 12 months include the following:
- Provide a Summary of Benefits and Coverage (SBC). This report summarizes for your employees all essential aspects of the plan, including out-of-pocket costs. The initial SBC must be provided during the first open enrollment period beginning on or after September 23, 2012. Your insurer should provide you with these.
- Prepare to withhold additional Medicare taxes. Commencing in 2013, individual Medicare tax increases are imposed by the ACA on high-income earners, which you may need to withhold for any employee who is paid wages in excess of $200,000. You should work with your payroll department to determine the extent to which your employees will be subject to these increases.
- Pay a comparative effectiveness research fee. The Patient-Centered Outcomes Research Institute established under the ACA is intended to do comparative clinical effectiveness research. It is funded by fees imposed on health plans and is calculated on the basis of the "average number of lives" covered under a plan for the applicable plan year. The annual fee becomes payable for the first plan year ending on or after October 1, 2012. Your insurer will pay this fee and likely pass it to you through premiums.
7) Seek Legal Counsel
While this article covers some of the determinations your business must make and the basic consequences of qualifying as a small business under the ACA, it is not an exhaustive analysis of the topic. In order to best ensure your business is meeting the requirements of the ACA over the next 18 months and beyond, consult legal counsel.