Patient Protection and Affordable Care Act Impact on Small Businesses

By Don McAnelly, CPA/ABV/CGMA
Rehmann

November 2012 – January 1, 2013 is just around the corner….and as you may know, it marks the effective date for some of the most significant provisions of the Patient Protection and Affordable Care Act of 2010 (PPACA and the “Act”). So are you confused about how the Act’s changes may affect your small business in the coming years?  Well, you’re certainly in good company.

Many business owners find themselves spinning in circles attempting to navigate the lengthy legislation that continues to be altered and has, at times, confused even the most competent professionals in the accounting and legal communities. So, I am sure that the question remains: “What do I need to know and what can I do to prepare for the impact of this Act?” To attempt to answer this question, we have compiled the following information addressing specific concerns of small business owners.

Just what is a “Small Business” under PPACA?
So you may be wondering: “Under PPACA just what is a ‘Small Business’?” This is a good question as depending upon which aspects of PPACA you are referring to, the definition of a small business seems to vary somewhat. If you are talking about reporting the cost of health insurance on an employee’s W-2, then the split between a large or small employer is at 250 employees. If you are talking about the ability of a business to access the Small Employer Health Insurance Credit, then the threshold for a small business is at 50 employees. Differences such as these, and PPACA’s yet unknown and misunderstood consequences, will continue to impact small business owners in many ways. In fact, earlier this year, a Gallup survey indicated that nearly half of all small business owners who aren’t hiring cited fear about the potential cost of health care as a reason.

Does a Small Business have to provide Health Insurance?
This is a good question. In the past, providing health insurance to employees was at the employer’s discretion. Starting January 1, 2014, if you have 50 or more full-time employees, it’s effectively mandated and failure to comply comes with a cost. Small employers coming close to the 50 full-time-employee threshold may have to think twice about hiring more employees knowing that it could burden the company with additional taxes. Under what has been termed “pay or play penalties,” a nondeductible excise tax may apply to employers with 50 or more full-time employees. Such employers that offer coverage but have at least one employee receiving a federal health insurance premium credit will have to pay the lesser of $3,000 for each employee receiving a premium credit or $2,000 for every full-time employee in excess of 30 employees.

Health insurance premiums reportable on W-2s
I’m sure you’ve heard about the numerous updates and changes regarding the reporting of health insurance premiums on your employees’ W-2s since 2011, when this part of PPACA was originally to go into effect. It’s probably safe to say you and your accounting staff have been dreading the additional time and cost that would come with compliance with this requirement, especially being a small business. It turns out I have some good news for you. The government finally agreed with those very concerns and has decided to exempt employers that file 250 or fewer Forms W-2. You can find out more details regarding W-2 reporting guidance within IRS Notice 2012-9. In case you were also wondering about the proposed expansion of Form 1099 reporting requirements, rest assured this measure was officially repealed in 2011.

Continuation of Small Employer Health Insurance Tax Credit
Does your business have fewer than 25 full-time employees who are earning on average less than $50,000 per year? If so, and you provide them health insurance coverage, you’re in luck! You will very likely continue to be eligible under Phase One of the Small Employer Health Insurance Tax Credit that began in 2010. While a bit more complex than what can be set forth in an article such as this, generally, during Phase One of the program, qualifying employers can receive a federal tax credit of up to 35 percent of the cost of health insurance premiums paid on behalf of employees if the employer paid at least 50 percent of those premiums. Phase One will continue through 2013. So you might be wondering, what happens in 2014? If you have 10 or fewer full-time employees who earn on average $25,000 or less, then you’re still eligible! These employers may qualify under Phase Two of the tax credit, which increases the credit from 35 percent up to 50 percent of health insurance premiums paid. Phase Two will be in effect from 2014 through the end of 2017. But, even if you have more than 10 full-time employees or they make more than $25,000, you might still be in luck. At this point, some complex calculations will dictate if you qualify, and if so for how much, based on the amounts by which these two criteria are exceeded.

Contribution limitations being imposed on health care Flexible Spending Accounts
Effective January 1, 2013, annual contribution limits to a Flexible Spending Account (FSA) for medical expenses will now be mandated by the Federal Government. What does this mean to you and your employees? In the past, FSA plan limits were set by the plan sponsors to accommodate the needs and desires of its participants. As you well know, many employees relied heavily on these tax-free funds to pay for, amongst many things, their children’s braces or their own specific medical needs. This legislation caps contributions for 2013 at just $2,500. It would likely benefit many of your employees to know about this drastic change ahead of time so they can plan accordingly. Luckily, this change only affects medical FSAs, so employees’ dependent care FSAs will be unaffected. While considering alternatives, keep in mind that although the contributions to Health Savings Accounts and Health Reimbursement Accounts have not been affected, certain restrictions have been placed on them. For instance, over-the-counter medicine is no longer a qualified expense under these plans unless prescribed by a doctor. Also, the penalty for unqualified distributions rose steeply from 10 percent to 20 percent.

Additional Medicare Part A hospital insurance tax on high earners
Does your small business rely heavily on valuable employees who are earning wages in excess of $200,000 ($250,000 in the case of married filing jointly, $125,000 married filing separately)? As an owner, do you draw wages in this range? If so, it is important to know that one of the more significant financing mechanisms of the Act will be an additional Medicare tax of .9 percent on all wages in excess of these amounts starting January 1, 2013. You may want to look at withholdings to assure compliance with this part of the Act.

Conclusion
The January 2013 implementations of the Patient Protection and Affordable Care Act will have varying impacts on small businesses based on numerous criteria, including the size and the current insurance offerings to name just two. What is important for small business owners such as you to keep in mind is that regardless of changes that may still come, we must use the best information available to begin planning today. The sooner your particular situation is analyzed, the better chance you will have to mitigate the new requirement’s impacts and protect the financial health of your company.

With extensive experience providing financial solutions to clients – from business operation & efficiency assessments to consulting & corporate tax guidance – Don McAnelly is ideally positioned to provide the support today’s businesses need. Don serves as Rehmann’s primary CPA contact for health care clients in East Michigan and his experience extends to tax, valuation and financial matters. Don has been with Rehmann for 18 years, with prior Big Five national accounting firm experience. Additionally, he is a member of the Michigan Association of CPAs, has authored overviews on the Patient Protection and Affordable Care Act for the Firm’s BWD magazine and has spoken on the Act to various chambers of commerce.