Patient Protection and Affordable Healthcare Act: Some thoughts on the Employer Mandate

By Don McAnelly, CPA/ABV/CGMA
Rehmann

December 2012 – An area of much discussion within the Patient Protection and Affordable Care Act are aspects relative to the ‘Employer Mandate’ that will go into full effect January 1, 2014. Since we are just a bit more than a year from the effective date of this provision, it’s a good idea to start evaluating your company’s situation and assess your options.

Under the Act, there are different provisions for Large and Small companies. So, when is a company considered Small or Large?

The first step in evaluating how this aspect of the Act may impact your organization is to determine if your business is considered a ‘Small’ or ‘Large’ employer under the Act. For the purposes of health insurance requirements, the Act designates businesses with fewer than 50 full time equivalent employees to be a ‘Small Employer’, while businesses employing 50 or more full time equivalent employees are considered to be a ‘Large Employer’. Be aware that the computation of full time equivalents under the Act has its complexities, especially if your employee base is reliant upon part-time or seasonal employees. Therefore it is a good idea to seek counsel from your health benefits advisor as you assess your compliance with this aspect of the Act. 
   
Are there penalties ‘Small Employers’ need to be concerned about?

If you fall into this classification of being a ‘Small Employer’, the good news is that no penalties currently exist for not offering insurance coverage. In fact, through December 31, 2013, if you employ 25 or fewer full-time workers whose average wages do not exceed $50,000 annually and you offer employer sponsored health insurance, you may qualify for the Small Employer Health Insurance Credit. This could help offset the costs of voluntarily offering health insurance coverage to your employees. After 2013, the provisions and requirements of the Small Employer Health Insurance Credit will change. Those of you who think your business may qualify for this Credit should consult your tax advisor.

What penalties (excise tax) will Large Employers face if no health insurance is offered?

Unfortunately, ‘Large Employers’ may incur an additional tax if they don’t offer eligible employees the option to enroll in an employer sponsored health plan. Under the terms of the Act, if the company chooses to not offer employee health coverage, and at least one of its employees is certified to receive a premium tax credit or cost sharing subsidy in an eligible State Exchange (public insurance program), the company will then subject itself to a nondeductible excise tax. This excise tax is what is referred to by many as a ‘penalty’. The calculation of this penalty can be somewhat complex, but in simple terms, could amount to $2,000 per full time employee in excess of the first 30 employees. It is a good idea to discuss your specific circumstances with your health benefits advisor and your CPA.

What about Large Employers who offer Insurance, are they exempt from an excise tax?

The simple answer is …it depends. If the company offers what the government considers to be ‘inadequate or cost prohibitive’ coverage, they may end up incurring an excise tax liability. There are two tests that must be met to avoid these taxes:

1.    The first test relates to the level of coverage offered. The coverage must on average pay for a minimum of ‘60% of covered health care claim costs for a typical population’.

2.    The second test focuses on the overall affordability of the coverage to the employee. Generally, the coverage is deemed unaffordable if the employee has to pay more than 9.5% of family income to obtain it.
These calculations become complex, but in simple terms, the excise tax could amount to as much as $2,000 to $3,000 for every fulltime employee whose coverage fails to meet one or both of these criteria. Therefore, it’s a good idea to discuss the impact of these regulations with your benefits consultant.

What are some of the Tax and Financial implications a Large Employer should consider:

As with many business decisions, the tax and financial implications are often key aspects to consider in the assessment of the impact of this Act. If your business is currently offering health insurance to its employees, under current regulations the costs of these benefits are tax deductible. But, if a ‘Large’ business elects to discontinue offering health insurance coverage or changes to a level of coverage that the regulations describe as ‘inadequate or cost prohibitive’, the business may likely be subjected to a non-deductible excise tax. Proper business planning around this Act will require one to assess the financial impact of these excise taxes in comparison to the costs of offering health insurance coverage. Such considerations must be done carefully, especially in a union environment. Additionally, whether a union environment or not, we all know how sensitive it can be to adjust benefit levels for your employees as it certainly has an impact on employee morale and productivity.

As we all continue to learn about PPACA’s constantly evolving regulations, there are a great number of considerations and unknowns a business must wade through in determining how the Act will impact them. The Employer Mandate component is no different than the other sections of the Act in that it will take a great deal of planning to make sure you are ready for its aspects come January 1, 2014.

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.