by Jennifer L. Villier, JD Legal Education Faculty
The U.S. Small Business Administration reports that before the Affordable Care Act (“ACA”), small businesses paid on average 18% more in health insurance premiums than larger companies paid for the same benefits. In addition, small businesses sometimes faced unpredictable rate increases, higher rates for certain groups (like women or aging employees), and waiting periods or denied coverage for individuals with pre-existing conditions.
The ACA attempted to level the playing field for health insurance by lowering premiums and increasing access to quality, affordable health insurance for small business employees. Under the ACA, insurance companies may not charge higher rates or deny coverage on the basis of gender or pre-existing conditions (except for tobacco users, to whom insurance companies may charge higher premiums). There is also increased transparency regarding rates: insurance companies must disclose and justify proposed rate hikes of 10% or more.
Many reforms under the ACA have decreased or eliminated the obstacles to a small business’s ability to offer health care coverage to its employees. For certain businesses, however, the benefits of the ACA also came with new responsibilities and burdens, such as Employer Shared Responsibility and the Medicare surtax.
Employer Shared Responsibility
Employer Shared Responsibility is a penalty payment on any business that (1) meets the applicable size threshold, (2) fails to comply with the ACA, and (3) has at least one full-time employee that receives a premium tax credit in the health insurance exchange marketplace (the “Marketplace”). Employer Shared Responsibility applies to any business with 50 or more full-time employees. In this context, a “full-time” employee is one that works 30 or more hours per week on average. Full-time equivalent (“FTE”) employees are also included in the employee count. For example, 10 employees working 15 hours per week on average are equal to 5 FTE employees.
The vast majority of businesses are exempt from this responsibility because they do not meet the size threshold. According to the U.S. Treasury Department, 96% of firms in the U.S. fall below the 50 or more fulltime (or FTE) employee threshold. Therefore, only 4% of employers nationwide are subject to the Employer Shared Responsibility provisions of the ACA.1 These provisions were meant to ensure that companies like Walmart share the responsibility in providing access to affordable healthcare to more Americans.2
Failure to Comply with the Act
Once it has been determined that a company meets the applicable size threshold, there are two ways in which the company could fail to comply with the ACA:
- Failure to offer health insurance coverage to at least 95% of its full-time (or FTE) employees and their dependent children; or
- Offering coverage that does not provide a “minimum value” or is not affordable.
Dependent children are those under the age of 26. Employers are not required to offer coverage to employees’ spouses. Coverage provides “minimum value” if the insurance pays for at least 60% of the employee’s covered health care expenses.
Employee Receives Premium Tax Credit
Any company that meets the size threshold and fails to comply with the ACA is potentially subject to Employer Shared Responsibility liability. For these companies, the penalty payment is triggered if at least one full-time (or FTE) employee (1) obtains coverage in the Marketplace, and (2) receives the premium tax credit. The premium tax credit is a refundable tax credit, available upfront (when the health insurance premium is due) that is designed to help eligible individuals and families with low or moderate income afford health insurance purchased through the Marketplace.
Amount of Employer Shared Responsibility Payment
Once an employee receives a premium tax credit, triggering the Employer Shared Responsibility payment, the amount of the payment depends on which of the two reasons the employer failed to comply with the ACA.
- If the employer did not offer health insurance coverage to at least 95% of its full-time (or FTE) employees and their dependent children, then the annual payment is equal to $2,084 multiplied by the number of full-time (or FTE) employees in excess of 30. The annual payment is divided into monthly payments for each month the employer fails to offer coverage.
- If the employer offered coverage but the coverage did not provide a “minimum value” or was not affordable, then the annual payment is equal to $3,126 multiplied by the number of full-time (or FTE) employees that received a premium tax credit. The annual payment is divided into 12 monthly payments, and it cannot exceed the monthly payment amount determined under (1) above.
The ACA has also imposed a 0.9% increase on the total Medicare part A tax, which is an obligation split between an employer and employee. Small businesses with less than $250,000 in taxable income and employees earning less than $200,000 are exempt from the surtax.
Impact of Affordable Care Act on Small Business
While the principal provisions of the ACA apply only to medium and large businesses (e.g., those with more than 50 or more than 100 employees), there are still several provisions that apply to all employers, including small businesses with 50 or fewer employees. For example, almost all employers were required to notify employees of the existence of the Marketplace and the implications of purchasing coverage through the Marketplace. The ACA also requires all employers to provide employees with a Summary of Benefits and Coverage, enabling them to better assess their options. Furthermore, under the ACA, waiting periods for employee health coverage are limited for all employers, regardless of size.
The ACA’s Small Business Health Options Program (SHOP) Marketplace was devised to enable small employers to provide health and dental insurance to their employees affordably, flexibly, and conveniently. To use the SHOP Marketplace, a business or non-profit organization must have 50 or fewer full-time equivalent employees (FTEs). SHOP insurance can be offered employees any time of year; there is no need to wait for an open enrollment period.
A small business may also qualify for employer health care tax credits if it has fewer than 25 FTE employees making an average of about $50,000 a year or less. The credit is worth up to 50% of the costs paid for employee premiums (35% for non-profit employers). To qualify for the tax credit, a business must:
- have fewer than 25 FTE employees;
- have an average employee salary of about $50,000 per year or less;
- pay at least 50% of its full-time employees’ premium costs; and
- offer coverage to full-time employees through the SHOP Marketplace.
Notably, the business does not have to offer coverage to dependents or employees working fewer than 30 hours per week to qualify for the tax credit.
Proposed Repeal of the Affordable Care Act
Republicans have promised to “repeal and replace” the ACA. Because of increasing healthcare premiums and deductibles, among other issues, the ACA has had an adverse impact on many Americans. Some conservatives also believe it is responsible for a loss of 350,000 jobs nationwide. President-elect Trump has promised to work with Congress to create more accessible, affordable, and higher quality healthcare and reverse the economic burden of the ACA. To lower healthcare costs, Trump calls for:
- interstate insurance marketing and sales, which use free market principles to drive insurance costs down and increase consumer satisfaction;
- deductibility of health insurance premium payments by individuals;
- allowing tax-free contributions to accumulate in Health Savings Accounts;
- price transparency for all healthcare providers;
- state-run Medicaid administration; and
- removal of barriers to market entry for low cost drug providers.
A budget reconciliation, which requires only a simple majority, is the Congressional Republicans’ planned route for ACA repeal. The budget reconciliation that was passed in 2015 but vetoed by President Obama is likely to serve as the blueprint for forthcoming Republican repeal legislation.3 The vetoed 2015 budget reconciliation would have repealed the tax penalties for people without health insurance, as well as the penalties imposed on larger employers that fail to offer employees coverage. Although measures to repeal are almost certain, the effective date of repeal legislation is likely be delayed so that the ACA can be phased out over several years. While repeal of certain provisions of the ACA may be possible via budget reconciliation, replacement of the ACA with new legislation will be a more difficult endeavor for Republicans if they cannot gain the support of some Democrats in the Senate.
Counseling Small Business Clients
Small business owners are likely to have questions regarding what the changing landscape of American healthcare will mean for their organization. Small businesses —those generally having 25 or fewer employees — are not subject to the Employer Shared Responsibility provisions of the ACA. But the Employer Shared Responsibility provisions have caused many employers to downgrade employees from full-time to part-time, replace employees with contractors, and freeze the hiring of employees who would work more than 30 hours per week.
The ACA’s mandates that (1) individuals obtain health coverage and (2) employers meeting the size threshold provide health insurance, have benefitted 20 million Americans who would otherwise be without health insurance. But it has burdened businesses with billions of dollars in direct and indirect costs, taxes and regulations that have inhibited their growth, and in some cases, their success. Small business attorneys should continue to ensure that clients are aware of the potential for Employer Shared Responsibility payments, as well as IRS reporting requirements for any business subject to Employer Shared Responsibility. The fees employers could face for failing to comply with the Act are potentially significant.4 In light of impending repeal efforts, attorneys should take the opportunity to keep business clients informed of legislative and regulatory developments. While transition often brings uncertainty, one thing is for sure: The ACA, now enmeshed in the American healthcare system, will see change in 2017.
1In determining whether a small business meets the size threshold, it is important to note that IRS control group rules apply. If companies have a common owner or are otherwise related, they will be combined for purposes of the Employer Shared Responsibility size threshold.
3 See H.R. 3762 (Restoring Americans’ Healthcare Freedom Reconciliation Act of 2015)
4 Additional information on this topic can be found at https://www.SBA.gov/healthcare and https://www.irs.gov/Affordable-Care-Act.
a community of over 4,000 trusts and estates attorneys with a common goal to practice excellence.
To learn more, visit wealthcounsel.com