How will the Patient Protection and Affordable Care Act (aka “ACA”) affect your taxes? Here’s a quick look.
How are you classified?
Businesses are effectively divided into three broad categories:
Those with up to 50 FTE (Full-Time Equivalent) Employees will not be required to offer coverage.
Those with 51-199 FTEs must offer “minimum essential coverage” or pay a penalty of $2,000 per year, multiplied by the number of FTEs exceeding 30.
Those with 200 or more FTEs must automatically enroll every employee in an acceptable health insurance plan.
NOTE: The effective date for these requirements was recently extended from Jan. 1, 2014 to Jan. 1, 2015.
The tax man cometh
In an effort to pay for the anticipated cost of the ACA certain taxes have been created or increased:
3.8% Hospital Insurance Tax - An additional 3.8% Hospital Insurance Tax (a part of Medicare) on “High-Income Individuals” (those making more than $200,000 per year; $250,000 for married couples filing jointly) became effective on Jan. 1, 2012.
.9% Medicare Hospital Insurance Tax - Starting Jan. 1, 2013, the Hospital Insurance Tax (originally 2.9%, divided equally, 1.45% each, between employers and employees) was increased by .9% on High-Income Individuals.
$8 to $14.3 Billion Health Insurance Tax (“HIT”) - An annual sales tax will be assessed on health insurers, and is to be distributed across such insurers.
40% Excise Tax on “Cadillac Plans” - Beginning in 2018, insurance companies will pay a 40% excise tax on high-end insurance plans worth over $27,500 for families ($10,200 for individuals).
$1 to $2 Adjustable Per Participant Fee - A separate $1-per-participant fee on the average number of individuals covered will be assessed in 2013. This fee will affect all issuers of specified health insurance policies as well as sponsors of self-insured health plans.
20% Tax on HSA Withdrawals - The tax on withdrawals from Health Savings Accounts for “non-qualified expenses” has been increased from 10% to 20%.
Credits and limitations
Following are some suggestions for reducing these additional taxes and claiming some of the available tax credits:
Small Business Tax Credits - The ACA permits qualified employers of up to 25 employees who pay average annual wages below $50,000, and fund at least 50% of employee health insurance premiums, to apply for a small business tax credit of up to 35% of the employer’s contribution.
3.8% Tax on Unearned Income - The 3.8% tax on unearned income might be reduced by allocating assets that generate high income into an IRA, using annuities to shield income, and/or reallocating a portfolio to include more tax-free investments.
HDHPs - “High-Deductible Health Plans” (having deductibles of at least $1,000 for individuals and $2,000 for families) have become more popular because they offer some cost savings, while allowing for employer reimbursements of deductibles (“HDHP/HRAs”) or savings plans contributed to by employers and/or employees) to cover their deductibles (“HDHP/SOs”).
Comparing the Cost - Business owners can be expected to begin comparing the cost of providing coverage against the cost of not doing so and simply paying the mandated penalties.
It’s the law
Implementation of the ACA begins in earnest in 2014, but its real cost remains a very large question mark for most businesses. We recommend contacting your tax professional well before the end of the year in order to give yourself the best opportunity to take the necessary steps to reduce your tax burden.