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Managing health and taxes

October 1st, 2012 / By: / Management

Under the Affordable Care Act, every business must provide “minimum essential” and “affordable” coverage, and size does matter.

Like it or not, the U.S. Supreme Court has ruled, and the so-called “Affordable Care Act” (ACA) is now the law of the land—and the tax code. Soon, every individual must have health insurance or face a tax penalty. Larger specialty fabric products businesses must offer their employees health insurance or face penalties.

Not quite hitting home yet is the full impact that the ACA’s 20+ tax hikes will have—not only on large businesses, but all businesses, their owners, the self-employed and every individual. By ruling that the ACA is constitutional, the Supreme Court has actually approved a raft of tax hikes, some of them already in play.

The tax most likely to affect manufacturing businesses, at least those with more than 50 employees, is the “Employer Mandate.” Under ACA, businesses with more than 50 employees are required to provide employees with health insurance or face an “assessable payment.” That means a business must be in compliance—or face a fine beginning after December 31, 2013.

Already on the books is the “Small Employer Health Insurance Tax Credit.” Employers with fewer than 25 employees earn a tax credit, a direct reduction of the tax bill (as opposed to a deduction that reduces the income on which the tax bill is computed) of as much as 35 percent of the health insurance premiums paid for their employees. In this case, the average annual wages of a fabrication or supply business’s full-time employees must be less than $50,000.

Where credit is due

Only operations with fewer than 10 full-time equivalent employees and average salaries of $25,000 or less are eligible for the full credit. Today, that full credit is 35 percent of the employer’s contribution toward employee insurance premiums. As the size of the business and the average wage amount goes up, the tax credit goes down. Once the business hits 25 full-time equivalent employees or $50,000 in average salaries, the credit is completely phased out.

This tax credit is scheduled to increase to 50 percent for small business employers after 2013. But after 2013, small business employers will be required to participate in an insurance exchange in order to claim the credit.

The impact for sole proprietors and specialty fabric professionals with no employees will be much like the impact on individuals. For people in this group, the crux of the 2014 rollout is the individual mandate, which requires all U.S. citizens and legal residents to have health coverage, or pay a penalty.

Regardless of size, no professional or business can purchase just any insurance to avoid the penalties. The operation must provide so-called “minimum essential” and “affordable” coverage.

“Minimum essential” coverage means covering 60 percent of the actuarial value of the cost of the benefits. “Affordable” means the premium for the coverage of an individual employee cannot exceed 9.5 percent of that employee’s household income.

The mandate also adds a major expense for sole proprietors and owners of small businesses with no employees, who must now buy health insurance for themselves or pay a fine. But sole proprietors and small business owners also have the new option of buying insurance on state exchanges, which are intended to lower costs for everyone by expanding the pool of insured and spreading out risk.

Exchange rates

The ACA requires each state to establish both an American Health Benefit (AHB) Exchange and a Small Business Health Options Program (SHOP), to provide qualified individuals and qualified small business employers access to health plans. Beginning in 2014, sole proprietors, owners and small businesses can shop for less expensive insurance through exchanges in each state.

One-person businesses may turn to the exchanges for individuals. Companies with up to 100 workers may turn to Small Business Health Options Programs. Both have a similar approach to bringing down costs: increasing the size of the insured pool to spread the risk. No exchange is up and running as yet.

In theory, however, the state-run exchanges will give not only small businesses, but all businesses, professionals and others the long-awaited ability to buy insurance at rates that once belonged only to larger companies. The federal law ordered states to create them, and a dozen states have already begun to establish them.

Tax rates

Individuals with incomes between 100 percent and 400 percent of the poverty level will enjoy reductions to their out-of-pocket health care expenses by two thirds, one half, or one third, depending upon their income. These tax breaks go into effect after Dec. 31, 2013. On the other hand, any business that rewards its owners, shareholders or employees with health insurance coverage that exceeds a threshold amount established by lawmakers will face a substantial 40 percent excise tax beginning in 2018.

In addition to a hike in the Medicare payroll tax on self-employment income (from 2.9 percent to 3.8 percent), an “unearned income Medicare contribution” tax will impose the new 3.8 percent rate on so-called “net investment income,” which includes interest, dividends, annuities, royalties, certain rents and other “passive” business income. Only individuals with incomes in excess of $200,000 (and married couples with incomes greater than $250,000) will be subjected to the 3.8 percent tax.

Starting in 2011, sole proprietors and owners of small businesses could no longer use a health savings account (HSA), flexible spending account (FSA) or health reimbursement (HRA) pre-tax dollars to purchase nonprescription, over-the-counter medicines. In addition, an increased, additional tax on nonmedical early withdrawals from an HSA, from 10 to 20 percent, put them at a disadvantage with IRAs and other tax-advantaged accounts, which remained at 10 percent.

Beginning January 1, 2013, employees will face a $2,500 cap on the amount of pre-tax salary deferrals they can make into a health care flexible spending account. There is no cap under current law. In light of the new cap, employee benefits groups are lobbying for Congress to modify the “use-it-or-lose-it rule,” which mandates that employees forfeit unused funds in those accounts at the end of the plan year.

Balancing benefits

Critics of the ACA claim that it gives employers a financial incentive to stop providing health insurance because the fines for not offering insurance are much less than the cost of the insurance itself. A business might initially save money under those circumstances, but the law also provides for penalties that will increase as insurance premiums do. These business owners must also consider the fact that not providing insurance can hurt them in terms of employee morale, and in their ability to attract good workers. What they save in money may ultimately cost them in terms of productivity and reputation as an employer.

It isn’t all bad news, despite the shouting in some quarters. The ACA limits how much premiums can go up each year. Premiums for some businesses may drop under the law compared with what those businesses are paying now. The law eliminates the surcharges that insurers impose on companies who have patients with serious medical conditions. The exchanges are expected to offer small businesses lower rates than insurance companies now charge.

Because the law requires all individuals to have health insurance, the smallest businesses (those with fewer than 50 employees) may be able to lure good workers away from larger companies that previously offered expensive benefit plans that smaller companies could not match. And while the possibility remains that lawmakers will completely or partially repeal the ACA, coping with the many tax hikes already in place, as well as those scheduled for the next several years, will require extensive planning for businesses of all types and sizes. If you haven’t already contacted your financial and tax advisors, now would be a good time.

Mark E. Battersby, based in Ardmore, Pa., writes extensively on business, financial and tax-related topics. Email him directly at

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