Small Business & the Affordable Health Care Act.
By: Margaret A. Lourdes, Esq.
The Affordable Health Care Act was signed into law in 2010 and shall be fully phased into effect by 2016. The new law is touted by supporters as a benefit to small businesses for its plan to create more affordable health care options.
Beginning in 2014, businesses with less than 50 employees may purchase employee health insurance through the Small Business Health Options Program (SHOP). SHOP is intended to provide small businesses with stronger buying power and simpler purchasing methods. It is also projected to spur more competition between insurance companies, leading to lower premiums. SHOP will provide a variety of policy choices, including the same coverage members of congress will receive.
Businesses with 25 or less workers with average salaries of under $50,000 also qualify for tax credits to offset the expense of employee health coverage. Currently, the tax credit equals up to 35% of a company’s premiums and will increase to 50% in 2014. The act grants the smallest companies with the fewest employees the highest amount of credits. Furthermore, credits are refundable. Therefore, generally, they can be returned to a company in a cash payment if the business has little or no income. A refund cannot be greater than the amount a business withheld from employees for Medicare and income tax. Any unused credit amounts can be carried over to the following year or retroactively applied to a previous, qualifying tax year.
Small businesses that employ less than 50 employees are also exempt from paying the shared responsibility payment. The payment, sometimes referred to as a penalty or tax, has been one of the most controversial aspects of the act. A significant caveat is sole proprietors are subject to the penalty if they do not purchase health care coverage. The maximum penalties for failing to have coverage are 1% of a sole proprietor’s yearly income in 2014, with penalties increasing to 2% in 2015 and 2.5% in 2016. Opponents of the act argue subjecting sole proprietors to the penalty unfairly hinders the smallest entrepreneurships.
Critics also raise concerns over the uncertain fate of high-deductible health care policies and health savings accounts. HSA policies are attractive for many sole proprietors because of low premiums and allowances of up to $3,250 in yearly, tax-deductible contributions. The Affordable Health Care Act will place certain minimum requirements on policy coverage. The details of the act’s minimum coverage requirements will be fully disclosed in 2014. The fate of high deductible HSA policies remains unclear, since there is no assurance they will meet coverage mandates. Employer-sponsored flexible health care spending accounts do remain intact under the act, but differ substantially from HSAs. FSAs allow tax-deductible contributions by employers and employees for qualified health costs not covered by insurance, such as co-pays and deductibles. However, FSA funds are governed by the “use it or lose it rule.” Employees forfeit unused FSA account balances at the end of each year. In contrast, HSA funds are permitted to accumulate from year-to-year.
Currently, small businesses pay an average of 18% more than big businesses for employee health care coverage. The benefits of the Affordable Health Care Act for small business will not be fully known until it is entirely implemented. Only time will tell.