If you have employees, you know that you may be required to provide health insurance for your employees or pay a fine under the Affordable Care Act (ACA).
Providing health insurance coverage is just one facet of the ACA requirements you may have to meet. As the ACA becomes more fully implemented, additional reporting requirements and rules come into play.
Not understanding exactly what is required of you as an employer in 2015 and 2016 can be a very costly mistake.
As a business owner, make sure you understand these 12 things about the ACA.
If you have employees, you may be required to offer affordable healthcare options by 2016 at the latest.
If you have more than 50 employees, your business is considered an applicable large employer (ALE) by the IRS and must provide affordable healthcare for them by the start of 2015 or the start of 2016, depending on the number of employees you have.
If your business has fewer than 50 employees, the fines don’t apply to you.
If your business employs 50-99 people, you must provide healthcare for 95 percent of your employees by January 1, 2016, or be penalized. You won’t be penalized in 2015 for not providing healthcare options.
If your business has more than 100 employees, you may be penalized sooner. You must provide healthcare coverage for at least 70 percent of your full-time employees by January 1, 2015, and 95 percent by January 1, 2016, or pay a penalty.
This year’s ALE status is determined by the number of full-time employees you had last year.
Your business’ ALE status is determined every calendar year using the number of full-time employees in the prior year. For example, your 2015 ALE status is determined by the number full-time employees you had in 2014, and your 2016 status will be based on 2015 full-time employees.
You may have 50 or more full-time employees by ACA standards, even if you actually have fewer than 50 employees who actually work full time.
According to the ACA, a full-time employee is someone who works 30 hours or more each week. It’s more complicated than just counting full-time heads. Your part-time employees can also affect the number of full-time equivalent employees you have.
For example, you could have 40 full-time employees and 20 part-time employees, but the ACA could consider you to have 50 or more employees based on total hours worked.
You would then be required to offer health insurance or pay a penalty. You could even have 50 full-time employees by ACA standards if you have exactly zero full-time employees, if your part-time employees put in enough total hours.
Check with your state’s marketplace for the method you must use to determine number of full-time equivalent employees. Some states use slightly different methods of computation.
Here’s how the math often works. Add up all hours worked by part-time employees for the year, and divide the total by 2080.
Add the result to the number of your full-time employees who work an average of 30 hours or more per week. That’s how many full-time equivalent employees you have for the ACA.
Always round down to determine the number of full-time equivalent employees you have. For example, if you have 49.7 full-time equivalent employees, round the number of employees to 49.
Because you can’t predict this number for the year in progress, your status is based on how many full-time equivalent employees you had in the previous year.
You, your spouse, and other family members do not count as full-time employees.
When you calculate the number of employees you have for purposes of ACA requirements, don’t count yourself, your spouse, shareholders, or partners who own more than 2 percent of an S corporation or more than 5 percent of a C corporation, or spouses or family members of these owners.
A family member for this purpose is child, grandchild, sibling or step-sibling, parent or grandparent, step-family member or in-law, niece or nephew, aunt or uncle, or a spouse of any of these.
If you offer health insurance, you may qualify for a tax credit.
If you have fewer than 50 employees (based on the ACA’s definition of full-time equivalent employees), you won’t be penalized if you don’t provide insurance.
There’s still motivation to get insurance, however. You may qualify for a special tax credit if you offer health insurance that meets the minimum requirements under the ACA.
For more information, refer to the IRS’ Q&As about the Small Business Health Care Tax Credit.
The coverage you offer must be considered “affordable.”
The first part of determining if a plan is affordable is simple. The plan must pay for at least 60 percent of covered health care expenses.
The second part is a little harder to determine. Your employees cannot be required to pay more than 9.5 percent of their annual household income for the coverage.
But how do you know what your employee’ household income is? You don’t.
Fortunately, the IRS provides three safe harbors for determining affordability:
- W-2 wages – Make sure the employee’s required contribution for self-only coverage is no more than 9.5 percent of gross wages on each employee’s Form W-2.
- Rate of pay – You can determine affordability based on the employee’s monthly or hourly rate of pay.
- Federal Poverty Line (FPL) – You’re safe if the employee’s cost does not exceed 9.5 percent of the FPL.
Unless you have a grandfathered group health plan, you must meet a third requirement – the out-of-pocket maximum.
For 2015, the maximum is $6,600 for an individual, or $13,200 for a family plan. This is the total limit the employee must pay for deductibles, co-insurance, co-payments, and similar charges for essential health benefits, combined. The total does not include premiums or out-of-network fees.
You are not required to cover your employee’s spouses or dependents.
The Affordable Care Act does not require you to provide coverage for spouses and dependents. If you do provide such coverage, you must have a plan that allows young adults to stay on their parents’ plans until age 26.
There is no requirement that dependent coverage be “affordable.”
Starting in 2015, employers will be fined if they give employees cash to purchase health insurance.
Some employers give their employees designated funds to purchase health insurance and tell them to purchase their own insurance.
This may be called a Health Reimbursement Arrangement (HRA) or an Employer Payment Plan (EPP). As of June 30, 2015, this is prohibited for most small businesses, under penalty of a $100 per day per employee fine.
It’s still permissible to pay employees more; however the pay must not be on the condition that the employee purchase insurance. In addition, the employer and employee must pay FICA tax on the amount, and the additional income is taxable to the employee.
You may be able to find and purchase group plans for your employees in the SHOP marketplace.
Similar to the federal marketplace for individuals, the SHOP marketplace lets businesses with fewer than 100 full-time equivalent employees purchase plans for their employees. You may also find tax breaks on SHOP (www.healthcare.gov).
You must provide specific information about the marketplace to employees.
You will soon be required to provide marketplace information to your employees. This is true whether you offer health insurance or not. This reporting started out voluntary for coverage providers in 2014, and becomes mandatory in early 2016.
Be aware of the 90-day maximum waiting period for health insurance coverage.
If you offer an insurance plan, you must offer it to all eligible employees within 90 days of their start date.
You may have to withhold an additional Medicare tax for high earning employees.
Starting in 2013, you must withhold additional Medicare tax on wages you pay to an employee of more than $200,000 in one calendar year.
This is true, even though the employee will not owe the tax unless his wages together with those of his spouse exceed $250,000 if he files jointly.
When your employees file their tax returns for the year, they may owe less additional Medicare tax than they had withheld.
For more information about the above, visit:
- Healthcare.gov – The federal government’s official website where individuals and small businesses can apply for insurance, change plans, and get answers.
- www.irs.gov/Affordable-Care-Act – Your IRS resource for all tax-related ACA matters. Be sure to check out the ACA Information Center for Tax Professionals.
- HealthcareACT.com, powered by TaxAct – Information, calculators, and resources to help you make sense of the tax implications of the ACA.
More to explore:
- The New Business Owner’s Guide to Filing a Tax Return
- Mid-Year Review for Tax Savvy Business Owners
- Insurance and Your Taxes — What Business Owners Need to Know
- Insurance Considerations for Freelancers, Entrepreneurs and Small Business Owners
- Affordable Care Act Tax Law Changes for Higher Income Taxpayers