The Patient Protection and Affordable Care Act (PPACA), or as it is more commonly known as, “Obamacare,” was signed into law by President Barack Obama on March 23, 2010. In addition to requiring some individuals to obtain and retain qualifying health care coverage, the Act also imposes certain requirements on employers.
50 Or More Employees
Of all employers, those employing 50 or more full time equivalent employees (i.e., “large employers”) will be affected most severely by PPACA, beginning in 2014. PPACA requires large employers to either offer affordable health care to all of their employees or pay an annual, nondeductible penalty for noncompliance. An “affordable” health care plan is one that: (i) includes an actuarial value of at least 60 percent, (ii) covers the minimum benefit standards in the new law such as inpatient care, preventative care, office visits, prescription drugs, etc., and (iii) restricts employee premium costs to less than 9.5 percent of that employee’s income. If any one of these requirements is not satisfied by the health care plan offered, then the large employer will be subject to penalties.
If a large employer fails to provide an affordable health care plan to its employees, it may be subject to penalties (aka “employer contributions”). In order for the employer contribution requirement to be triggered, the employer must not offer an affordable health care plan and at least one full time employee must receive a health insurance tax credit. Under these circumstances, an employer would be required to pay an annual penalty equal to the lesser of:
$3,000 per full time employee that receives a tax credit; or
$2,000 per [total number of all full time employees] – 30
An employer has 50 full time employees and does not offer an affordable health care plan. Five employees receive a health insurance tax credit.
Required Contribution: The lesser of [$3,000 X 5 = $15,000] and [$2,000 X (50 – 30) = $80,000]. In this case, because paying $15,000 under the first formula is less than paying $80,000 under the second formula, the large employer is only required to pay $15,000.
Between 26 And 49 Employees
PPACA does not impose penalties on businesses with less than 50 employees. Businesses employing between 26 and 49 (inclusive) will be unaffected by PPACA with respect to offering health insurance or facing penalties.
25 Or Fewer Employees
For some small businesses, PPACA may actually come as a benefit. Qualifying small businesses will be eligible for federal tax credits in return for offering employer-sponsored health care to their employees. In order to meet the threshold qualifications for a tax credit, the employer must:
Employ 25 or fewer full time employees; Pay average annual wages of less than $50,000; and Provide affordable health care coverage for its employees. The amount of the tax credit provided is determined by four key factors: (1) firm size, (2) average wage paid, (3) amount of employer contribution to premiums, and (4) tax year.
The actual rate tables can be found at the website for the National Conference of State Legislatures, but to provide a few examples:
In 2012, an employer has 3 full time employees, pays an average wage of $25,000 per employee and paid $4,500 in premiums per employee.
According to Table 1, this employer would be eligible for a tax credit equivalent to 50% of her total premium contributions for 2012. In this case, 50% of $13,500 ($4,500 X 3) would amount to $6,750.
In 2013, an employer has 18 full time employees, pays an average wage of $35,000 per employee and paid $5,500 in premiums per employee.
According to Table 1, this employer would be eligible for a tax credit equivalent to 2% of her total premium contributions for 2013. In this case, 2% of $99,000 ($5,500 X 18) would amount to $1,980.
In 2014, an employer has 25 full time employees, pays an average wage of $45,000 per employee and paid $6,500 in premiums per employee.
According to Table 2, this employer would not be eligible for a tax credit. The three criteria of (1) firm size, (2) average wages paid, and (3) providing affordable coverage are merely threshold criteria for tax credit eligibility—they do not guarantee a tax credit. As the Tables illustrate, the greater the firm size and the higher the average wages paid the less likely a small employer is to benefit from PPACA tax credits.
PPACA will affect employers differently; large employers are bound to feel the economic realities of the “play or pay” approach while some small employers may enjoy relief in the form of federal tax credits. Regardless of which side of the line your business falls on, competent legal counsel should be sought. PPACA is a wide-ranging and complex piece of legislation and maintaining compliance with its requirements will demand the attention of an experienced professional.
If you have questions about how PPACA will affect your business, call our office at (309) 676-1381.