As you have probably heard by now, starting Jan. 1, 2014, you will have to comply with the “pay or play” guidelines of the Affordable Care Act (ACA) if you have more than 50 employees. If you have anywhere near 50 or more employees, hopefully you are looking at the requirements and considering your options. If you have less than 50 employees, you may jump to the conclusion that the ACA will not impact you. Not so fast…
Although smaller businesses won’t be required to provide employees with health insurance, the law is likely to impact the labor market and ultimately the cost of doing business.
So what does this mean to you if you have less than 50 full-time equivalents (FTEs)? On the surface, it appears to be good news. You won’t be required to offer health insurance to your employees and you won’t be subject to penalties larger employers could face. Sounds good, but we’ve got to dig a little deeper to understand the law’s impact on you and your employees.
Understanding The Individual Mandate
Aside from the “pay or play” requirements, another key change in 2014 is the “individual mandate.” In a nutshell, this requires each person to have health insurance, or be subject to a penalty on his individual tax return. The penalties start out fairly mild in 2014 but increase rapidly in 2015 and 2016. In 2014 the penalty is the greater of:
1) $95 for each adult plus $47.50 for each child claimed on your tax return that does not have health insurance or
2) 1 percent of your modified adjusted gross income (MAGI)
In 2015 the penalty increases to the greater of $325 per adult and $162.50 per child, or 2 percent of your MAGI. And it goes up from there; in 2016 the penalty is $695 per adult and $347.50 per child, or 2.5 percent of your income, whichever is greater.
Now that you understand the individual penalties, consider the situation of employees whose employers don’t offer health insurance. They have two options: purchase their own health insurance or pay the above-mentioned penalties. Individuals purchasing insurance will use the soon-to-be-launched public insurance exchanges, which are in the process of being set up by the federal and several state governments. It’s important to understand that the pricing of the exchanges is income-based: the more an employee makes, the more he will have to pay for his insurance.
In the exchanges, the federal government will subsidize the health insurance premiums for anyone making less than 400 percent of the federal poverty level, with a goal of having insurance purchased through the exchanges cost approximately 9.5 percent of income plus the cost of out-of-pocket medical expenses. Individuals making more than 400 percent of the federal poverty level will not receive premium subsidies. To put this in perspective, a family of four living at 400 percent of the federal poverty level makes $94,200.
The Individual Mandate’s Impact on Small Employers
Here’s the tricky thing about the insurance subsidies: as an employer, the more you pay your employees, the more it will cost them to purchase insurance through the exchanges. If you don’t offer health insurance to your employees, you can see how they may quickly become discouraged with their options of paying a penalty or paying out-of-pocket to purchase health care coverage through an exchange. Don’t be surprised if many of these employees begin looking for another job that provides health insurance. This is just one more challenge facing small employers in an already competitive labor market.
As you can see, by changing the labor market, the regulations coming in 2014 will have an impact on employers of all sizes. Even those that are have less than 50 employees and aren’t required to offer health insurance will be affected. Small employers may soon find themselves in a position where they need to offer affordable health insurance in order to maintain their employee base.
Health Care Reform Help for Small Businesses
The health care reform regulations aren’t all bad news for businesses; there are steps you can take now to start preparing for the changes coming in 2014. For tips of how to mitigate health care reform’s impact on your business, watch Rea’s webinar recording: Bracing for Impact: What You Need to Know About Health Care Reform. Or visit to our health care reform resources page to learn about the burdens and opportunities that health care reform poses for your business. Have specific questions about preparing your business? Contact Rea & Associates. Our Ohio tax professionals will let you know which new regulations apply to your business and help you develop a plan to be ready for them, at the least cost to your bottom line.
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