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Affordable Health Care and Taxes

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.

By Mark E. Battersby

Soon, every individual must have health insurance or face a tax penalty. Large businesses must offer their employees health insurance or face penalties.

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

    The Employer Mandate
    The tax most likely to affect sign professionals and businesses, at least those with more than 50 employees, is the so-called "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 the fine beginning after December 31, 2013.

    Already on the books, is the so-called "Small Employer Health Insurance Tax Credit." Employers with fewer than 25 employees can enjoy a tax credit, a direct reduction of their tax bill as opposed to a deduction that merely reduces the income upon which the tax bill is computed, of as much as 35% of the health insurance premiums they pay for employees. Of course, the average annual wages of a sign business's full-time employees must be less than $50,000.

    It is only those sign operations that have fewer than 10 full-time equivalent employees and average salaries of $25,000 or less that are eligible for the full credit. Today, that full credit is 35% of the employer's contribution toward an employee's insurance premium. 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% for small business employers after 2013. Unfortunately, after 2013, small business employers will be required to participate in a state operated insurance exchange in order to claim the credit.

    Surprisingly, although already available, the Small Employer Health Care Tax Credit, appears to be under-utilized. The Government Accountability Office (GAO) recently reported only 176,300 of the between 1.4 and 4 million small businesses eligible claimed the credit in 2010. One reason, at least according to the GAO, the perceived complexity of computing the tax credit.

    The Individual Mandate
    The impact for sole-proprietors and sign 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 to pay a penalty.

    There are some exemptions, however, such as those from certain religious backgrounds and those who are eligible for the so-called "hardship exemption" if the cost of the annual premium exceeds 8% of household income. There are also penalties intended to ensure compliance with the top penalty for individuals not having insurance, once fully phased in, $695, or 2.5% of income -- whichever is greater.

    Minimal Qualified Insurance
    Regardless of size, no sign professional or business can purchase just any old insurane and hope to avoid the penalties. The operation must provide so-called "minimum essential," and "affordable" coverage.

    Minimum essential coverage means covering 60% of the actuarial value of the cost of the benefits. And affordable means the premium for the coverage of the individual employee cannot exceed 9.5% of the employee's household income.

    If the coverage offered by a large employer is unaffordable, qualifying employees can get subsidized coverage through the state exchanges. In these cases the employer will have to pay the lesser of $3,000 per subsidized full-time employee, or the $2,000-per-employee penalty after the first 30 full-time employees.

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

    The Exchanges
    The ACA required each state to establsih both an American Health Benefit Exchange, and Small Business Health Options Program (SHOP Exchange), to provide qualified individuals and qualified small business employers access to health plans.

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    Starting in 2014, sole proprietors, professionals, small businesses and their owners can shop for less expensive insurance through exchanges in each state. Exchanges will have four levels of coverage: bronze, silver, gold or platinum.

    One-person businesses can turn to the exchanges that will be established 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. Unfortunately, no exchange is up and running yet. In theory though, they will give small sign businesses the long-awaited ability to buy insurance at rates that once only belonged to larger companies. The federal law ordered states to create them, and a dozen have already begun establishing them.

    Lower deductibles and more out-of-pocket
    It is predicted that after Dec. 31, 2013, individuals with incomes between 100% and 400% of the poverty level will enjoy reductions to their out-of-pocket health-care expenses by two-thirds, one-half, or one-third, depending on their income.

    On the other hand, any sign business that rewards its owners, shareholders, or employees, with health insurance coverage that exceeds a threshold amount established by our lawmakers, will face a whopping 40-percent excise tax beginning in 2018. Although the IRS has yet to weigh in, the dollar limit for determining the tax threshholds are estimated to be $10,200 (for 2018) multiplied by the health cost adjustment percentage for an employee with self-only coverage and $27,500 (for 2018) for employees with coverage other than self-only coverage.

    In addition to a hike in the Medicare Payroll Tax on self-employment income (from 2.9% to 3.8%), a "unearned income Medicare contribution" tax will impose the new 3.8% rate on so-called "net investment income." That includes interest, dividends, annuities, royalties, certain rents and other "passive" business income. Fortunately, 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% tax.

    Tax-deffered health insurance plans have long been popular -- and affordable -- for sole proprietors and small business owners interested in lowering the paperwork burden and costs. Last year, they were prohibited from using the pre-tax dollars in a health savings account (HSA), flexible spending account (FSA), or health reimbursement (HRA), to purchase non-prescription, over-the-counter medicines (except insulin).

    What's more, an increased, additional tax on non-medical 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.

    Capping the FSA caps
    Although there is no cap under current law, beginning January 1, 2013, employees will face a $2,500 cap on the amount of pre-tax salary deferrals they can make into a healthcare flexible spending account. Little wonder that many employee benefits groups are lobbying for Congress to modify the "use-it-or-lose-it rule" under which employees forfeit unused funds in their accounts at the end of the plan year.

    Critics of the ACA claim 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 insurance. The Congressional Budget Office predicted earlier this year that up to 20 million Americans are likely to lose their current coverage as a result.

    Although a sign business might initially save money, the law contains penalties that will rise as insurance premiums do. Business owner/managers must also consider 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 cost them in terms of productivity and reputation as an employer.

    Fortunately, it is not all bad news. The ACA limits how much premiums can go up each year. Premiums for some sign businesses may drop under the law compared with what they're paying now. The law eliminates the surcharges that insurers impose on companies that have employees with serious medical conditions. The exchanges are expected to offer small businesses lower rates than insurance companies charge.

    Because the law requires individuals to have health insurance, the smallest sign businesses, those with fewer than 50 employees, will be able to lure good workers away from larger companies. And while there is the possibility that lawmakers will completely or partially repeal the ACA, planning to cope with the many, already in place tax hikes, as well as those scheduled in the years ahead, is strongly advised.

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