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What Will Health Care Reform Cost You?

Guest post by: Barbara Weltman

Article Overview: Even though small businesses (fewer than 50 employees) escaped a health coverage mandate, the historic health care reform package enacted in March 2010 will affect every business in ways large and small. Here is a rundown of some of the administrative and tax costs you're likely to encounter as a result of health care reform; only you will be able to tally the costs to your business.

What Will Health Care Reform Cost You?

Even though small businesses (fewer than 50 employees) escaped a health coverage mandate, the historic health care reform package enacted in March 2010 will affect every business in ways large and small. Here is a rundown of some of the administrative and tax costs you're likely to encounter as a result of health care reform; only you will be able to tally the costs to your business.

Background

The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act comprise the health care reform package. Most experts agree that health care costs won't come down immediately, and there are differing views about whether the package will ever lower costs.

While the country awaits legal challenges to the constitutionality of some of the provisions in the package (such as the mandate that nearly every American have coverage), small businesses need to address the costs they face now as a result of the new law. They also want to know whether tax incentives in the package apply to them.

Revising health care and certain benefit plans

If you currently offer health insurance, you'll have to adjust plan rules for 2010 to allow for tax-free treatment of coverage for employees' children until age 27. For example, if you have a cafeteria plan, it will need to be amended to permit employees to make pre-tax contributions to pay for this coverage.

If you currently offer adoption assistance and want to provide the maximum allowance exclusion, you'll have to amend your adoption assistance plan for 2010 to provide a benefit up to $13,170. The health care reform package raised the limit for 2010 by $1,000; the total limit will be indexed for inflation for 2011.

If you offer a flexible spending arrangement (FSA) or health reimbursement plan, you'll have to make certain changes in what can be reimbursed under the plan starting in 2011. The new law restricts reimbursements to costs that could be deducted as itemized medical costs, namely prescription drugs and insulin; over-the-counter medications will not be reimbursed and the language of your plan as well as credit card authorization will have to be changed.

For 2013, you'll have to change FSAs again to restrict employee salary reduction contributions to $2,500; now employee contributions are set by you. The $2,500 limit will be indexed for inflation after 2013.

Starting in 2014, the health care mandate begins. Companies with at least 50 employees will have to pay some part of health care or face a tax penalty. (This part of the package is often referred to as "play or pay.") Individuals not covered by a plan at work will have to obtain their own coverage or pay a penalty. (Lower-income taxpayers qualify for a tax credit to assist them in paying for coverage.)

Small businesses that have so-called "Cadillac" plans will have to re-think their coverage. Starting in 2018 such plans will be subject to a 40% excise tax. Business owners may want to change coverage. It's too early to know whether exchanges, such as the Small Business Health Options Programs, or SHOP exchange, will provide a good alternative to private coverage at an affordable price.

Determining eligibility for a tax credit

There is a small business health insurance credit for eligible companies that pay at least half the cost of employee health insurance. The credit, which runs from 2010 through 2013, applies only to "small employers." This means employers having no more than 25 employees who have average annual pay below set limits. The maximum credit of 35% of premiums applies for the smallest of employers with low payrolls; a partial credit applies for larger employers with bigger payrolls that still fall within set limits. You'll have to see whether you meet the definition and what your top credit can be. As you can guess, this isn't a simple process and you may want to control payroll if the credit could be meaningful to you and your actions would entitle you to the credit.

Note: Starting in 2014, you'll only be entitled to a credit of up to 50% of costs for coverage purchased through an exchange, which has yet to be set up. The credit in this period can only be claimed for two years.

Tax reporting

Starting in 2011, you'll have to report the value of any employer-provided health coverage on employees' W-2 forms. Be sure your outside payroll company, CPA, or other tax advisor will work with you to ensure you report the information correctly.

Getting ready for higher taxes

If you're a profitable business owner, you're likely to face significant tax increases starting in 2013:

• The Medicare portion of self-employment tax will increase by 0.9% on earned income over $200,000 ($250,000 for joint filers; $125,000 for married persons filing separately).

• There is a new unearned income Medicare contribution of 3.8% on investment income of those with adjusted gross income over $200,000 ($250,000 for joint filers; $125,000 for married persons filing separately).

Note: There is no complementary tax on employers; these additional Medicare taxes are only on employees and self-employed individuals.

While it may be too early to plan ahead for this tax hike, it may give you pause with respect to business planning over the next several years.

Final word

Business planning and strategizing will have to factor in the impact of the health care package on your taxes and administrative costs.

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Article Tags: health care, health care reform, health coverage, mandate, small business, small business taxes



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