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Ultimate Guide to Obamacare for Small Business Owners

The Affordable Care Act, nicknamed ‘Obamacare,’ forever changed the healthcare system in the United States, and its impact can still be felt by small businesses today.

What is the Affordable Care Act?

The Affordable Care Act (ACA) is a comprehensive health care reform law signed by President Barack Obama in 2010. The law outlined three primary goals:

1 – Make affordable health insurance available to more people.

2 – Expand the Medicaid program.

3 – Support innovative medical care delivery methods designed to lower the costs of health care generally.

The Affordable Care Act created new rules and regulations (a lot of them), making it easier for people to get comprehensive health coverage.

Essential health benefits

A key part of the ACA was creating a minimum standard of coverage for all major health insurance plans. The law outlined a list of ten “essential health benefits” to be covered by all new individual and small group plans for them to be ACA-compliant.

1 – Ambulatory patient services (outpatient care you get without being admitted to a hospital)

2 – Emergency services

3 – Hospitalization (like surgery and overnight stays)

4 – Pregnancy, maternity, and newborn care (both before and after birth)

5 – Mental health and substance use disorder services, including behavioral health treatment (this includes counseling and psychotherapy)

6 – Prescription drugs

7 – Rehabilitative and habilitative services and devices (services and devices to help people with injuries, disabilities, or chronic conditions gain or recover mental and physical skills)

8 – Laboratory services

9 – Preventive and wellness services and chronic disease management

10 – Pediatric services, including oral and vision care (but adult dental and vision coverage aren’t essential health benefits)

Premium tax credits for individuals

While the ACA was signed into law in 2010, some of its major provisions, including the premium tax credit, did not go into effect until January 1, 2014. To help make individual health plans more affordable, the ACA established the premium tax credit, which allows recipients to apply the credit to their medical premium in advance, essentially lowering the total cost of their health insurance policy.

In order to qualify for the premium tax credit, an individual must have a household income that falls within a specific range; cannot have filed a tax return with the status of Married Filing Separately; cannot be claimed as a dependent by another person; cannot be able to get affordable coverage through an eligible employer-sponsored plan that provides minimum value; and, cannot be eligible for coverage through a government program, like Medicaid, Medicare, CHIP or TRICARE.

Employer shared responsibility provisions

Another key provision of the ACA that went into effect in 2014 was the employer shared responsibility provision. Prior to 2014, employers were never required to offer health insurance to their employees, nor were they penalized for not doing so.

In 2014, employers known as “applicable large employers” became required to offer minimum essential coverage to their full-time employees and their dependents or risk paying an employer shared responsibility payment, otherwise known as an employer mandate.

Applicable large employers (ALEs) can avoid employer mandates by offering employees and their dependents minimum essential coverage that is “affordable” and provides “minimum value.”

For a full-time employee, coverage is considered affordable if the lowest cost health plan (for self-only, no dependents) is 9.61% or less of the employee’s household income. Because it is unlikely for an employer to know their employees’ household income, they are allowed to use a W-2 Form, an employee’s rate of pay, or the federal poverty line for purposes of the employer shared responsibility provisions.

In addition, a health plan meets the minimum value standard if the plan is designed to pay at least 60% of the total cost of medical services for a standard population, and its benefits include substantial coverage of physician and inpatient hospital services.

Definitions for employees

To determine if you are an ALE, you must adequately calculate your average number of full-time employees and full-time equivalent employees.

A full-time employee is an employee who has on average at least 30 hours of service per week during the calendar month or at least 130 hours of service during the calendar month. A full-time equivalent employee is a combination of employees, each of whom individually is not a full-time employee but who, in combination, are equivalent to a full-time employee.

An employer’s number of full-time equivalent employees (or part-time employees) is only relevant to determining whether an employer is an ALE. An ALE does not need to offer essential coverage to its part-time employees to avoid an employer shared responsibility payment.

Applicable large employers (ALEs)

Determining whether an employer is an ALE generally depends on the average size of an employer’s workforce during the prior year.

Suppose an employer has fewer than 50 full-time employees, including full-time equivalent employees, on average during the prior year. In that case, the employer is not an ALE for the current calendar year. Therefore, the employer is not subject to the employer shared responsibility provisions or the employer information reporting provisions for the current year.

Now, suppose an employer has at least 50 full-time employees, including full-time equivalent employees, on average during the prior year. In that case, the employer is an ALE for the current calendar year and is subject to the employer shared responsibility provisions.

Pay or play

The employer shared responsibility provisions are sometimes referred to as “the employer mandate” or “the pay or play provisions.” Either an employer “plays” and offers compatible-ACA coverage, or they “pay” up to the IRS.

If an employer doesn’t offer employees the appropriate level of coverage and ends up having to “pay,” there are two different types of employer shared responsibility payments an applicable large employer could be on the hook for. It’s important to note that for either payment to be triggered, at least one full-time employee must receive a premium tax credit for purchasing coverage through the Marketplace.

If an ALE does not offer minimum essential coverage to at least 95 percent of its full-time employees, and an employee receives a premium tax credit, the ALE could be fined up to $2,000 for each full-time employee, with the first 30 employees excluded from the calculation. 

If an ALE does offer minimum essential coverage to at least 95 percent of its full-time employees, but a full-time employee manages to receive a premium tax credit, the ALE could be fined $3,000. But, the fine would only be for each full-time employee who receives the premium tax credit.

Reporting requirements

The same employers subject to the employer shared responsibility provisions (ALEs) also have information reporting responsibilities regarding minimum essential coverage offered to employees. These responsibilities require employers to send reports to employees and to the IRS.

Applicable large employers must report to the IRS information about the health care coverage, if any, they offered to full-time employees.  The IRS will use this information to administer the employer shared responsibility provisions and the premium tax credit.

Tax deductions for small businesses

The small business health care tax credit is another tax benefit for employers but has specific requirements. In order to be eligible, employers must:

  • have fewer than 25 full-time equivalent employees
  • pay average wages of less than $50,000 a year per full-time equivalent
  • offer a qualified health plan to its employees through a Small Business Health Options Program Marketplace

You must also pay at least 50 percent of the cost of employee-only – not family or dependent – health care coverage for each employee. The amount of the credit you receive works on a sliding scale. The smaller the employer, the bigger the credit.

Small business owners need to know

When it comes to Obamacare, the first thing small business owners need to know is whether or not they are an applicable large employer. If you are an ALE, you must offer minimum essential coverage to your full-time employees and their dependents or risk paying hefty fines to the IRS. 

If you are not ALE, you should still consider offering a group health insurance plan to your employees to help recruit and retain top talent. Not only that, but if you offer an ACA-compliant plan, you could benefit from the small business health care tax credit along with other tax benefits.

Not sure what you need for your small business?  Woligo’s team of experts can help you select the best coverage option for you.  Call us now (888) 633-5229 (option 1) to speak to a licensed agent about our group plan options.

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