The Affordable Care Act (ACA) is one of the more complicated pieces of legislation passed in recent years. ACA consists of over 20,000 pages of regulations, has added almost two-dozen new taxes and/or has made changes to existing tax laws and imposes hefty fines and penalties for non-compliance.
ACA impacts both large and small employers and with most small businesses in the U.S. organized as flowthrough entities, such as partnerships and/or Sub-Chapter S corporations, the ACA regulations affect not only the small business employer at the business level, but also the small business employer at their own individual level. With this said, it is imperative that every small business owner be informed as to the potential impact the ACA could have on their business operations.
One of the more confusing parts of the ACA faced by small employers is the mandate to provide health insurance to its employees. Many small business employers erroneously believe that the ACA mandate applies to only applicable large employers (ALE) or those with 100 or more full-time employees in 2015 and 50 or more full-time employees in 2016 and beyond. What they may not be aware of is that ACA’s definition of full-time employees also includes the concept of full-time equivalent (FTE) employees. This concept is very important as it requires the inclusion of non full-time employees to the total number of actual full-time employees and could potentially catapult a small business employer to one that is classified as an ALE subject to the ACA and its mandate. FTE employees include a host of employees, such as part-time employees, seasonal employees, leased employees, employees terminated during the year, employees covered under a collective bargaining agreement and others.
ACA provides for a complicated calculation by which employers are required to calculate the total number of hours FTE employees work. ACA also includes an exemption for seasonal employees which a small business employer may utilize to keep its seasonal employees out of the calculation.
Certain small business employers with fewer than 50 employees, but with multiple small business entities under common ownership and which provide services to each other or work together to provide services to third parties, could also be subject to the ACA mandate. ACA’s mandate provides that if the total number of employees in the combined controlled or affiliated service group exceeds 50, then the combined or affiliated group would be considered to be an ALE subject to the mandate.
A small business employer may not avoid the mandate to provide health insurance to its employees by opting to reimburse them on a pre-tax or non-taxable basis for health insurance premiums they paid to a health insurance exchange or to an insurance outside of the employer. Such arrangements do not satisfy the market reforms and would subject the employer to a $100 per day penalty per impacted employee to a maximum penalty of $36,500 per applicable employee.
Non-compliance with the ACA mandate carries hefty fines and penalties should just one full-time employee receive a premium tax credit on the Marketplace. Failure to provide coverage that is not ACA compliant and/or is not affordable starts at $2,000 per applicable employee in 2015 and increases to $3,000 in 2016. Depending on the number of employees, the penalties could add up to a substantial amount. And, as a final note, the penalties are treated as a non-deductible excise tax to the employer.
The ACA’s rules are complicated and not for the uninformed. The record keeping can be onerous. Every small business owner should be aware of ACA’s many complexities and the ultimate impact non-compliance could have on their business and ultimately on them personally.
Other New Regulations
There are other changes mandated by the ACA that small business owners should be aware of.
W-2 Reporting – Effective for the calendar year 2015 reporting year in 2016, employers, both small and large, are now required to report the cost of health insurance on the employee’s Form W-2 in Box 12 with a code of DD.
New taxes to fund ACA – One new tax paid by employees to assist in funding the ACA is the additional .9% Medicare tax. Small businesses are now required to withhold and transmit to the IRS this new tax on employees whose compensation is above $200,000 for single taxpayers and $250,000 for married taxpayers.
Another tax created by the ACA is the 3.8% tax on net investment income /capital gains.
New Forms to be Filed – While small employers may not be subject to the ACA, those with self-insured health plans are required to report plan information to their employees by completing for each employee and then filing with the IRS, two new Forms. Form 1095-B Health Coverage and Form 1094-B Transmittal of Health Coverage Information.
And, small employers who are members of a controlled or affiliated service group that collectively employ at least 50 or more full-time employees are required to file Forms 1095-C Employer Provided Health Insurance Offer of Coverage and 1094-C Transmittal of Employer Provided Health Insurance
Is the ACA “Good” or “Bad” for Small Business?
Ultimately, whether the ACA is “good,” or “bad” for small business is a hotly contested issue which remains to be determined. ACA does include some positive and negative impacts on small businesses.
One positive impact on small businesses with fewer than 25 FTE employees is a tax credit of up to 50% of the premium cost paid by the small business employer towards their employees insurance. Another positive impact for small employers is that they can purchase health insurance for their employees through the Small Employer Health Insurance or SHOP.
On the negative side, ACA does have associated increased administrative and reporting costs, which will ultimately impact the bottom line of a small business. The inclusion of FTE employees could cause some small businesses to cut back on hiring and hinder their growth in order to stay below the mandate threshold. And, ultimately one overlooked negative impact small business owners now face is the time they are now required to focus on becoming educated with the ACA rather than focusing on their business.
This article can only begin to scratch the surface of how the ACA can impact your small business. It is imperative that every small business owner understands the potential effects the ACA could have on their operations, and should therefore consult with tax professionals, such as those at MBAF, who are well-familiar with the ACA and all of its implications.
Compliance issues regarding the Healthcare industry, especially since the passage of the Affordable Care Act, (ACA) can be quite complex. If you would like to benefit from our expertise in these areas or if you have further questions on this Advisory, do not hesitate to contact our Healthcare Specialists, or call us at 1-800-239-1474.