03 Apr 10 Tips for Businesses under the Health Care Act
In 2010, the President signed the Patient Protection and Affordable Care Act (PPACA) into law.
Upheld by the United States Supreme Court in 2012, the Act comprises the most sweeping changes on the American fiscal scene since Social Security was established by President Roosevelt. The changes occurred slowly in 2010-2012 but in 2013 new surtaxes kick in for individuals and in 2014 all Americans are required to have health insurance.
Because the Act is so far-reaching, there is no one size fits all solution, but there are a number of planning ideas that businesses should consider or implement in order to mitigate the cost of the new plans for the business and its employees.
Ideas to Consider to Benefit Employees and Employers:
One of the overall unwritten philosophies of the Act is to eliminate tax deductions for individuals who pay for their own health care costs and to transfer those costs to employers. Consequently, employers must consider the entire compensation package of employees, which should now include cash wages and various health related fringe benefit programs. In most cases, employers are still allowed to deduct health care fringe benefits for employees, and since employees have for the most part now lost the ability to deduct their own costs, employers need to consider the following health related fringe benefits. When we refer to health care costs, we are referring to doctors, dentists, prescriptions, health insurance and similar items.
1. Establish written Section 125 health care flex plans for employees.
This plan allows each employee to direct up to $2,500 annually towards direct employer payment of the employee’s health care costs. Any amount directed to the Flex plan by the employee is not taxed to the employee. This plan even has a benefit for the employer because any amounts designated by the employee as a flex amount is not subject to Social Security tax for either the employee OR the employer. When Social Security rates are as high as 7.65% on each party, this can be substantial cash flow savings for both parties. So this plan saves the employee both income and Social Security tax, and saves the employer Social Security tax. The employer gets a full deduction for any payments and the employee does not have to include anything in income.
2. Establish Health Reimbursement Arrangements (HRA) as part of the employee’s total compensation package.
These plans allow most employers with written plans to pay employee health care costs as a tax deductible fringe benefit for the employee. This plan must be in writing and the employer may limit the benefit in terms of dollars and qualifying costs. Again, the advantage is that the employee does not have to include any of the benefit amounts in income and the employer in most cases is allowed a deduction for the amounts paid.
Both flex plans and HRAs require written plans that do not discriminate in favor of the owners or senior management. We strongly suggest using a third party administrator to establish and monitor these plans. The largest national provider is www.TASConline.com.
3. Because employees will be essentially losing all deductions for medical costs, employers may want to consider a total compensation package that includes better health insurance coverage than currently offered to employees.
As part of a totalcompensation package concept, the employee may not receive as much cash wage as they had previously received, but they receive better health insurance coverage that is deductible by the employer and tax free to the employee. The net effect of better insurance without more cash wage might actually be more cash in the employee’s pockets at year end because they are not paying health care costs out of after-tax dollars.
4. When Congress passed the Act, it included a “Small Business Health Care Credit” for businesses with fewer than 50 employees. Although the complexity of the credit (see our YouTube video http://www.youtube.com/watch?v=sb59uJNJVJc) has made it nearly impossible to use, the credit cannot be overlooked. The IRS tells us that less than 4% of the estimated businesses that qualify for the credit have used it because of the complex design requiring more cost to determine the credit than the amount of the credit itself. Nevertheless, the credit is 35% of qualifying health insurance costs through the end of 2013 and bears examining for extreme small businesses.
5. The credit discussed above increases to 50% in 2014. This makes it even more important to examine expenses now to determine the credit. The bad news? In order to get the credit in 2014, a small business will have to cancel its existing health insurance and buy a new policy from one of the new insurance exchanges. The worse news? The 50% credit ends 12/31/2015 – no more credits after that.
6. Employee leasing is a fantastic tool overlooked by many employers that can bringhealth care costs down substantially.
With employee leasing the employer uses a third party “co-employer” commonly known as a professional employment organization (PEO) to pay employees as the agent of the actual employer. The employees are considered part of a much larger group of employees of the PEO rather than the smaller employer. This gives the employer the ability to benefit from greater benefit savings, insurance price negotiations, etc. We have used it ourselves for many years to great benefit. The national association at www.napeo.org should be your starting point.
7. An unusual concept overlooked by nearly all advisors is the self-insurance concept. With this idea, the employer decides to pay directly the first xxx dollars of employee health care costs then buys a stop-loss policy to cover any overages for major medical issues. Usually the stoploss provider will also provide administration of the self-insurance program for a small additional fee. For employers whose employees have low health care costs, this is clearly worth examining. Lots of local agents do not yet have experience with self-insurance so you may want to start by checking out one of the national associations. Try www.siia.org to start.
Some states are trying to outlaw this practice for small business in a curious discrimination rule that still allows self-insurance for large business so keep abreast of your own states rules on this one.
8. Avoid some really bad advice.
Employers who have 50 or more full time employees are now potentially subject to tax penalties if they do not carefully monitor health insurance costs for employees. Many advisors are incorrectly telling these businesses to merely break the business into more than one company in order to drop under the 50 employee test. This is absolutely horrible advice in most cases. In 1964 Congress, added the controlled group rules to the Internal Revenue Code in Section 414(a). In 1974, ERISA added Sections 44(b) and 414(c) to require that all employees of commonly controlled entities be treated as employees of one entity. The definitions of controlled groups lie in a third Code Section 1563.
This twisted path of rules looks at families, friends, common ownership and ownership as low as 1% and then applies something called attribution to ensnare even more unsuspecting businesses. If someone tells you to just split your business into 3 new businesses where you own less than 50% of each – RUN. They do not understand these rules and you will pay the potential $2,000 per employee penalty. We are hearing examples of this advice from insurance agents, brokers, advisors and even some CPAs and attorneys.
9. Remember that part-time employees do not have to be provided health insurance. Even though they are included in the count of total employees, they are not included in penalty calculations. Some complex rules exist here but essentially if you keep their hours less than 30 hours every week they fall underneath the threshold for providing insurance. Watch out for something called “the look-back rule” – if you are cutting the hours of existing employees.
Under the look-back rule, an employer would determine each ongoing employee’s status as a full-time employee by looking back at a defined period of not less than three but not more than 12 consecutive calendar months, as chosen by the employer (the measurement period), to determine whether during that measurement period the employee was employed on average at least 30 hours of service per week. This means that 2013 work hours can impact the provision of insurance during 2014.
10. The best advice – be proactive to protect your business. Ask your advisors what training they have had regarding the new laws. In the next year, all financial professionals will need to substantially improve their knowledge of these rules, whether they are tax professionals, lawyers, insurance agents, business advisors or business brokers. Carefully question your advisor – ask what classes they have taken, when, and how long. We are seeing a demand for full day classes just to cover what we know now, so if your advisor is not keeping up you could potentially be paying the penalties.