The Affordable Care Act – What It Means To Individuals and Businesses

Mike Burt, CPA (Oct, 2013)

For the past few months many have pleaded for a repeal of the Affordable Cart Act (ACA), also known as Obamacare.  The initial enrollment opened October 1, 2013 allowing individuals and small businesses to purchase health insurance through exchanges set-up by individual states or the federal Health & Human Services Agency (HHS).  Coverage will be offered as early as January 1, 2014, forcing many to realize Obamacare is coming for good or bad.

Unexpected hurdles always pop up with new legislation.  While there have already been inevitable delays and problems with accessing the exchanges, the federal and state governments have been doing their best to quickly resolve issues.  Only the future, with time allowing for any necessary adjustments to the ACA, will tell if the ACA will be as beneficial as proponents have been touting it.

The individual mandate requiring individuals to carry minimum essential health insurance or pay a penalty under the ACA begins March 31, 2014.  Listed below is important information for individuals:

  • The penalty for not complying will be paid through the filing of the annual income tax return.  The penalty will be the greater of a flat amount ($95 – 2014, $395 – 2015, $695 – 2016, $695 + inflation – 2017 and later), or a percent of the taxpayer’s Modified Adjusted Gross Income (1% – 2014, 2% – 2015, 2.5% – 2016, 2.5% + inflation – 2017 and later).
  • There are some exclusions to the penalty.  These include people who are not required to file a federal income tax return, people insured less than 3 months, financial hardship, religious reasons, and people whose income is below the Federal Poverty Level.

  • Exchanges will offer four levels of coverage tiers for consumers to select from (bronze, silver, gold, and platinum) with each level meeting established core service criteria in order to be listed under each category.  There is a fifth catastrophic level below bronze only available in the individual market for individuals under 30 years old or exempt from the mandate to purchase coverage.

    • Bronze coverage – insurance covers 60% of the benefit costs of the plan with the individual responsible for 40% of the benefit costs of the plan.
    • Silver coverage – insurance covers 70% of the benefit costs of the plan with the individual responsible for 30% of the benefit costs of the plan.
    • Gold coverage – insurance covers 80% of the benefit costs of the plan with the individual responsible for 20% of the benefit costs of the plan.
    • Platinum coverage – insurance covers 90% of the benefit costs of the plan with the individual responsible for 10% of the benefit costs of the plan.

  • Essential health benefits covered within the exchange include:  doctor’s office care, emergency services, hospital care, pregnant mother/baby care, mental health/addiction treatment, prescription drugs, rehab/skill development services/devices, lab services, prevention/wellness services/long-lasting disease management, and dental/vision care for children.
  • No eye care services and dental insurance is offered at this point on the exchange for adults.

  • Changes to the minimum essential coverage include:  no exclusions for pre-existing conditions, mandatory coverage for clinical trials, no annual/lifetime limits may be applied to health benefits, coverage for obesity related services, new employee waiting periods imposed by employer groups cannot exceed 90 days, and employers may increase rewards for employees meeting specific wellness initiatives from 20% to 30%.

  • Individuals not offered affordable insurance through their employers or other unemployed individuals who purchase insurance through an exchange may receive premium reduction assistance based on graduated income levels.  There is also cost-sharing assistance available for those under 250% of the Federal Poverty Level.

  • Employees who decline affordable insurance offered by their employer and instead choose to buy insurance from the exchange will pay for their premiums out of pocket rather than having the option of withdrawing the premiums tax-free from their wages.  These employees also will not qualify for any premium assistance or cost-sharing assistance from the exchange.

  • There are wide premium rate fluctuations not only from state to state, but also within states.

  • Out of state employees must use the insurance exchange in the state in which they reside.

Listed below is important information for businesses:

  • Beginning October 1, 2013 small businesses (average of less than 50 full-time equivalent employees) can purchase insurance through exchanges offering coverage to employees on January 1, 2014.  The exchange offers small businesses insurance options that are affordable (defined below), offer some cost assistance, and offer increased buying power previously only available to larger businesses.

  • In 2014 the Small Employer Health Insurance Tax Credit increases from 35% to 50%, but only for employers participating in an insurance exchange.  It is important to remember however, that the credit is not based solely on the number of full-time equivalents, but the number of full-time equivalents and their average annual wages, which can quickly phase out the credit in certain circumstances.

  • The business mandate requiring large businesses (average of 50 or more full-time equivalent employees in the preceding calendar year) to offer minimum essential health insurance to full-time employees or pay a penalty under the ACA begins January, 1, 2015.

    • Minimum essential coverage is defined as an employer offering at least one eligible employer sponsored insurance plan to employees that meet the minimum standards under a bronze plan (the plan covers at least 60% of the costs) to the employee and their children.  A spouse does not need to be offered coverage.

    • An employer sponsored plan is considered affordable if it does not exceed 9.5% of the employee’s household income for the tax year.

  • Below are the penalties that may be imposed on large businesses:

    • If insurance coverage is not offered to employees the penalty is $2,000 per full-time employee.  The first 30 employees are exempt from the penalty. 

    • If insurance coverage is offered to employees but does not meet the minimum and affordable definitions the penalty is $3,000 per full-time employee obtaining insurance on the exchange and receiving premium credits from the exchange.  This penalty may be capped.

  • Business franchises are treated as separate businesses.

  • In 2016 businesses with 51 – 100 employees will shift to community rating.  Currently, businesses with 51 – 100 employees pay higher insurance premiums than businesses with 50 or less employees or above 100 employees.

  • In 2017 states can open their exchanges to large businesses with more than 100 employees.

  • In 2018 a 40% “Cadillac” excise tax is to be imposed on insurance coverage with excessive premiums.

At Dermody, Burke & Brown, CPAs, LLC, it is our commitment to be your most trusted advisor.  The new laws on the ACA are very complex and confusing.  Our professionals are dedicated to keeping you informed about how the new health care environment will impact you and/or your business.  Please contact your tax professional to assist you.

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