Three years ago, the Patient Protection and Affordable Care Act (ACA) was enacted to ensure that, starting in 2014, everyone will have health insurance coverage. In 2013, the provisions of that act start to kick into gear, with more taking effect next year. How will these changes impact your business?
Changes Effective in 2013
While the heart of ACA starts next year, the funds to pay for many of the changes are going to be partially raised in 2013. Business owners will pay more in Medicare taxes on their earned income and investment income if they are “high income.” They will also have a new payroll withholding responsibility.
0.9 percent Medicare surtax on earned income. Taxable compensation (wages, bonuses, and taxable fringe benefits) is subject to this added Medicare tax. It applies for amounts over $200,000 for singles and $250,000 for joint filers. Employers must begin to withhold the tax once taxable compensation exceeds $200,000, regardless of filing status. There is no matching amount due from the employer; this tax is imposed solely on the employee. For self-employed individuals, there is a comparable Medicare surtax paid as part of self-employment tax; where appropriate, factor this tax into estimated tax payments throughout the year.
3.8 percent net investment income tax (another Medicare surtax). This tax is the lesser of net investment income (NII) or the excess of modified adjusted gross income over a threshold amount ($200,000 for singles; $250,000 for joint filers). NII includes the typical investment-type income, such as interest and dividends. NII does not include business income, such as from an S corporation or limited liability company, if the owner is active in the business; it does apply to distributions to passive investors.
Even if employees request it, employers are not permitted to withhold additional Medicare taxes. However, employees can adjust their income tax withholding by filing a new W-4 form with employers; this withholding can then be applied toward the additional Medicare taxes when they file their personal income tax returns.
Cap on FSAs. Until now, it was up to employers to set the limit on how much employees could contribute in pre-tax dollars from their wages to flexible spending accounts (FSAs). Now the taw law fixes the cap. For 2013, it is $2,500; next year, this limit will be adjusted for inflation.
Reporting on W-2 forms. Employers must include on employees’ 2012 forms filed in 2013 the value of health coverage. This does not change the tax treatment of coverage (i.e., employer-paid coverage is fully tax free). Small employers (those who filed fewer than 250 W-2 forms for 2011 wages reported in 2012) are exempt from this reporting for the time being.
Changes Effective in 2014
This is the watershed year for the ACA. The key feature of the law—a mandate for coverage—takes effect on January 1.
Mandated coverage. Businesses with more than 50 full-time employees (those working 30 hours or more per week) must offer insurance covering at least 60 percent of the actuarial value of the cost of benefits. This coverage must be affordable to employees. If it exceeds 9.5 percent of their household income, employees may receive tax credits to help pay their premiums. Employers who fail to offer this coverage will pay a fine of $2,000 per employee (the first 30 employees are excluded).
Additional reinsurance premiums. To help pay for the required changes in insurance coverage, the law imposes a temporary fee. Technically the fee is on the insurance company, but it is passed along to you. For 2013, the fee is $63 per employee, regardless of how many workers you have on the payroll. Thus, you’ll pay this fee even if you’re a small employer who is exempt from mandatory health coverage but provides coverage nonetheless.
Access to insurance. A boon to small businesses, the ACA requires health insurance plans to guarantee the availability and renewal of coverage for all participants. Pre-existing health conditions can no longer be used to deny coverage.
Coverage through insurance exchanges. Small businesses will able to buy health coverage from a state’s Small Business Health Option Plans (SHOP Exchange) instead of from insurers. The idea is that the SHOP Exchange will lower the cost of coverage, but this depends on the number of businesses that use the exchange and on other factors.
Small businesses for this purpose are defined as 1 to 50 or 1 to 100 full-time equivalent employees, at the state’s option. While it has been estimated that about 2.6 million small employers will acquire coverage from the SHOP Exchange, this number could be much smaller unless details about the SHOP Exchange’s offering and costs are announced early enough for employers to make an informed choice.
New small employer health credit. Starting in 2014, small employers (those with fewer than 25 full-time equivalent employees) who buy coverage through a SHOP Exchange can take a tax credit of up to 50 percent of their premium payments. (The credit for coverage from a private insurer ends in 2013.) The credit is reduced or eliminated, depending on the number of employees and their average annual wages.
It’s likely going to take time for business owners to fully digest all of the changes taking effect in 2013 and 2014 and what they mean for their businesses. Guidance on these changes can be found at:
• HealthCare.gov for a timeline of some provisions
• IRS for tax-related rule
Barbara Weltman is an attorney, author (with such titles as J.K. Lasser’s Small Business Taxes and The Complete Idiot's Guide to Starting a Home-Based Business), and trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® at www.barbaraweltman.com, and host of Build Your Business radio. Follow her on Twitter: @BarbaraWeltman.