Patient Protection and Affordable Care Act
Frequently Asked Questions for Small Businesses
What were the challenges facing small businesses that the health care reform law is designed to address?
Health care premium costs for small business rose more than 123 percent in just the last decade. (By comparison, the inflation rate over that period was 28 percent.) In addition, small business administrative costs of health care were three to four times higher than those costs for large businesses. According to the Center for American Progress, small businesses were paying 18 percent more for premiums than large businesses for the same coverage because their smaller number of employees meant a smaller risk pool and therefore higher premiums.
What are employer responsibilities under the health care reform law?
The new health care reform law requires businesses with 50 or more employees to provide affordable health insurance to employees who are legal citizens. Most already do. In fact, this provision in law only affects about 3.5 percent of the businesses that have 50 or more employees. The vast majority of all businesses, therefore, will be unaffected by the requirement to provide health insurance, either because they already do, or because they are too small to fall under the requirement.
The result is a sharing of costs and responsibility among employers, employees, and private insurers. This expands the pool of insured individuals, spreading risk more evenly, and it builds upon the decades-old practice of employers providing health insurance, since more than 60 percent of workers are already covered by employer-sponsored plans.
Which businesses are exempt from the responsibility of providing health insurance to employees?
Small businesses with fewer than 50 full-time equivalent workers do not have to provide health care insurance to their employees. (‘Full-time equivalent,’ or FTE, means an employee who works at least an average of 30 hours per week, calculated on a monthly basis.) Ninety-six percent of all businesses, or 5.8 million of the 6 million businesses in the nation, have fewer than 50 employees, so this provision exempts these businesses. These smaller firms employ nearly 34 million workers. The vast majority of larger businesses – those with 50 or more employees – already offer employees health coverage, so they already comply with the employer responsibility requirements and don’t have to change anything.
Businesses that employ seasonal workers who work less than 120 calendar days per year are also exempt from providing health insurance to those employees. Many of these exempted businesses will be able to offer coverage in 2014 because of lower premiums and wider choices that will be available to all individuals and employers through state exchanges.
What happens to employers required to provide employee insurance that fail to do so?
The law imposes a penalty on employers of 50 or more employees, starting at a rate of $2,000 per year for every full time equivalent worker above 30 employees. There may be instances when an employer offers coverage through the exchange, but one or more employees cannot afford that coverage without a tax credit or other government assistance to pay for insurance. In that case, the employer must pay $3,000 toward health care coverage for each of those employees. This provision is designed to ensure that the responsibility for financing health insurance costs is shared by employer and employee.
This provision will become effective in 2014 and the Department of Health and Human Services Centers for Medicare and Medicaid will release regulations providing guidance related to the calculation of these penalties.
What assistance is provided to small businesses that want to offer employees health insurance?
The health care law is designed to encourage, rather than require, most small businesses to offer health insurance plans to their employees. The law sets up a number of tax credit plans to accomplish this goal, while also creating new insurance pools, or state exchanges, to make health insurance coverage much more affordable. Small businesses with fewer than 25 full time equivalent (FTE) workers earning average annual taxable wages below $50,000 get an immediate tax credit if they offer health insurance coverage. The tax credit would equal as much as 35 percent of the cost of premiums they pay for employee health coverage each year through 2013. Tax-exempt organizations are eligible for a credit up to 25 percent of the premium costs.
The full 35 percent credit will be given to businesses with 10 or fewer FTE workers, if all of those employees are earning under a $25,000 average wage. The credit phases down from there, based on the number of employees above 10 and the amount of wages between $25,000 and $50,000, and businesses with 25 or more FTE workers or with wages of $50,000 or more, would not be eligible for a tax credit. More than three out of four businesses have 10 or fewer employees, so the full credit will apply in most cases.
Here are some examples:
A small bakery employs 10 full-time workers earning an average salary of $30,000. The owner pays $70,000 a year towards their health insurance premiums. Under the new health care law, the owner stands to receive $24,500 in tax credits, a savings of 35 percent. When the credit expands in 2014, owner will receive $35,000 in tax credits to help cover the cost of insurance for its employees, a savings of 50 percent.
A smalls store employs 12 full-time workers and pays them average wages of $35,000. If the employer pays $80,000 a year towards their health insurance premiums, she could receive a tax credit of 16 percent or $12,800 towards these premium costs. When the credit expands in 2014, the owner could receive a credit of 23 percent or $18,400 towards these premium costs.
When is the credit available?
Small businesses can claim up to the 35 percent credit for for-profit businesses and 25 percent credit for tax-exempt organizations retroactive to January 1, 2010. This credit is available for each of the years 2010 through 2013. Beginning in 2014, the maximum credit available goes up to 50 percent of the employer’s contribution towards premiums and up to 35 percent for tax-exempt organizations, and is available for a maximum of two consecutive years.
How does a small business employer claim the tax credit?
The credit is claimed on the employer’s annual income tax return as part of the general business tax credit for for-profit employers. For tax-exempt organizations, the credit will be in the form of a reduction in both the payroll income and Medicare tax the employer is required to withhold from employees’ wages and the employer share of Medicare tax on employees’ wages.
An employer generally cannot claim the credit if it has no taxable income for the year. Except in the case of a tax-exempt employer, the credit for a year offsets only an employer’s actual income tax liability (or alternative minimum tax liability) for the year.
Nearly 15,700 Rhode Island small businesses will be eligible for the credit.
What else ensures that costs are controlled for small businesses providing employee health insurance?
The health care reform law ends the insurance industry practice of excessive premiums increases. It does this by giving the Secretary the authority to review and approve premium increases and requires insurers to provide written justification for excessive premium increases.
For small businesses, what options are available for purchasing affordable coverage?
Small businesses with up to 100 employees have the option of purchasing insurance on Small Business Health Options Program (SHOP) Exchanges. These state-based exchanges enable businesses to purchase insurance on an Internet web site with easy-to-understand information comparing insurance option prices. These exchanges also reduce administrative burdens on these small businesses. Beginning in 2017, businesses with more than 100 employees will be able to access these SHOP Exchanges.
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