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Tax hikes, credits result from Affordable Care Act
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Like it or not, the U.S. Supreme Court has ruled, and the so-called “Affordable Care Act” (ACA) is now the law of the land – and the tax code. Soon, every individual must have health insurance or face a tax penalty. Large employers must offer their workers health insurance or face penalties.
Not quite hitting home as yet is the full impact the ACA’s 20+ tax hikes will have not only on large employers, but all businesses, professional practices, their principals or owners, the self-employed and, in fact, every individual. By ruling that the ACA is constitutional, the Supreme Court has actually approved a slew of tax hikes, some of them already in play.
The employer mandate
The tax most likely to affect large practices and businesses, at least those with more than 50 employees, is the so-called “employer mandate.” Under ACA, those employing more than 50 employees are required to provide employees with health insurance or face an “assessable payment.” That means a practice or business must be in compliance or face the fine beginning Dec 31, 2013.
Already on the books is the “Small Business Health Care Tax Credit.” Employers with fewer than 25 employees can enjoy a tax credit, a direct reduction of their tax bill as opposed to a deduction that reduces the income upon which the tax bill is computed, of as much as 35% of the health insurance premiums they pay for employees. Of course, the average annual wages of an optometric practice’s full-time employees must be less than $50,000.
Although the full credit is 35% of the employer’s contribution toward an employee’s insurance premium, it is only those optometric practices that have fewer than 10 full-time equivalent employees and average salaries of $25,000 or less that are eligible for the full credit.
Mark E. Battersby
As the size of the practice and the average wage amount goes up, the tax credit goes down. Once the practice hits 25 full-time equivalent employees or pays $50,000 in average salaries, the credit is completely phased out.
This tax credit is scheduled to increase to 50% for smaller employers after 2013. Unfortunately, after 2013, small practices/employers will be required to participate in an insurance exchange in order to claim the credit.
Already in effect, the Small Business Health Care Tax Credit appears to be under-utilized. The Government Accountability Office (GAO) recently reported that only 176,300 of the 1.4 to 4 million small businesses and professional practices eligible claimed the credit in 2010. One reason, at least according to the GAO, was the perceived complexity of computing the tax credit.
The individual mandate
The impact on sole practitioners and other optometric practices with no employees will be much like the impact on individuals. For people in this group, the crux of the 2014 rollout is the individual mandate, which requires all U.S. citizens and legal residents to have health coverage or pay a penalty.
There are some exemptions, however, such as those with certain religious backgrounds and those who are eligible for the so-called “hardship exemption” if the cost of the annual premium exceeds 8% of household income. There are penalties intended to ensure compliance. The top penalty for individuals, once fully phased in, for not having insurance is $695 or 2.5% of income – whichever is greater.
Minimal qualified insurance
Regardless of size, no optometric practice or business can purchase just any old insurance in order to avoid the penalties. When required, the practice must provide so-called “minimum essential” and “affordable” coverage.
Minimum essential coverage means covering 60% of the actuarial value of the cost of the benefits. Affordable means the premium for the coverage of the individual employee cannot exceed 9.5% of the employee’s household income.
If the coverage offered by a large employer is unaffordable, qualifying employees can get subsidized coverage through the state exchanges. In this situation, the employer will have to pay the lesser of $3,000 per subsidized full-time employee, or the $2,000-per-employee penalty after the first 30 full-time employees.
The mandate also adds a major expense for sole practitioners and principals in small professional practices – those with no employees – who must now buy health insurance for themselves or pay a fine. But sole practitioners and small business owners also get the new option to buy insurance in state exchanges, which are intended to lower costs for everyone by expanding the pool of insured and spreading out risk.
State exchanges
The ACA requires each state to establish both an American Health Benefit Exchange and Small Business Health Options Program (SHOP Exchange) to provide qualified individuals and qualified small employers access to health plans. Starting in 2014, sole practitioners, small practices and businesses can shop for less expensive insurance through exchanges in each state.
One-person practices or businesses can turn to exchanges for individuals. Employers with up to 100 workers may turn to SHOP Exchanges. Both have a similar approach to bringing down costs: increasing the size of the insured pool to spread the risk.
Unfortunately, no exchange is up and running yet. In theory though, they will give small optometric practices and businesses the long-awaited ability to buy insurance at rates that once only belonged to larger companies. The federal law ordered states to create them, and a dozen have already begun establishing them.
Lower deductibles, more out-of-pocket expenses
Individuals with incomes between 100% and 400% of the poverty level will enjoy reductions to their out-of-pocket health care expenses by two-thirds, one-half or one-third, depending on their income. These tax breaks go into effect after Dec. 31, 2013.
On the other hand, any optometric practice that rewards its principals or employees with health insurance coverage that exceeds a threshold amount established by our lawmakers will face a whopping 40% excise tax beginning in 2018. Although the IRS has yet to weigh in, the dollar limit for determining the tax thresholds is predicted to be $10,200 (for 2018), multiplied by the health cost adjustment percentage for an employee with self-only coverage and $27,500 (for 2018) for employees with coverage other than self-only coverage.
In addition to a hike in the Medicare payroll tax on self-employment income (from 2.9% to 3.8%), an “unearned income Medicare contribution” tax will impose the new 3.8% rate on so-called “net investment income.” That includes interest, dividends, annuities, royalties, certain rents and other “passive” business income. Fortunately, only individuals with incomes in excess of $200,000 and married couples with incomes greater than $250,000 will be subjected to the 3.8% tax.
There are also a number of new rules for the health care programs used by so many principals in small optometric practices … and their workers. Last year, sole practitioners and professionals were no longer able to use health savings account (HSA), flexible spending account (FSA) or health reimbursement (HRA) pre-tax dollars to purchase non-prescription, over-the-counter medicines (except insulin).
There was also an increased (from 10% to 20%) tax on non-medical early withdrawals from HSAs, putting them at a disadvantage with IRAs and other tax-advantaged accounts, which remained at 10%.
While there is no cap today, beginning Jan. 1, 2013, employees will face a $2,500 cap on the amount of pre-tax salary deferrals they can make into a FSA. In light of the new cap, employee benefits groups are lobbying for Congress to modify the “use-it-or-lose-it rule” where employees forfeit unused funds in their accounts at the end of the plan year.
Fines will increase
Critics of the ACA claim it gives employers a financial incentive to stop providing health insurance, because the fines for not offering insurance are much less than the cost of insurance. In fact, the Congressional Budget Office predicted earlier this year that up to 20 million Americans are likely to lose their current coverage as a result.
Although a large practice or business might initially save money, the law provides for penalties that will rise as insurance premiums do. Every optometric professional must also consider the fact that not providing insurance can hurt them in terms of employee morale and in their ability to attract good workers. What they save in money may cost them in terms of productivity and reputation as an employer.
The good news
Fortunately, it is not all bad news. The ACA limits how much premiums can go up each year. Premiums for some optometric practices or businesses may actually drop under the law compared with what they are paying now. The law eliminates the surcharges that insurers impose on employers who have workers with serious medical conditions. The exchanges are expected to offer small professional practices and businesses lower rates than insurance companies charge.
Because the law requires individuals to have health insurance, the smallest practices and businesses (those with fewer than 50 employees) will be able to lure good workers away from larger companies. And while there is the possibility that lawmakers will completely or partially repeal the ACA, planning to cope with the many, already-in-place tax hikes as well as those scheduled in the years ahead is strongly advised.