Health care costs increase despite ACA

However, the smaller the practice the better the tax breaks.

Issue: January 2016

ByMark E. Battersby

The U.S. Supreme Court in King v. Burwell, ruled that the health insurance tax subsidies provided by the federal government to citizens in the 34 states that have not established the health insurance marketplaces or exchanges were legal. That means some 6 million people, including the nearly 3.5 million people in small business plans, small business owners, self-employed professionals and early retirees who depend on subsidized health care costs, will continue to receive them.

Unfortunately, despite those subsidies and other tax incentives, health care costs continue to skyrocket. What is more, according to a report from the Urban Institute, a Washington-based think tank, small businesses and professional practices are among those most vulnerable to the steep health care cost increases.

ACA today

Admittedly, the Affordable Care Act (ACA) provides optometry professionals and their practices with a number of insurance options, increased buying power via the government-sponsored marketplace ... and an overwhelming amount of confusion and paperwork. What can an optometry professional do to keep health care costs manageable while complying with the ACA’s updated and ever-changing rules?

First, it should be understood that the ACA’s taxes and tax credits are based on the number of full-time equivalent employees (FTEs) and their average annual wages, not solely on the number of full-time employees. In simple terms, FTE equals the total number of full-time employees plus the combined number of part-time employee hours divided by 30. Seasonal employees, contractors, practice principals and business owners do not count toward the total.

The downside

In addition to sharply escalating costs, every optometrist should be aware of the ACA’s downside. While much of the seemingly negative impact of the looming “employer mandate” stemmed from reports of employers cutting hours, many of those earlier claims appear to have been over-dramatized. In reality, the impact of the ACA is all-too-real for many mostly larger practices and businesses.

Large employers with 50 or more full-time (or the equivalent) employees must report to the IRS if and what health insurance they offer. The IRS uses the information to administer the employer-shared responsibility provisions and the tax credit.

Some employers held off plan recording and reporting until the Supreme Court ruled. Now, however, the obligation is clear. While no one was in violation for 2014 because reporting was not required, the reports of some large employers for 2015 are due in early 2016.

Among those required to comply with the ACA, it is only truly large businesses with many low-wage, full-time employees that do not currently offer benefits that face the threat of penalties. Those businesses offering higher wages typically already provide benefits, while smaller operations (with between 50 and 100 FTEs) will escape, thanks to an exemption for fees on the first 30 employees.

The upside

It is safe to say the smaller the practice or business the better the tax breaks. After all, the ACA provides small optometric practices and businesses with affordable insurance options, cost assistance and increased buying power via the Small Business Health Options Program (SHOP). Employers with fewer than 50 FTE employees can use the SHOP to get better deals on employee insurance but are not mandated to do so.

Consider a few of the ACA’s other and applicable rules:

Small optometric practices can see up to a 50% reduction in their share of the cost of employee premiums. Employers with fewer than 25 FTEs paying average annual wages below $50,000 qualify for tax credits to help pay employee health care premiums. Employers with 10 or fewer full-time employees paying annual average wages of $25,000 or less qualify for the maximum credit of 50%. The employer’s share is tax deductible and can be carried forward or backward.

Form 8941, Credit for Small Employer Health Insurance Premiums, must be filed to claim the tax credit – all the way back to 2010, because the credit is retroactive.

Thanks to the ACA, employers can offer more and better quality benefits. Because small practices and businesses are able to shop for group health plans on their state’s health insurance marketplace via the SHOP, an optometric practice now has the same buying power as larger businesses and may be able to provide benefits to its employees.

The self-employed with no employees can get health coverage through the health insurance marketplace for individuals, but not through SHOP.

Retroactive to Jan. 1, 2014, and through at least 2015, 2% shareholders in professional practices or businesses operating as S corporations can receive reimbursement for their individual health insurance premiums. Even better, the S corporation is not subject to the excise tax penalty if it correctly includes the health insurance premiums on the 2% shareholders’ W-2. The 2% shareholder must report the income as wages but will be allowed to take a self-employed health insurance deduction.

In 2014, many small employers were shocked to learn that plans under which they reimbursed employees for the cost of obtaining individual health insurance violated the ACA rules and they risked a $100-per-day-per-affected-employee excise tax. The IRS recently provided guidance that clears up some of the earlier confusion.

Do not forget that there is an additional cost for some small optometric practices and businesses: a $63 pre-existing conditions fee. That is correct; for some employers purchasing insurance, there is an annual $63 fee. The ACA small business fee decreases each year until 2017, when pre-existing conditions are phased out.

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Medicare tax hike

The Medicare Part A tax is paid by both employees and employers. Often overlooked, however, is the fact that a practice or business with profits of more than $250,000 faces a 0.9% increase (from 2.9% to 3.8%) on the current Medicare part A tax.

Because this tax is split between the employer and employee, both will see a 0.45% increase. Small practices making less than $250,000 are exempt from the tax. Employees making less than $200,000 as an individual or $250,000 as a family are also exempt.

Optional strategies

Instead of shifting to the individual markets, some optometric practices have opted for a high-deductible group plan and set up a health reimbursement arrangement (HRA) to help offset employees’ medical expenses. An employer can dictate the expenses they will reimburse, thus limiting their out-of-pocket exposure.

The advantage of an HRA over a health savings account (HSA) is that the plan can be structured so that if an employee does not use the money in an HRA, the money will still belong to the optometry practice. An HSA is another option, but it gives employers less control over how the money in an account is spent; the funds are made available to employees whether or not they incur any medical expenses.

The future

On the horizon is an excise tax on high-cost plans (also known as the “Cadillac tax”) that now kicks in for employers in 2020. Employers may have to pay up if their group health plans exceed a certain dollar limit. The limit for 2020 is $10,200 for individual coverage and $27,500 for family coverage.

For self-insured plans that exceed these limits, employers will pay a 40% nondeductible excise tax on every dollar above the limit. This penalty can be significant even for a plan that exceeds the limits by only a few hundred dollars per year, making now the time to think about changing an existing plan.

The subsidies

Before the ACA became fully effective in late 2013, small employers were much less likely to offer health insurance plans to workers than their larger brethren. In 2013, more than 93% of businesses with between 100 and 999 workers offered health coverage to employees, compared with just 32.3% of those with fewer than 25 workers.

Self-employed optometry professionals and workers in small practices and businesses, at least since late 2013, have been able to buy subsidized individual health insurance plans on government-run exchanges. This has reduced the uninsured rate among nonelderly workers at businesses and practices with fewer than 50 employees from 23.5% in June 2013 to 13.2% currently. The uninsured rate among self-employed workers fell from 30.4% in mid-2013 to 19.6%.

The subsidies, available to anyone who earns between 100% and 400% of the poverty level, have helped reduce the cost of insurance – at least until recently. Escalating insurance costs have already begun impacting optometrists and practices that do not qualify for subsidies.

While supporters of the ACA tout its success in providing insurance to millions of Americans, recent rate filings from large insurers reveal the law may have been built on a shaky foundation. In recent weeks, large insurers selling coverage under the ACA have proposed massive rate increases for 2016 – some exceeding 40% – because they have not been able to sign up enough young and healthy customers.

Skyrocketing health care costs are not, however, the only reason every optometry professional – and practice – should seek professional assistance. Keeping abreast of the many benefits and potential pitfalls of the ACA are also extremely important.

For more information:
Mark E. Battersby has been reporting on news and developments in the tax and financial arenas for more than 25 years. He can be reached at MEBatt12@Earthlink.net.

Disclosure: Battersby has no relevant financial disclosures.