SMC Business Councils Government Relations
A Short Guide to the Affordable Care Act – Part I of II
By Eileen Anderson

On March 23, 2010, President Obama signed the Affordable Care Act into law and brought sweeping changes to our healthcare system that will be implemented over the next eight years. The new law will extend coverage to 32 million uninsured individuals by 2019.

As a small employer you need to be aware of the changes coming over the next months and years. This guide presents the high points and briefly explains the changes that will most directly affect the small business community. Many of the changes included in the new law will be shaped by regulations that have not yet been written. Many of the largest and most direct changes to employers take effect in 2014.
The Congressional Budget Office estimates the total cost of the Affordable Care Act over 10 years to be around $940 billion, which will be financed through savings from Medicare and Medicaid, and a series of new taxes and fees.

Overall, employers should not anticipate lower costs as a result of the reform law.  Aside from new taxes and fees provisions in the new law including insurance market reforms such as the elimination of lifetime limits, annual limits, and pre-existing condition exclusions will put upward pressure on premiums.
The small business tax credits designed to assist in the purchase of healthcare coverage are very limited in their scope. The credits are available to the smallest of employers, who will have to meet certain coverage conditions for their employees in order to qualify for the assistance.

Q. When will the new changes that have the most impact on small businesses take place?

A. Here’s a brief timeline of the changes:

2010

Insurance Market Reforms - Bars insurance carriers from recissions, denying coverage to children with pre-existing conditions, and removes lifetime caps on coverage.

Dependent Coverage - Requires insurers to allow people to stay on their parents’ policies until they turn 26.

Preventive Services - Insurers are required to cover preventive services such as immunizations for children and cancer screenings for women.

2010-2014

Small Business Tax Credits - Businesses with 10 or fewer full-time equivalent employees earning less than $25,000 a year on average will be eligible for a tax credit of 35% of health insurance costs if the employer contributes at least 50% of the employee-only premium. Companies with between 11 and 25 workers and an average wage of up to $50,000 are eligible for partial credits.

2011

Form 1099 Expanded Corporation Information Reporting - Applies to all payments to vendors made after December 31, 2011, and drastically expands the scope of information reporting.

Tax Changes on Health Savings Accounts - The federal tax on individuals who spend money from health savings accounts on ineligible medical expenses will double to 20%.

Flexible Spending Accounts - Excludes over-the-counter drugs from being reimbursed by either a flexible spending account or health reimbursement account.

Wellness Program Grants - Funds appropriated for five years to provide grants to small employers to establish wellness programs.

W-2 Reporting
Aggregate cost of employer sponsored health benefits must be included on W-2 form.

2013

Contribution Limits on Section 125 Flexible Spending Accounts - The limit on how much individuals contribute to flexible spending accounts will be set at $2,500.

Itemized Deductions for Unreimbursed Medical Expenses - The threshold for deducting medical expenses will increase from 7.5% of adjusted gross income to 10%.

Medicare Taxes - The Medicare tax rate will increase by 0.9 percentage point—from 1.45% to 2.35%—on earnings over $200,000 for individuals and $250,000 for families. A 3.8% Medicare tax will be imposed on unearned income - capital gains, interest, dividends, and other net income, including some profits from investments and partnerships and Sub Chapter S Corporations.

2014

Individual and Employer Mandates - U.S. citizens and legal residents must have qualifying health coverage. Those without coverage are subject to a tax penalty the greatest of $95 per year or 1% of taxable income. Employers with 50 or more employees must offer coverage or be subject to a “free rider” penalty fee.

Federal Subsidies Based on Income - Federal government will provide refundable and advanceable premium credits to eligible individuals and families with incomes between 133% and 400% of federal poverty level.

Guarantee Issue Insurance
Policies - Insurance carriers may no longer deny coverage based on health factors. Health plans in the individual and small group markets are required to guarantee issue and renewability.

Pre-Existing Condition Exclusions - All plans are prohibited from imposing pre-existing condition exclusions on adults.

Health Insurance Exchanges - Creates state-based exchanges where individuals and small businesses with up to 100 employees can purchase qualified coverage.

Wellness Programs - Allows employers to offer employees rewards such as premium discounts or benefits for participating in a wellness programs.

Deductible Limits - Deductibles for health plans in the small group market are limited to $2,000 for individuals and $4,000 for families unless contributions are offered that offset deductible amounts above these limits.

Lifetime and Annual Limits - Prohibits all plans from imposing lifetime limits and any annual dollar limits for essential benefits.

2018

“Cadillac Tax” – An excise tax on high cost “cadillac” health plans that exceed certain cost limits will be incurred by insurers and possibly employers.

Q. What do I need to KNOW about immediate important insurance market changes?

A. These important changes will affect your health plan on September 23, 2010.

The new health law calls for changes that will affect insurance companies six months after the bill was signed into law. The changes listed below will apply to the rules and regulations that insurance companies will be required to comply with for plan years beginning on or after September 23, 2010. All changes listed below with the exception of Preventive Services Paid will also apply to all plans in existence prior to the effective date.

Dependent Care Coverage - All individual and group policies (including those in existence prior to the effective date) are required to extend coverage to employee’s dependents up to age 26 that lack access to other employer-sponsored coverage. Pennsylvania already allows for the option of group plans to offer coverage for dependents up to age 29 with certain conditions.

Elimination of Pre-existing Condition Exclusions - Pre-existing condition exclusions may not be applied to enrollees under age 19. Also, insurance companies will be banned from engaging in practices that include insurance “riders,” which exclude specific injuries or illnesses from receiving coverage.

Limits on Rescissions - Insurance companies are now unable to drop coverage when a patient is sick. Coverage may not be rescinded except in the case of fraud or non-payment. Policyholders must be notified prior to cancellation.

Elimination of Lifetime Limits on Insurance Coverage - Group health plans and health insurance issuers offering group or individual health coverage are prohibited from placing lifetime caps on the dollar value of essential benefits coverage. Group health plans may also not establish unreasonable annual limits as determined by the Secretary of Health and Human Services.

Preventive Services Paid - Effective for plan years beginning on or after September 23, 2010, health plans will now be required to cover preventive services and cannot impose co-payments, cost sharing, or deductibles for preventive care which may include recommended immunizations, preventive care for infants, children and adolescents, and additional preventive care and screenings for women and so forth.

Action - Make sure the plan you offer your employees meets the new requirements by September 23, 2010. Check with your agent.

Q. What do I need to KNOW about “grandfathered plans”?

A.  A “grandfathered plan” is a group health plan or health insurance coverage in which an individual was enrolled on March 23, 2010. The grandfathered plan will retain its status even if the covered individual renews the coverage after March 23, 2010.

While the new law specifically exempts grandfathered plans from certain regulations and requirements, there are a number of new regulations and requirements that even “grandfathered plans” will have to comply with in the future. For starters see previous section on important changes to your plan by Sept. 23, 2010. Keep in mind these are only the major provisions that affect health plans.

Both new family members and new employees (and their families) are allowed to enroll in a grandfathered plan.

Grandfathered plans may lose status if significant changes in plan design are made at renewal such as changes in deductible, co-pays, and so forth. Visit  http://www.smc.org/health-reform-resource for more detailed information on “grandfathered plans”.

Action - Speak with your agent about your plan and what grandfathering means, and determine if is advantageous to keep your existing plan or change to a new plan.

Q.  What do you need to KNOW small business tax credits and the “Cadillac” tax?

A. The new healthcare reform law gives some small businesses tax credits for providing health insurance to their employees. The first credit is available in 2010. The second credit is available in 2014 and requires the business purchase insurance from the new health insurance exchange.

Your company may be eligible to receive a tax credit if you meet the requirements. Speak with your accountant but here are some of the basic requirements:

Small Business Tax Credit (available 2010-2013) – The tax credit is equal to 35% of the employer’s health insurance costs. It applies to all employers regardless of whether or not health insurance was offered previously. To qualify the business must have:

• 10 or fewer full-time equivalent employees
• An average annual wage less than $25,000. This does not include the owner or owner’s family’s wages, or any seasonal employee working fewer than 120 hours per year.
• 50% or more of the premium paid by the employer

Small Business Tax Credit (2014-2016) – Tax c redit is equal to 50% of the employer’s health insurance costs and lasts 2 years. To qualify for the full credit, the business must meet the three requirements previously listed AND must purchase coverage through the state based health insurance exchange.

Some Important Notes:

• Sole proprietors and their family members are not eligible to receive the credit. 
  
• To calculate number of full-time employees, divide the total hours worked by all employees during the tax year by 2,080. Seasonal workers, self-employed individuals, partners, sole proprietors and two percent shareholders of the employer are not treated as employees for purposes  
  
• Companies with between 11 and 25 workers and an average wage of less than $50,000 are eligible for partial credits. The credits phase out as firm size and/or average wage increases.
  
• Employers with more than 25 employees or an average wage above $50,000 receive no tax credit.

The credit is available to offset actual tax liability and is not payable in advance to the taxpayer or refundable. The business must claim the credit at the end of the year on its income tax return. As part of the general business credit against taxable income and against the Alternative Minimum Tax for for-profit companies.

The “Cadillac” Tax
This provision takes effect in 2018 and imposes an excise tax of 40% on health insurers and health plan administrators for coverage that exceeds the thresholds of $10,200 for single coverage,  $27,500 for family coverage and $11,850 and $30,950 for retirees and employees in high-risk professions. Health insurance coverage subject to the “cadillac” tax includes not only the employer and employee premium payments for health insurance but also flexible spending accounts, health savings accounts and health reimbursement accounts.  Stand-alone dental and vision plans are excluded from the tax.

Action - Talk with your accountant to determine if your small business qualifies for any or all of the tax credits available.

Using 10% as an inflation factor to project what your premium cost may be in 2018 when the “cadillac” tax’ begins. Visit
http://www.smc.org/health-reform-resource for more detailed information on tax credits and the “Cadillac” tax.

(Part II continued...)

About the Author:
Eileen Anderson is Government Relations manager at SMC Business Councils. Her personal experience with health insurance as a small businesswoman compelled her to become an outspoken advocate for affordable health insurance for small businesses. She joined SMC in 2004 specifically to work on health care reform and support their legislative agenda aimed at health care cost containment and saving job-based insurance coverage. SMC has spent many years at the forefront of the fight for affordable health care for small employers. She can be reached at
412-342-1606 or eileenanderson@smc.org.