Obamacare – An Introduction for Small Businesses

Regardless of which side of the political aisle you reside, Obamacare, which is more formally known as The Patient Protection and Affordable Care Act (PPACA), is here to stay so you need to invest some time learning about how it will impact your business.  If there is any good news it is that most of its new provisions that affect businesses do not become effective until 2014.  But don’t feel too good as you will need much of 2013 just to get ready.  This is an incredibly complicated piece of legislation.  The new laws total well over 2,000 pages and the regulations – which will be critical to figuring out how to interpret and apply the new laws – will total almost 30,000 pages when they are finally complete.

Beginning in 2014, if your business has 50 or more full-time equivalent employees (‘FTE’, defined as any employee who works 120 or more hours per month) and you do not have an “affordable health care plan” for your employees you will always incur a penalty.  In order for the plan to meet the definition of “affordable” it must have an actuarial value equal to or greater than 60% of the law’s required health care expenses with annual deductibles no greater than $2,000 per individual and $4,000 per family.

The penalty will be calculated by subtracting the number ‘30’ from your FTE’s and then multiplying that result by $2,000.  For example, if your business has 80 FTE’s and does not have an affordable healthcare plan then your penalty for 2014 would be $100,000 [80 – 30 = 50 X $2,000].

Businesses with 50 or more FTE’s that do have a healthcare plan could also incur a penalty if any of their employees receive a new government premium subsidy to help them pay for health insurance.  An employee is only eligible for a subsidy if they meet both of the following two conditions:

  1. The employee’s household income is less than 400% of the Federal Poverty Level (‘FPL’ which can found at http://aspe.hhs.gov/poverty/12poverty.shtml/ ).  This equates to $60,500 for a family of two and $92,200 for a family of four except for families residing in Alaska and Hawaii (threshold slightly higher in those states due to higher cost of living).
  2. The employee’s portion of the insurance premium on the employer’s plan must be greater than 9.5% of the employee’s household income.  To receive the subsidy the employee must opt out of the employer’s plan and purchase insurance in one of the new individual exchanges.

For these businesses with more than 50 FTE’s that do have employees that receive a subsidy, the penalty will be equal to $3,000 for each employee that receives a subsidy.

So what does all of this mean to you as a business owner, especially if your business has more than 50 FTE’s or if your business now has less than that number but is likely to exceed that threshold unless certain countervailing actions are taken?   The first thing you need to do is to weigh the value that your business gains by offering a healthcare plan to your employees.   You need to consider what your competitors are doing and how important having a plan will be to retaining existing employees and attracting new ones.  If you determine that having a healthcare plan is not vital to your business then your decision is a relatively easy one:  calculate the cost of your annual penalty from not offering an affordable healthcare plan and compare it to the least costly health care plan that will meet the “affordability” requirements.    If the cost is less than the penalty (unlikely but possible) or the excess cost is not significantly greater than the penalty, you may decide that offering a plan might still be the best decision.

Of course as is now quite clear, there is nothing “easy” about the PPACA.  This point is further underscored by the complexity of the FTE calculation.  Some readers of the new law upon first glance simply concluded that by cutting down the hours of some of their full-time employees to less than 30 hours per week they will be able to circumvent the penalty.  This is incorrect as your FTE calculation will still be affected by the hours worked by your part-time employees.  For example, assume your business has 35 FTE’s (each working on average 120 or more hours per month) and 20 part-time employees each of whom work on average 96 hours per month.  The 20 part-timers are equal to 16 FTE’s [20 X 96/120 = 16] so this company has 51 FTE’s in total [35 + 16] and will incur a penalty if an affordable plan is not offered. It is also very important to note that the FTE calculation will be based upon the previous 12 months so while the penalties do not become effective until 2014, the calculation for determining your FTE’s will be based upon 2013.

Hopefully if there is one message that comes through loud and clear from this writing is that this new legislation is quite complicated.   And like it or not, all businesses need to understand it and plan accordingly.    So whether you decide to reach out to me, your CPA or insurance broker, do reach out to someone who understands the new laws and don’t delay getting help for too long.   While time is now on your side it will not remain that way for very long.

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