American Osteopathic Association

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What Small Employers Need to Know About the Affordable Care Act

July 2, 2014
By Thomas J. Force, Esq. & Adam D. Goldstein 

With the enactment of the Affordable Care Act (ACA), there are several tax- and compliance-related consequences stemming from the difference between small employers and large employers. For the purposes of the ACA, “small” employers are those with less than 50 employees. “Large” employers are those with 50 or more employees. 

'Play or Pay' Won’t Apply to Small Employers

The main difference centers on the “play or pay” provision, which does not apply to small employers. The “play-or-pay” provision, which takes effect Jan. 1, 2015 (or 2016 for employers with 50-99 full-time employees), imposes penalties on large employers who do not offer “minimum essential” coverage, or who offer coverage that is “unaffordable.” Small employers must be aware of their workforce—quantity of personnel as well as the hours they work—in order to know whether you are still a small employer or have grown into a large one. This means factoring in full-time equivalent employees (FTEs) as well as regular full-time employees. 

Health Care Coverage Tax Credit Increases by 15%

The other important aspect of the ACA relates to the tax credit that has been available to small employers who provide health insurance to their employees. Through 2013, the maximum tax credit was 35% of premiums paid by qualified small employers (25% for tax-exempt organizations). In 2014, that number has jumped to 50% for small employers and 35% for the tax-exempt. While this is great news for small employers, it is not a cue to offer employees the most generous possible plan. Other provisions in the ACA make it so that you’ll get the same tax benefit you would receive for an “average” plan, regardless of the depth of coverage offered. 

To qualify for the maximum credit, employers cannot have more than 10 full-time employees with FTEs factored in. Reduced tax credits are available to employers with more than 10 but fewer than 25 FTEs, or that pay average wages of more than $25,000 but less than $50,000. When calculating employees, for purpose of size or average wage, numbers exclude sole proprietors, partners in a partnership, shareholders who own more than 2% of an S-corporation’s stock, and family members of the above-mentioned classes. The IRS has also stated that small employers will only qualify for tax credits if they chose coverage through the Small Business Health Options Program (SHOP). For employers who do not have access to SHOP, the Treasury Department has stated that coverage that meets the guidelines of a SHOP plan will suffice. Lastly, beginning in 2014, the tax credit can only be taken twice, and it must be in consecutive years. Thus, it may be worthwhile to hold off until they provide the greatest value. 

Don’t Forget To Comply With Exchange Notices and Waiting Period Requirements

While avoiding the “play-or-pay” provision and an increased tax credit are sure to benefit the small employer, business owners should not neglect two other simple requirements put in place by the ACA. Once per year, and for all new employees, employers are required to issue Exchange Notices. These notices expressly inform the employee that: (1) there exists a Health Insurance Marketplace; (2) employees may get a tax credit if they use the marketplace to purchase their health care; and (3) employees risk losing their employer contribution to health coverage if they opt to purchase a plan from the marketplace. Additionally, employers must strictly comply with the waiting period limitation. This provision ensures that employers do not hesitate to provide coverage by requiring that coverage for all new hires must start within 90 calendar days of that employee’s start date.


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