6 Things Small Business Owners Need To Know About The Affordable Care Act

May 1, 2014

Whether you agree with it or not, the Affordable Care Act (ACA) is now law and it affects everyone. As a small business owner, there are some key components you need to understand and changes you may need to implement in order to be in compliance and avoid penalties.

1. Everyone must have qualified health insurance in 2014 or pay a fee

Anyone without qualified health insurance by March 31, 2014 must pay the full price of their medical care and either an "individual responsibility payment" or a fee equal to the higher of the following:

  • 1 percent of your yearly household income, with the maximum penalty equal to the national average monthly premium for a bronze plan.
  • $95 per person for the year ($47.50 per child under 18) with a maximum of $285 per family.

This penalty increases each year and is collected along with your income taxes in 2015. Recognizing that the high cost of health insurance has been a major deterrent to its purchase, the law provides a Premium Tax Credit to reduce that cost - the lower your income, the higher the credit.

2. Health plans must provide basic minimum coverages

The ACA established a set of Essential Health Benefits that must be offered by plans in the individual and small group markets. These include ambulatory patient services, emergency services, hospitalization, maternity and newborn care, prescription drugs, laboratory services, pediatric services and more. There is no annual limit to the dollar amount spent on these benefits, and all preventive services must be covered with no out-of-pocket cost to the insured. They must also meet the federal parity standard for mental health and substance abuse services.

In addition, the insurance companies offering these plans must spend at least 80 percent of premiums received on medical expenses and cover a minimum of 60 percent of the cost of healthcare without discriminating based upon age, disability, expected end of life, medical dependency, quality of life, gender identity or sexual orientation. Many people have discovered that their existing health plans would not meet the required standards, resulting in some insurers withdrawing policies from the market.

3. Businesses with fewer than 50 employees are exempt from financial penalties

Large employers, with 100 or more full-time employees, and mid-sized employers, with 50 to 99 employees, are required to offer workers and their dependents health insurance benefits that meet ACA standards. Failure to do so results in a tax penalty of $2,000 per year. Large employers have until Jan. 1, 2015 to cover at least 70 percent of their employees while mid-sized employers have until Jan. 1, 2016. If your company employs fewer than 50 employees, you are not required to offer health benefits under the law.

4. A new SHOP Marketplace for small businesses and a health insurance marketplace for individuals is available

The SHOP Marketplace is available only to employers with 50 or fewer full-time-equivalent employees. The Health Insurance Marketplace is available to any individual who lives in the U.S., is a legal resident or citizen, and is not in prison. Both marketplaces offer four levels of health insurance coverage from major insurers. The plans vary according to premiums, deductibles, co-payments and the amount paid out-of-pocket each year.

5. Businesses with fewer than 25 employees qualify for a healthcare tax credit

The Small Business Health Care Tax Credit is available to employers who meet the following criteria:

  • Employ fewer than 25 full-time-equivalent employees.
  • Pay an average wage of less than $50,000 annually.
  • Pay at least 50 percent of employees' health insurance premium costs.
  • Employ workers who purchase insurance through the SHOP Marketplace.

The credit is deducted directly from any income taxes you owe at the end of the year. If you are self-employed with no employees, you are not considered an employer under the law, even if you hire independent contractors to do work. Depending upon your income and the number of people in your household, you may qualify for the Advance Premium Tax Credit.

6. People earning more than $200,000 annually are subject to additional Medicare tax

Two new Medicare taxes were imposed under the ACA:

  1. A 0.9 percent surtax on wages and self-employment income above $200,000 annually which employers are required to withhold regardless of filing status.
  2. A 3.8 percent tax on net investment income for individuals with an adjusted gross income above $200,000.

It is possible that either or both of these rules may change if tax reform occurs. If you are potentially subject to these taxes, you should seek competent advice from a professional. Find out what led up to the passage of the Affordable Care Act here.

About the author

Michael Lewis is a retired business exec who writes and discusses topics related to government, politics, economic policy and investing strategies.

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