Many of the tax-related provisions of Obamacare–the Patient Protection and Affordable Care Act or the “Act”—will require businesses to take action this year and next. Here is a short summary:
Employers that filed 250 or more 2011 W-2 forms must begin reporting the cost of employer-provided health care coverage on the W-2 beginning with the 2012 tax year — that means the W-2s distributed in January 2013. IRS Notice 2011-28 explains that the new requirement calls for informational reporting only. It does not cause excludable benefits to become taxable or change the tax treatment in any way. The purpose of the requirement is “to provide useful and comparable consumer information to employees on the cost of their health care coverage.”
Medicare subsidy payments
As of Jan. 1, 2013, employers can no longer claim an income tax deduction for the Medicare Part D retiree drug subsidy payments they receive from the federal government.
Medicare tax withholding
Starting in 2013, employers must withhold an additional 0.9% in Medicare taxes on employee earnings over $200,000 (even for married employees). However, employers are not required to match that extra payment. Employers need only pay 1.45% on all earnings.
The IRS has indicated that employers are not required to break out the additional withholding amounts on employees’ W-2 forms. In fact, to avoid penalties, employers are required to do little more than arrange to withhold the additional amounts.
Employers that offer health care flexible spending accounts (FSAs) are currently allowed to set the employee contribution limits for them, but starting in 2013 a $2,500 limit applies. According to the IRS, this is on a plan year basis. Thus, non-calendar-year plans must comply for the plan year that starts in 2013. Employers will need to amend their plans and summary plan descriptions to reflect the $2,500 limit (or a lower one, if they choose) by Dec. 31, 2014, and institute measures to ensure employees don’t elect contributions that exceed the limit. Note that there will continue to be no limit on employer contributions to FSAs.
Play or pay provision
The employer mandate provision is scheduled to take effect Jan. 1, 2014. It does not require employers to provide health care coverage but it in some cases imposes penalties on employers that do not offer coverage or that provide coverage that isn’t “affordable.” Penalties will increase annually based on premium growth.
Employers with 50 or more full-time employees (those working 30 hours or more per week) that don’t provide their employees with health coverage will be assessed a penalty if just one of their workers receives a premium tax credit—a government subsidy for persons with incomes below certain thresholds–when buying insurance in a health insurance exchange. The annual penalty is $2,000 per full-time employee in excess of 30 workers. For example, if the employer has 53 full-time employees, the penalty would be $46,000 (23 × $2,000).
Employers that do provide coverage could also face penalties unless the coverage is deemed affordable. Penalties may be triggered if (1) the coverage doesn’t cover at least 60% of covered health care expenses for a “typical population,” or (2) the premium for the coverage exceeds 9.5% of a worker’s income. In such cases, the worker can opt to obtain coverage in an exchange and qualify for the premium tax credit. If any workers receive the credit, the employer must annually pay the lesser of $3,000 per employee for each employee receiving the credit or $2,000 for each full-time employee beyond the first 30 employees.
Some employers may opt to simply pay the penalties because the increased costs due to the broader scope of coverage now required (for example, coverage of dependents up to age 26) may be greater than the penalties, even after consideration of the lost tax benefits (unlike health care benefits, penalties aren’t deductible).
Other employers may try to avoid the penalty by holding employees’ hours below thirty per week so that they are not deemed full-time. The CEO of Papa John’s Pizza recently announced that his franchisees are likely to take that approach. Darden Restaurants, which operates 2,000 restaurants (Olive Garden, Red Lobster, and Longhorn Steakhouse), is currently experimenting with a 29.5 hour work week aimed at avoiding the Act’s employer mandate. Applebee’s and Jimmy John’s are making similar plans, as are, according to the Wall Street Journal, Pillar Hotels and Resorts (owner of 210 franchise hotels), CKE Restaurants (parent of Carl’s Jr. and Hardee’s restaurants), and Anna’s Linens.
Small business tax credits
The Act’s provision providing tax credits to qualifying small businesses took effect in 2010. Businesses with fewer than 25 full-time equivalent employees (FTEs) and average annual wages of less than $50,000 that pay at least half of the cost of health insurance for their employees may qualify.
For 2012 and 2013, the credit is for up to 35% of the cost of group health coverage. The maximum credit is available to employers with 10 or fewer FTEs and average annual wages of less than $25,000. Businesses that exceed either threshold are entitled to partial credits on a sliding scale, and the credit is phased out altogether when a company reaches 25 FTEs or average annual wages of $50,000.
The number of FTEs is determined by calculating the total hours of service for which the business pays wages to employees during the year (but not more than 2,080 for any one employee), and then dividing that figure by 2,080.
Only the employer’s portion of health insurance premiums counts in calculating the credit. And that amount is further limited to the amount the employer would have paid based on the average premium for the small group market in the employer’s state or area, if it’s less than the actual premium. (See the example below.)
For 2014 and later, small businesses must purchase coverage through their state exchanges to qualify, but the amount of the credit may be higher — as much as 50% of their contributions toward the health insurance premiums.
After 2013, businesses can take the credit for only two years, although there is no requirement stating which two years must be chosen. Thus, some planning could be involved in determining when to claim the credit. That is, if the credit will be reduced in a particular year due to one or more of the various limits that apply, the business may be better off waiting until the following year to see if the credit will then be more valuable.
Example: For the 2012 tax year, Company XYZ offers its employees a group health plan with single and family coverage and pays 50% of the premiums. Company XYZ has 10 FTEs with average annual wages of $23,000. Six employees are enrolled in single coverage and four are enrolled in family coverage. Total premiums are $4,000 a year for single coverage and $10,000 a year for family coverage. Average premiums for the small group market in XZY’s state are $5,000 and $12,000, respectively. XYZ’s premium payments ($2,000 for single coverage and $5,000 for family coverage) don’t exceed 50% of these averages, so it computes the credit based on its actual premium payments of $32,000 (6 × $2,000 + 4 × $5,000). XYZ’s tax credit is $11,200 ($32,000 × 35%).
It is not likely the negotiations between the White House and the Congress over the “Fiscal Cliff” will affect any of these provisions of the Act so it is time for businesses to start preparing, starting with a call to their tax adviser.