Health Care Reform And Your Business
How the New Law Will Impact Your Bottom Line
Now that health care reform legislation with a true price tag of nearly $2 trillion is the law of the land, many small business owners are asking how they will be impacted. The answer is to expect higher costs and more mandates.
Mandates. The new law forces small businesses to provide health insurance whether or not they can afford it. Beginning in 2014, employers with more than 50 employees will be required to offer coverage or pay a $2,000 fine per employee if just one employee receives a subsidy to purchase insurance through newly created state health insurance exchanges. A firm’s first 30 employees will be subtracted from this penalty payment calculation.
Even businesses with more than 50 employees that do offer health benefits will face a $3,000 fine for each full-time employee who opts out and receives a subsidy to purchase coverage through an exchange. Part-time employees are taken into account as full-time equivalents, defined as working 30 hours per week. The total employer penalty is capped at the maximum penalty amount it would face if it did not offer any coverage at all. An employer plan must cover a specific set of services to be determined by the government and meet actuarial standards laid out in the law.
It is estimated that nearly 220,000 small businesses employing more than 26 million workers could be subject to the employer mandate. As premiums rise, some businesses will decide that it makes sense to drop coverage and pay the fine. The Joint Committee on Taxation estimates that employers will pay $52 billion over 10 years in penalties for noncompliance. The Congressional Budget Office (CBO) projects that 3 million fewer Americans will be covered through employer plans in 2019.
Exchanges and Tax Credits. By 2014, states are required to offer insurance exchanges where small businesses and individuals can purchase coverage. Through 2016, the exchanges are restricted to small businesses with no more than 100 employees, but states will have the option of limiting pools to companies with 50 or fewer employees. State benefit mandates will apply to plans sold through the exchange.
From 2010 to 2013, small businesses with fewer than 25 employees who on average earn less than $50,000 per year will be eligible for tax credits paying up to 35% of their insurance costs. This credit, however, will do little to blunt new costs for businesses that previously did not provide coverage. For example, a company that pays $40,000 a year to insure its employees will still be faced with $26,000 in unsubsidized costs. The tax credit grows to 50% of insurance costs in 2014, but it disappears completely two years later.
Taxes and Fees. The bill imposes $569 billion in new and higher taxes on businesses and individuals. New taxes on pharmaceutical companies (beginning in 2011), medical devices (beginning in 2013), and the health insurance sector (beginning in 2014) will be passed on to every American in the form of higher prices and premiums. Beginning in 2018, a 40% excise tax will be imposed on employer-sponsored health premiums that exceed $10,200 for single coverage and $27,500 for family coverage.
Upper income earners are targeted for additional tax hikes. Beginning in 2013, the Medicare payroll tax will increase 0.9% for individuals earning more than $200,000 ($250,000 for married couples filing jointly). That equals an extra $2,250 per year in taxes for a family earning $500,000. Further, income thresholds are not indexed annually, meaning that every year more taxpayers will be subject to the payroll tax increase.
Those same households will face a 3.8% Medicare tax applied to net investment income, which captures income from interest, dividends, capital gains, and some profits from investments in partnerships and S-corporations.
In addition, the law curtails several positive features of the health care system designed to promote individual initiative and private sector efficiency. For example, caps on tax-free Flexible Spending Accounts (FSAs), which are used to reimburse some medical bills not covered by insurance, have been cut in half to $2,500, and over-the-counter medications will no longer be considered a qualified medical expense.
Learn more at www.uschamber.com/healthcare.
Originally published May 2010. Reprinted by permission, uschamber.com, May 2010.
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