ObamaCare

Employer Requirements and Tax Implications

Section I: Small Employer Tax Credits

Can a small employer receive federal funding assistance under the Patient Protection and
Affordable Care Act (PPACA)?

Yes. Under PPACA, small employers offering health insurance coverage to employees enjoy several benefits,

including a new income tax credit. However, certain criteria must be met as described below.

How does the PPACA define a small employer for purposes of qualifying for a tax credit?

Eligible small employers are defined as those employing 25 or fewer full time equivalent employees with average

annual wages of less than $50,000 and contributing to employees’ qualified health care coverage a uniform

percentage, no less than 50 percent, of the premium cost. These employers are eligible for a partial tax credit.

Employers who pay annual wages greater than $50,000 are not eligible for the tax credit, as the purpose of the tax

credit is to incentivize small employers to provide insurance to employees earning low wages. Employers can

receive the full amount of the tax credit percentage if they employ 10 or fewer full time employees and pay an

average of $25,000 or less in annual wages. Starting in 2013, the payment of premiums must be made through a

state health Insurance Exchange to constitute qualified health plan coverage and receive the federal funding

assistance.i If an employer chooses to purchase insurance outside of an Exchange, that employer will not be eligible

for the tax credit.

When does a small employer get a tax credit to help subsidize the premiums?

In keeping with PPACA’s stated goal of providing health care to all Americans, the Government Accountability

Office (GAO) closely examined the small business tax credit. The report states that while “about 17 percent of

employers with less than 10 employees who earn low wages offered health insurance to their employees in 2011,

about 90 percent of employers with 100 to 999 employees who earn low wages did.” To remedy this problem,

PPACA offers a tax credit to eligible small employers, as described above. If an eligible employer meets the

specified criteria, the employer can then “claim the credit as part of the general business tax credit and use it to

offset actual tax liability. If they do not have a federal tax liability, they cannot receive the credit as a refund but

may carry the credit forward or back to offset tax liabilities for other years.” Employers that claim the credit are

also permitted to deduct health insurance expenses on any tax returns minus the amount of the credit. The credit may

be claimed for up to six years; initially, the tax can be claimed from 2010 through 2013, and if insurance is

purchased through an Exchange, an employer may claim the credit for an additional two years.

Regarding “for-profit” companies, those employers that meet the requirements can qualify for an income tax credit

that is equal to 35 percent of the employee’s annual premiums that the employer pays for the years before 2014 and

will increase to 50 percent after 2014. For “not-for-profit” organizations, those employers are eligible for a 25

percent tax credit computed in the same manner as described above. For more information on this income tax credit,

click here.

The income tax credit is subject to several limitations. Employers are only eligible for up to 50 percent of an

average premium costs for the surrounding area.ii Also, the credit is effectively phased out as additional employees

are hired, beginning with the eleventh employee.iii Finally, the amount of the credit decreases as the average wage

paid by the employer raises above $25,000 annually.

Do large employers get help funding employer-sponsored coverage?

No. Under PPACA, a premium subsidy program is not established for a large employer. In fact, a tax penalty may

be assessed against a large employer as described below.

How does the PPACA define a large employer?

A large employer is defined as employing at least 50 full time equivalent employees in the previous calendar year,

for at least 120 days.iv A full time employee is defined as one who works at least 30 hours per week. Part time

employees are also added into this calculation, by adding together the total hours worked by all part time employees

and dividing that total by 120.v

What is the tax penalty that may be assessed against a large employer?

Perhaps the most important requirement that PPACA imposes on large employers is the requirement that large

employers must offer medical coverage to its full time employees beginning in 2014.vi If a large employer fails to

offer appropriate coverage, that employer may be potentially liable for a tax penalty.

What triggers the tax penalty for large employers?

The tax penalty can be triggered in one of two ways:

1) If the employer does not offer coverage, and at least one of its full time employees claims the premium

assistance tax credit, or

2) The employer does offer coverage, but the coverage fails to meet the minimum essential coverage

threshold and one full time employee is certified to claim the premium tax credit.vii

What is the minimum essential coverage threshold?

In the first issue of this four part series, we discussed the concept of minimum essential coverage. As a brief recap,

minimum essential coverage can be obtained through a government sponsored plan, an employer-sponsored plan,

plans obtained in the individual market, grandfathered health plans, and any other health benefits coverage

recognized by the Secretaries of HHS and the Treasury.

How much will the tax penalty cost?

The monthly penalty a large employer is obligated to pay for not offering any coverage is equal to $2,000 divided by

12, times the number of full time employees employed during the applicable month, minus the first 30 full time

employees. Only full time employees (not full time equivalents) are counted for purposes of determining the

penalty.

A large employer who offers coverage that does not satisfy the minimum value or minimum affordability threshold

is assessed a penalty of $3,000 divided by 12 times the number of employees that qualify for the tax credit. The

purpose of the tax penalty in this case is to reimburse the federal government the cost of the premium assistance tax

credit afforded to the employee.

Section III: Employer W-2 Reporting Requirements

What is the W-2 reporting requirement that the PPACA establishes?

An additional requirement imposed on employers by PPACA concerns reporting the cost of employer-sponsored

healthcare coverage on employees’ W-2 forms for all tax years starting on or after January 1, 2011.viii This

IRS.

Who must report the cost of employer-provided health insurance?

The reporting requirement is applicable to all employers that provide group health plans, including federal, state, and

local governments, and religious organizations. The Notice provides two exemptions.

An employer need not report if:

· The employer was required to file fewer than 250 Forms W-2 for the preceding calendar year;

· The employer is a federally recognized Indian tribal government.

What exactly must an employer report?

Guidance issued by the IRS clarifies that employers must report the aggregate cost of applicable employer-

sponsored coverage.ix Key terms include:

Applicable employer-sponsored coverage is defined as “the total cost of coverage under any group health

plan made available to the employee by an employer that is excludable from the employee’s gross income,

or would be so excludable if it were employer-provided coverage.”x

A group health plan is defined as “a plan (including a self-insured plan) of, or contributed to by, an

employer (including a self-employed person) or employee organization to provide health care (directly or

otherwise) to the employees, former employees, the employer, others associated or formerly associated

with the employer ins a business relationship, or their families.”

What costs are excluded from the aggregate reportable cost?

Several costs are not included in the Aggregate Reportable Cost of the applicable employer-sponsored coverage.

The following is a list of those costs:xi

• The amount contributed to any Health Reimbursement Account (HRA), Health Savings Account

(HSA), or Archer MSA

The amount of any employee contribution to a health flexible spending arrangement (provided,

however, that any employer contributions to such an arrangement, such as in the form of flex credits,

may need to be reported as described in more detail below)

• An employer’s contributions to a multiemployer plan

• Costs of coverage under a stand-alone dental plan or a vision plan

• Costs of coverage provided under a self-insured group health plan that is not subject to any federal

continuation coverage requirements

• Costs of coverage provided by the federal government, the government of any state or political

subdivision thereof, or any agency or instrumentality of any such government, under a plan maintained

primarily for members of the military or for members of the military and their families.

When should an employer report the cost of the health benefit on the employee’s W-2?

The reporting requirement will now be effective for January 1, 2013 for W-2 forms referencing tax year 2012 and

thereafter. For an employee who terminates before the end of the calendar year, the terminating employee’s W-2

must reflect the cost of the health benefit plan coverage for the employee. Otherwise, employers must include the

cost of an employee’s health benefit on the W-2 that must be postmarked no later than January 31, 2013 and for

each succeeding year thereafter.

As we stated above, this is interim guidance. The federal government will issue final rules at some time in the

future.

Section IV: Employer Deductions for Retiree Drug Coverage

How does the PPACA limit employer deductions for retiree drug coverage?

The final PPACA provision relating to employers concerns the tax-free subsidies afforded to employers who provide

drug coverage for their retirees.

Prior to January 1, 2013, employers are authorized by the Medicare Modernization Act of 2003 to a tax-free subsidy

of 28 percent of the costs they incur to provide a prescription drug benefit program to their retirees. Employers are

also permitted to deduct any outlays made with these subsidies to provide retiree drug coverage for income tax

purposes. This legislation was intended to provide relief by reducing the coverage gap, known as the doughnut hole,

for individuals in the Medicare Part D program.

Under PPACA, employers will still receive the tax-free subsidy after 2012, but they will no longer be able to deduct

on their federal tax returns the cost of the prescription drugs to the extent reimbursed by the federal subsidy.xii

What type of economic impact will this have on businesses?

The economic impact of this provision should not be underestimated. Even though this provision does not become

effective until 2013, its impact on a company’s bottom line could be significant. A Towers Watson study estimates

that the total cost for U.S. corporate financial statements would be $14 billion if companies do not shift their retired

employees out of drug subsidy plans. An American Benefits Council study concluded that between 1.5 million and

2 million retirees would have their drug coverage terminated because employers would be forced to shift them into

Medicare Part D coverage.

This provision may have an unanticipated impact of losing the federal government a substantial amount of money.

James A. Klein, president of the American Benefits Council, explains, “The $4.5 billion figure only looks at the

revenue from the tax; it does not take into account the increased government outlays as retirees are moved to the

Medicare Part D program. As more retirees are moved, the revenue collected will go down and the government

expense in Medicare will go up.”

i See IRC § 45R(e)(2)