Lots of small business, I suspect, have ignored the Affordable Care Act, the healthcare law we all better know as “Obamacare.”
But that’s not practical because there are probably at least ten Obamacare facts small business owners and their managers need to know and potentially act on in the coming months.
Mandate Kicks In at 50 Employees for 2016
Here’s the first thing you need to know, for example.
You aren’t required to provide employees and their dependents health insurance if you have fewer than 50 employees. But if you do have 50 or more employees, yeah, you are required to provide them with health insurance.
Note: For 2015, only employers with 100 or more employees are required to have health insurance for employees and their dependents. The 50 or more employees threshold applies to 2016 and later years.
By the way, you count employees using basic “full time employee” math. And a full-time employee is someone who works (basically) 2000 hours a year. (The rules are a little more complicated than this, but you get the idea.)
Just to flesh out the details, then, if you have 49 2000-hour-a-year employees, you have 49 full-time employees. And in this case you fall one employee short of the “50 or more employees” trigger.
Similarly, if you have 99 1000-hour-a-year employees, you have 49.5 “full time equivalent” employees—and here you fall half an employee short.
However, if you have 80 half time employees (which equals 40 full time equivalent employees) and then 10 full time employees, you sit at 50 full time equivalent employees. And now you are required to provide health insurance to employees and their dependents.
Seasonal Employees Often Don’t Count
Even if you break the 50-employee threshold, you aren’t considered to have crossed the “50 or more employees” threshold if your employee count meets or exceeds 50 employees for 120 days or less only because of seasonable employees.
Employers with Same Ownership May Be Combined
A quick point: You can’t split a business with, say, 80 full-time employees into two smaller employers each with only 40 employers and get around the law. Or do anything else like this.
Tax law makes you combine the “smaller” employers with the same ownership into a single employer for purposes of Obamacare. (Tax law also requires you to do this in a bunch of other cases, too, by the way.)
Nearly All ACA Rules Still Apply to Employer Group Plans
An important point: If you provide employees with a group health plan, your plan must still comply with nearly all of the Affordable Care Act’s rules and regulations. If you don’t, you could be subject to a $100 per day per employee penalty.
Just to make this point clear, then, if you have fewer than 50 employees, you don’t have to provide health insurance to employees. But if you do provide health insurance to employees, you have to provide ACA-compliant insurance.
Caution: Where small businesses get into trouble even if they have fewer than 50 employees is when they offer one or more employees some half-baked, free-form health insurance arrangement that doesn’t comply with ACA. (Most of these free-form, ad hoc arrangements surely won’t comply… just so you know.)
Note: For more about this penalty, see our blog post here.
Self-employed Health Insurance Deduction Still Exists
Okay, another quick point: The self-employed health insurance deduction still exists in the Obamacare era. Which is good.
But how the deduction works? Yeah, that’s a little unclear for partners in partnerships and shareholder-employees in S corporations. Sorry.
Coverage Required for Full-time Employees
If you have to provide insurance for employees and their dependents because you employ 50 or more FTEs, you should know that you have to provide coverage for all employees who work more than 30 hours a week or more than 130 hours a month for at least 120 days.
By the way, just in case you’re confused: Yes, the definition of a “full-time employee” for purposes of the determining whether a particular employee needs to be covered differs from the “full time equivalent” employee definition used for purposes of determining whether an employer employs 50 or more full-time workers.
Health Plans Must Meet Minimum Coverage Requirements
If you do have 50 or more employees, any health plan you offer as an employer must meet a “minimum coverage” requirement. This means you need to offer at least bronze-level ACA-compliant health insurance. A bronze-level insurance policy should cover at least 60% of an employee’s healthcare costs.
If you have more than 50 employees and you don’t meet the minimum coverage requirement, you will be penalized with an employer responsibility payment. The penalty formula is complicated, but roughly speaking you will pay $2,000 per employee minus $60,000.
For example, if you have 70 employees, you pay $80,000 because 70 employees x $2,000 – $60,000 equals $80,000.
Health Plans Must Meet Affordability Requirements
If you have 50 or more employees, any health insurance you offer employees must also be affordable. Per the law, “affordability” means an employee can’t pay more than 9.5% of his or her annual household income for his or her health insurance.
As a practical matter, just to make this point clear, someone who makes $10 an hour can’t pay more than $.95 an hour for their health insurance.
If insurance costs more than 9.5% of the employee’s annual household income, an employer needs to subsidize the insurance to meet the affordability requirement.
Two related points here: First, employers won’t really know what an employee’s annual household income equals. (An employer would only know the employee’s wages earned at the employer’s place of business.) Second, the affordability requirement hits employers of low-wage employees much harder than employers of high-wage employees.
If you have 50 or more employees and you don’t provide affordable healthcare, you will be penalized with an employer responsibility payment. Again, the penalty formula is complicated, but roughly speaking you will pay whatever amount is less: $2,000 per employee or $3,000 for every employee who gets a premium subsidy for their health insurance.
For example, if you have 70 employees but only 2 employees buy their insurance through a state exchange and get a premium credit, your penalty equals $6,000 because 2 employees x $3,000 equals $6,000.
Note: The IRS will send you a bill for your previous year’s responsibility payment shortly after the year ends.
Small Businesses and Self-insurers Need to File New Returns
Small businesses need to report on health insurance they provide to employees on employee’s W-2s starting in 2015 (which means the W-2s small businesses provide in early 2016 need to include this data).
You can refer to this IRS article for more information on this: click here.
If you are subject to the employer shared responsibility penalties (for minimum essential coverage or for affordability) or you’re operating a self-insured health plan, you will also need to file either 1094-C and 1095-C returns or 1094-B and 1095-B returns.
You use the 1094-B/1095-B returns if you’re operating a self-insured health plan and the 1094-C/1095-C returns if you’re subject to the employer shared responsibility penalties.
Note: See this IRS brochure for more information: http://www.irs.gov/pub/irs-pdf/p5196.pdf
Tip: We understand that not all of the big payroll service companies will prepare these forms for you and expect few CPA firms to prepare them for you, so you’ll want to verify this reporting requirement doesn’t drop between the cracks. For example, we believe ADP and Paychex will provide these services, but it appears at this writing that QuickBooks won’t. And we don’t plan to offer this service to our clients at this point.
Small Businesses Tax Credit May Work for Some Employers
One final thing you should know about is the ACA’s small business tax credit for health insurance purchased for employees.
In a nutshell, if an employer has 10 or fewer employees making on average $25,400 or less per year, you get a 50% credit for premiums paid for two years.
Example: You have ten employees making on average $25,400. For each employee, you pay half of a $200 a month insurance premium, or $100 a month
The credit in this case equals $500 a month, calculated as 10 employees times $100 a month times 50%.
If you have more than 10 employees or your average wages exceed $25,400, the credit phases out. At 25 employees or at $50,800 of average wages, you don’t get any credit.
More Detailed Information is Available
Earlier this spring, we published a monograph (downloadable as a pdf) for other CPA firms trying to help their clients deal with the Affordable Care Act’s complexity. If you’re a client of our CPA firm, we are happy to provide you with a complimentary copy of the monograph. Just call us.
If you aren’t a firm client but rather are a CPA, know that we’d be happy to sell you a copy of the monograph for $100. Roughly 60 pages in length, the monograph outlines everything you need to know in order to advise small business clients on the elements of the Affordable Care Act they must know. The monograph also includes useful Appendixes which provide sample health plans, sample W-2s that show how ACA-compliant W-2 should be prepared, sample client letters, and sample handouts you can use to help clients learn the new law. (Need more info? Click here.)
In summary, this relatively short whitepaper should save tax practitioners and their clients hours of learning time by describing the ACA issues that one needs to understand if one operates in the world of small business.
Money Back Guarantee
As with all of our publications, the Small Businesses and the Affordable Care Act (Obamacare) monograph comes with a money-back guarantee, so if you purchase it and then for whatever reason find it’s not what you need or what you expected, simply email us your refund request. We will happily issue you a refund, no questions and no hassles.
Hi Steve,
Just so i understand correctly, i have a small employer client that offers group health insurance thru a national private carrier in an s-corp for 7 employees and pays at least 50% of the total monthly premium, as the CPA I am not required to report anything at year end other than the total amount of health insurance paid in 2015 on form W-2, correct?
Health insurance issuers or carriers are required to file Form 1095-B for most health insurance coverage if my thinking is correct.
Greatly appreciate all the info and education you provide on this site.
Hi Juan,
For your client, you don’t need to worry about anything other than getting your W-2s prepared right… correct.
BTW, some of our colleagues have clients with non-ACA-compliant group plans… and those clients are in trouble.
Does Juan’s 7 employee client have to report the cost of health insurance on the 2015 w-2’s ?
No. Or more accurately maybe, “not yet.” Only large employers (firms employing more than 250 employees) currently need to report health insurance benefits on employee W-2s.
BTW, that said, it’s sort of nice to report this info to employees anyway since it’ll probably automatically flag the employee’s tax return as one where the shared responsibility penalty doesn’t get levied. E.g., if we see a big health insurance value on someone’s W-2 and we’re preparing the person’s tax return, we pretty much know they have health insurance.
Thanks for answering my question Steve.
In regards to your second paragraph this is why i posted what i did on another one of your earlier blogs about the ACA and CPA responsibility with the additional section of my 2014 engagement letters about not being responsible for any and all ACA non compliance issues.
I have my business clients initial underneath my new ACA paragraph in addition to signing the overall engagement letter.
I also require clients to initial the portion of my engagement letter about having or not having foreign bank accounts and assets.
Your foreign trust blog was another eye opener for sure.
With penalties regarding these 2 areas being potentially staggering i cannot protect myself enough, i hope other CPA’s are doing the same.
I have three employees, one who works 32hrs per week. I do not offer health insurance. Does the ACA reporting apply to me?
Yes, it does. But with three employees, you don’t need to offer insurance. However, as blog post notes, if you do offer insurance to employees, you need to comply with law.
BTW, I don’t understand what you mean by “does ACA reporting apply to me?”… You won’t have anything to report if you don’t provide insurance to anybody.
Hi Steve,
Happy post tax season, hope you had a nice summer.
Now its time for SSARS 21. 🙁
Quick question…
If a < 2% shareholder of an s-corp purchases health insurance on an exchange and receives NO subsidiary are the premiums still an above the line deduction?
I attended a seminar recently and was told health insurance purchased on an exchange did not qualify for the above the line deduction, i've looked online for additional confirmation, no luck as of yet.
Does a subsidiary vs non subsidiary matter?
Thanks
Hmmm. I think a shareholder with less than 2% of the stock doesn’t qualify for the self-employed health insurance deduction, so seems like that’d be first issue you’d maybe confront in scenario.
Also, for a less than 2% shareholder, it seems like you’d just deduct on 1120S return–which would mean you get the deduction there–and so don’t need on the 1040…
Thanks for the reply Steve,
I just realized i screwed up in my post, it should have been for a GREATER than 2% shareholder, not less than.
Hi Steve,
I have a client that is an s-corp that has 7 employees, of which 2 are greater than 2% shareholders. They do not offer health insurance to their employees. But in the past they have been reimbursing the 2% shareholders for their private policies and adding the costs to their wages. Fully taxable in boxes 1, 3 & 5 on W-2. With the recent changes taking effect in 2015, is this practice discriminating against their other empoyees? Or is it just a bonus that the shareholders happen to use to pay their insurance premiums?
I think the way you’re doing it is correct until IRS tells us otherwise. BTW, the way you’re doing it is the only way I can see that shareholders get self-employed health insurance deduction…and ACA did not delete the loophole.
Steve,
My company has 49 full time employees and 7 partners that are also working total 56 employees. All partners are 2% or greater S Corp.
1- Do I count the partners as employees to determine if we are a Small Group or a large Group?
I think you have 56 employees. So you’re going to need to provide ACA compliant health insurance starting in 2016.
Steve, regarding my comment above, if the health insurance plan is deemed to be established under the s-corp since it paid for greater than 2% shareholder premiums and the non shareholder employees are not covered, wouldn’t this be a ACA discrimination violation subject to the $100 a day penalty?
I don’t know. And I’m not sure (now at the time I’m replying to your comment) that the IRS knows either…
I would advise clients without ACA compliant plan for other employees to add the health insurance to boxes 1, 3 and 5 of the shareholder-employee’s W-2 and then take as a self-employed health insurance deduction on the shareholder’s 1040.
BTW, we’ve been recently talking among CPAs in office about case where employer *does* have an ACA compliant plan for employees, but doesn’t cover shareholder-employees under that plan because shareholder-employees have another plan. I actually think until we get more guidance from the IRS that you could in this case treat the shareholder-employee health insurance in the old, pre-ACA manner… meaning you’d add health insurance to box 1 but not to box 3 and 5 of the W-2… and then that you’d take the self-employed health insurance deduction on shareholder’s 1040 return.
My logic here is that ACA didn’t eliminate the self-employed health insurance deduction so you do get to take the deduction. And further that the preceding approaches are the obvious and safe way to handle the bookkeeping.
Thanks for the reply Steve, just concerned about any health insurance reimbursements coming out of an s-corp that doesn’t offer group health insurance to all employees.
In my case i have clients (2% or more shareholders) with non covered employees paying their health individual premiums personally since i do not want the s-corp involved with any issue that could be considered a discrimination item.
So I think in that case, you basically say that some of the shareholder-employee’s wages are for reimbursing them for their health insurance… and you flag that amount on the shareholder-employee’s W-2 in box 14.
However, if you have a situation where all the non-shareholder-employees get or could get an ACA compliant plan from employer, then I think in that case, you can still do the “old-style” bookkeeping for the shareholder employee as per the old notice.
Thanks so much, Steve for the helpful info. I really appreciate it and will share your blog wherever I can. Happy holidays!
Happy Holidays to you too!
Hello! I’m leaving my job to join my partner at his company. I’m worried about my own health insurance, having always had a job with benefits. He’s currently on my insurance plan.
His company is listed on CONCORD as a Domestic Limited Liability Company with himself as the Sole Owner. He has a handful of part-time employees. I’ll probably be joining as his first full-time employee.
What are our options for insurance for ourselves at this point?
Thanks!
Scott
Hi Scott, So I assume since you’re becoming an employee that by “partner” you mean a domestic partner and not a business partner in the LLC. This response is based on that assumption…
A single owner LLC is probably treated as a sole proprietorship typically so the member/owner just uses the usual rules for a sole proprietor. Basically, unless the business has a health insurance benefit for employees, that means the owner buys his own insurance (for him, his spouse and any dependents) and claims that insurance as a deduction using the self-employed health insurance deduction.
I don’t think you can get coverage under that plan, though. As noted, you need to either be a spouse or a dependent.
So I would think the options the LLC owner wants to look at are maybe setting up a health insurance plan for employees. Something like the qualified small employer HRA might be worth considering. More info here:
https://evergreensmallbusiness.com/qualified-small-employer-health-reimbursement-arrangement-rules/
BTW, if the LLC is treated as an S corporation for tax purposes, the accounting works a little differently, but you get the same place:
https://evergreensmallbusiness.com/payroll-accounting-rules-for-s-corporation-shareholder-health-insurance/
A final question is what you do for your health insurance if you don’t get coverage through the LLC as your new employer… That’ll need to be a regular individual policy…