Really Simplified Guide to Small Business Obamacare Rules

A couple of weeks ago, we did a blog post for tax accountants about how the Affordable Care Act rules apply in 2016 to small businesses. When Bob Jennings, a well-known and widely-respected CPA who teaches tax law to other CPAs, complimented the post in a LinkedIn forum, we were honored… but we also realized that, gosh, maybe we need a little simpler piece about the small business Obamacare rules for the small business owners who actually need to make the decisions about a small business’s health insurance programs.

If you’re interested in the blog post that Bob referred to, click here. (The other blog post, by the way, provides the nitty gritty details the post you’re reading right now lacks.) But here’s what you really need to know and act on quickly…

Step 1: Cancel Any Employer Payment Plan

You need to cancel any employer payment plan (EPP) where you give money to employees which they then use to buy individual health insurance. Yes, for decades small businesses used this approach. And it worked pretty well. But you can’t do this anymore. Sorry.

We’ll talk about the penalties you risk if you continue this practice in a minute…

But let us say this: We think you need to be careful of anything that smells like an employer payment plan. For example, if you used to pay $250 a month for Tom’s insurance, $300 a month for Harriet’s insurance and then $150 a month for Dick’s insurance, we think it’s risky to stop doing that and then simultaneously add $250 a month to Tom’s check, $300 a month to Harriet’s check, and $150 a month to Dick’s check unless you’re really careful and follow some essential rules to show that you truly have “completely abandoned” the old EPP:

• Don’t recommend they use the extra money to buy health insurance, tell them to do whatever they want with it.
• Don’t recommend any particular health insurance plan to purchase.
• Don’t give the extra part of the paycheck any special tax treatment when you enter it in your payroll software.

Note: For 2017 and later years, you can use a qualified small employer reimbursement arrangement. (Click that link for details.)

Step 2: Cancel Any Healthcare Reimbursement Arrangements

You also need to cancel any healthcare reimbursement arrangements (sometimes also known as Sec. 105(b) plans) unless you’ve paired the HRA with a true small-group health plan. In the past, you could sometimes also get these arrangements to work as a way to provide for health insurance premiums and more commonly pay for uncovered out-of-pocket and copay expenditures. But you also shouldn’t do one of these any more except in limited circumstances (ask your tax adviser).

By the way, a word about the penalties of not taking steps 1 and 2: The risks of you using an employer payment plan or a healthcare reimbursement arrangement are shockingly high. You could be fined a $100 a day per employee. So, just to do the math, if you have five employees and get hit with the penalty, you’re looking at about $182,500 in penalties for a year of breaking the rules.

That’s 5 employees… each triggering a $100 penalty or $500 a day in total… for 365 days. Ouch.

Tip: A quick point: If you’ve been using something like a healthcare reimbursement arrangement to jack your small business’s tax deductions, you should know that there are probably other, lower risk ways to do this.

The plain fact is, federal and state tax laws provide small businesses with dozens of powerful tactics for cutting taxes.

If you want information about how to take advantage of these “loopholes,” consider our popular downloadable ebook “Small Businesses Tax Deduction Secrets“.

Step 3: Don’t Worry about S Corporation Shareholder-employees… Yet

If your business is an S corporation and you were correctly handling your shareholder-employee health insurance before—which means following the rules described in IRS Notice 2008-01—you don’t need to change anything.

The pre-Obamacare accounting still works the same way. But you need to be careful and alert because the IRS may change the accounting for your situation at some point in the future.

Note: A shareholder-employee’s health insurance is treated as wages and subject (potentially) to income taxes but not to payroll taxes like Medicare and Social Security. But usually, the health insurance becomes a “self-employed health insurance” deduction on the shareholder’s individual tax return.

Step 4: Plan on Your State’s Small Business Exchange Failing

An awkward point because it sounds political—but actually is not political.

Ever since the IRS and Department of Labor effectively banned EPPs, the clean way to provide health insurance to a small business’s employees has been to let employees use the state’s small business exchange. The mechanics of how you did this required a little bit of thinking. But in a sense, all an employer had to do was pick the level of “metal” like bronze or silver or gold or platinum that the employer wanted to pay for and then let employees sign up.

However, because of all sorts of reasons best left to other people to sort out, many SHOP exchanges don’t appear to be stable yet. In Washington State, for example, SHOP won’t be available in 2017 in most counties. For this reason, we think you ought to check now on whether your state’s SHOP exchange will operate after this year. And we think you ought to plan for the very real possibility that your state’s SHOP exchange might be unavailable in the future.

Step 5: Consider Going Bare

While Obamacare understandably sets an expectation that employers will provide for employee’s health care, we think your small business probably needs to consider going bare. Sorry.

For the record, this is the choice that, regrettably, we think our small CPA firm will have to select given that United Healthcare, the sole provider for our state’s SHOP exchange in most Washington counties, decided to withdraw from the state for reasons described here.

Yes, you can possibly set up a non-SHOP-exchange small group. But that choice seems impractical. Note that the whole reason the SHOP exchanges were created by Obamacare was that the SHOP exchange option was supposed to be the workable way for super-small employers to provide insurance without too much administrative burden.

Tip: If you are operating as an S corporation, you want to make any decisions about health insurance in light of how health insurance for shareholder-employees works and shareholder-employee salaries.

You can get more information about how to set shareholder-employee salaries, including the effect of health insurance on wages and pensions, in our “Setting Low Salaries for S Corporations” e-book.

Step 6: Consider Writing a Letter to Your Elected Representatives

A crazy idea? Can I suggest you consider writing a letter to your U.S. representative (click here to get that mailing address) and your state’s two U.S. senators (click here to get those address)?

There’s every tendency to write some long-winded complaint if you do this, of course. If I wasn’t trying to be on my best behavior here, who knows what I’d say. But as a practical matter, what I’m thinking is something a bit more “how to” in nature like this:

Dear Senator Murray, Senator Cantwell, and Rep. Del Bene,

While the continuing political discussion about the Affordable Care Act includes many points of view from all over the political spectrum, I write to ask you to work toward fixing an outcome which probably no one anticipated and surely no one involved wants.

As you may know, in Washington State as in many other states, the Small Business Health Options Program exchange (also known as the SHOP exchange) essentially fails at the end of this year because the only insurance company providing coverage in most counties is exiting the state. This means that small businesses like my own will no longer have a practical option to provide employees with health insurance.

Further, the Affordable Care Act prohibits small businesses from paying for employee health insurance through previously acceptable practices such as Employer Payment Plans as described in Revenue Ruling 61-146, and Healthcare Reimbursement Arrangements allowed an IRC Section 105(b).

I understand that action is tricky. But no matter what your political point of view, I respectfully ask you to consider the impact and hardship suffered by small business employers in your state when the Affordable Care Act sets up an expectation that employers provide health care, then prohibits long-used mechanisms for providing healthcare, and then fails to provide a functioning replacement option.

Sincerely,

Stephen L. Nelson, CPA

In addition, if you’re a small business owner in Washington State, definitely consider making a public comment to the Exchange’s board explaining what you need from them when it comes to employee health insurance. They want to hear from Washington small business owners so they understand what you guys need from them, and what you don’t.

Finally, if you’re a Washington State small business owner, consider writing to your legislator (you can find out who your state legislators are here) and explaining to them what’s happening to your small business as it relates to employee health insurance.