So the first thing I need to say, before you jump to any wrong conclusions, is this: This blog is only about the nuts and bolts of you running a small business. We cover “how-to” stuff here. Not politics.
Yes, of course, the politics of a subject like the Affordable Care Act (more popularly known as Obamacare) merit continued careful discussion. And, sure, if participants want, that discussion can be spirited.
But that’s not what we want to do with this blog and that’s not what I want to warn you about in this particular post.
Rather I’m concerned about a very specific risk that small business owners need to address now: The penalties baked into Obamacare that many (most?) small businesses need to actively work to avoid.
And note, too, that the time clock is running down. You only have until the end of June to sidestep serious trouble.
Note: If you’re only interested in our monograph about the Affordable Care Act, just scroll down the page.
The Big Problem for Small Businesses
Okay, so probably you already know this. Under the Affordable Care Act (ACA), most small businesses do not need to provide health insurance to employees.
The actual cut-off? Employers with fewer than 50 employees don’t under the law have to provide this fringe benefit.
But here’s the rub which too many people don’t understand: If a small business does provide health insurance for its employees—even if the small business isn’t required to provide health insurance—the employer must provide insurance that complies with the Affordable Care Act.
If the employer provides insurance that doesn’t comply, the penalty is $100 per day per employee. That adds up to $36,500 per year per employee.
I say this without exaggeration: These penalties are so catastrophic that surely they will kill many small businesses.
Example: If some struggling small business owner pays the individual health insurance premiums only for two single unmarried employees, but then has (say) three other married employees who get insurance through their spouses’ employers, that’s a non-compliant healthcare plan. And very possibly the business owner can be assessed $36,500 in penalties for all five employees. That’s $182,500 in penalties.
Example: If some well-meaning small business owner feels he can’t provide real health insurance and so provides $200 or $300 a month in cash to each of his ten employees so they can buy their own health insurance, again, that’s a non-compliant healthcare plan. And very possibly the small business owner can be assessed $36,500 in penalties for each of the ten employees. You can do the math too, of course, but I still want to write the number down here. That’s $365,000 in penalties.
Why Small Businesses Must Act ASAP
The Obamacare penalties have been in the law since the beginning, by the way. But originally they weren’t going to be effective until 2014.
And then, for small businesses, they actually didn’t even matter until now because early this year, the IRS issued a notice saying that it would temporarily not assess the penalties (see Notice 2015-17).
But that period of temporary relief ends June 30, 2015.
With the exception of multiple-employee S corporations (which are still waiting for guidance and so are still being granted temporary relief), small business employers need to make sure they are not violating the market reform rules when the grace period ends on June 30th, 2015.
Before that date, small businesses need to get with the program and figure out a plan for health insurance that complies with the new market reform rules.
By our analysis, after June 30th small businesses only have three options when it comes to providing their employees health insurance:
- They can purchase health insurance through the SHOP exchange
- They can hire a broker or insurance agent to find them an ACA-compliant group health plan outside of the exchange
- They can “go bare,” by not offering any of their employees health insurance at all
No matter how much small businesses or their employees might wail and gnash their teeth, there are no other options.
Need More Help with the Small Businesses and the Affordable Care Act?
If you’re a tax practitioner advising small business clients about how to navigate the treacherous waters of healthcare reform, you may be interested in our monograph, Small Businesses and the Affordable Care Act, which is available for $100 and which includes sample forms, client letters and handouts you can use for explaining the mechanics of the Affordable Care Act to your clients..
We think this short whitepaper (roughly 70 pages in length) should save tax practitioners several hours of learning time. For example, it describes the ACA issues that you need to understand for your small business clients in detail and is richly footnoted with hyperlinks to primary source authorities. The monograph also provides a boilerplate healthcare policy document practitioners can use for their clients, and it supplies example W-2 forms to show how these items should be prepared given the ACA. We’ve also included sample client letters and longer “handouts” you can use to communicate with clients.
If you’re ready to buy you can use this button below. Or if you need more information, click here.
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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.
In your first example, what makes this non-compliant? Is it because not everyone was offered insurance? To restate, did this example employer just decide to provide insurance to the two single people and did not even offer it to the married individuals who have insurance through their spouses? If that is true, my assumption is that if everyone was offered insurance and the three married people declined because they had coverage, that would be compliant. Thank you for your great blog.
Good questions, and I tried not to be absolute in my description, tried to be a little wishy-washy… but I would worry on behalf of any clients in a situation like that described in example #1 that (a) individual plans they’re buying maybe aren’t ACA-compliant, that (b) the arrangement itself isn’t an ACA-compliant group plan because it’s obviously not, and that (c) the non-covered employees are being discriminated against. Any of these flaws, it seems to me, may trigger penalties.
BTW I think we all want to think about this stuff in the same way that probably we all understand pension plans. In order for a pension plan deduction to work and in order for the plan to not discriminate, the precise rules need to be followed. And if a small business violates the rules–even if the small business has only good intentions and nobody arguably gets hurt–both the deduction and the plan are in jeopardy.
This is way the ACA penalties work, too, sort of…
What’s especially dangerous about the ACA penalties, however, is that you’re not talking about losing deductions… you’re talking about gigantic penalties. Business-killing penalties I would argue.
Thanks Steve.
I would like to use your blog on my websites and also email blast it to about 1,000 individuals and small businesses.
Any chance that can happen?
Hi Jerry, I’m not sure I understand your question… but if you want to include links to blog pages from your website or in an email you send your clients, sure, that’s fine.
We got a question via email from a reader who wanted more clarification on how the ACA affects S corporations with more than one employee. Since we realized this was a question many other readers would have, we thought it would be appropriate to add a more detailed treatment of the issue as a comment on this post:
The question: how does an S corporation with more than one employee handle the accounting for health insurance for its >2% shareholders? The answer: at this point no one, not even the IRS (by its own admission) knows.
In Notice 2015-17 the IRS said that it would study the issue more, and until the IRS issues specific guidance on this issue, S corporations can continue to account for their shareholders’ health insurance as they’ve always done in the past. In addition, the notice points out that S corporations with one single employee don’t have to worry about the new market reform rules, since the rules apply to group health plans and there is no such thing as a group health plan of one.
Hope this helps!
Hi Steve,
Thanks for another great blog.
All my business engagement letters (now 7 pages long) as of 2014 have a standard paragraph which basically says……
“I CPA am not responsible for any ACA penalties or non compliance issues. It is your (client) responsibility to consult with a professional health insurance agent to acquire an ACA compliant health insurance plan based on your business needs if you wish to obtain offer health insurance to employees.
I only cover the basic rules such as no reimbursements allowed and W-2 reporting.
We have a small Subchaper S with 15 employees (including two couples – 4 individuals that own the business).
One of the couples is retired military and has health insurance via the military. The other owner/couple pay their health insurance and is reimbursed by the S-Corp. The reimbursement is reported as taxable income on their W-2 and they deduct the expense as self-employed health insurance above the line on their personal returns. The health insurance coverage of the policy is compliant under the HCA. No other employees are offered health insurance.
Is it your interpretation that this business would be subject to fines for non-compliance?
I would worry that you might be subject to the penalty, yes… so with 11 employees who aren’t shareholder-employees, you’re looking at about a $400,000 penalty. Sorry.
Do you know if there has been an update yet for multiple s corp owner-employees? How would one find out if there has been one. Notice 2015-17 says it’s valid until end of 2015 or further guidance has been issued. I don’t generally have time to check on this monthly!
Also – can a 2 owner s corp reimburse just one of the owners for their health plan, and not the other – and thus make it a one participant plan? Or does that break other rules?
No additional guidance has been provided at this point. Sorry.