Shawn has a masters of public administration, JD, and a BA in political science.
The Patient Protection and Affordable Care Act
Calvin is a human resources specialist in charge of benefit administration. Part of his job is to ensure that his company will be in full compliance with the Patient Protection and Affordable Care Act (ACA), which was signed into law by President Obama in 2010. The Act is a series of healthcare reforms that are to take effect over a period of years, including an expansion of Medicaid, an individual mandate for people to obtain coverage, creation of health care exchanges for the purchase of health insurance and a prohibition of denial of coverage for preexisting conditions. The Act also has some important implications for employers like Calvin's. Let's take a look.
The first thing Calvin needs to figure out is what his company's obligations are under the ACA. Calvin discovers that no employer is legally required to offer health coverage to employees. However, if a business is large enough, it may have to make a payment to the government called an Employer Shared Responsibility payment if it does not. On the other hand, if an employer is small enough, it may be entitled to tax credits if it provides employees health insurance benefits. Calvin decides to dig deeper.
Employer Shared Responsibility Payment
Calvin reviews the current regulations regarding the Employer Shared Responsibility provisions under the ACA to determine if his company risks being affected. Calvin notes that the provisions are not effective until January 1, 2015. At that time, a company will be subject to the Employer Shared Responsibility provisions if it generally employs 50 full-time equivalent employees. This rule applies to for-profit, non-profit and government employers.
Calvin has no clue what a full-time equivalent employee is, so he does some research. He finds out that it means 50 full-time employees, or a combination of part-time and full-time employees whose total average workweek hours equal the workweek of 50 full-time employees. Full time is considered 30 hours per week under the Act.
Basically, this means as long as the hours worked by the employees of the company equal the hours worked of 50 full-time employees, then the company is subject to the payment provisions. For example, if a company employs 30 full-time employees and 40 part-time employees who each work at least 15 hours on average, then the company is basically utilizing 50 employees worth of full-time work.
If an employer employs less than 50 full-time equivalent employees, then the employer is not subject to the Employer Shared Responsibility payment. Calvin's company does employ more than 50 full-time employees, so he has to continue his exploration of the ACA.
According to the Internal Revenue Service, 'if these employers do not offer affordable health coverage that provides a minimum level of coverage to their full-time employees (and their dependents), the employer may be subject to an Employer Shared Responsibility payment if at least one of its full-time employees receives a premium tax credit for purchasing individual coverage on one of the new Affordable Insurance Exchanges, also called a Health Insurance Marketplace (Marketplace).' In other words, if the government has to subsidize an employee because a covered employer doesn't provide coverage, the employer may be liable to pay under the Employer Shared Responsibility provisions.
Affordable and Minimum Value Coverage
Importantly, Calvin notes that providing employee insurance coverage is a necessary but not sufficient condition to avoid an Employer Shared Responsibility payment. The insurance coverage offered must be both affordable and offer a minimum level of value to employees. Regulations have been developed to guide employers on whether employer-provided healthcare is affordable and meets the minimum value threshold.
Small Business Health Care Tax Credit and Shop Market
Calvin's interest is piqued when he reads that there is a small business health tax credit available for small businesses under the ACA. Calvin's company is not huge, so he figures it's worth a shot. He learns that the tax credit is valued up to 50% for a for-profit employer's contribution to its employees' premium costs and up to 35% for tax-exempt employers.
A tax credit is a great deal - a dollar of credit takes away a dollar of taxes. Smaller businesses get better credits. The credit is only available if insurance is acquired through the Small Business Health Options Program Marketplace (SHOP Marketplace). The SHOP Marketplace is a market where small businesses can go to obtain employee health plans. Most large employers are not entitled to use the SHOP Marketplace. However, commencing in 2016, employers with up to 50 full-time equivalent employees will be able to do so.
Let's look at an example. A small company that qualifies for a 50% credit contributes $80,000 in insurance premiums. The company gets to take a $40,000 tax credit. If its tax bill is $40,000 before the credit, the credit actually eliminates the tax owed.
Unfortunately for Calvin's company, the credit only applies to employers with less than 25 equivalent full-time employees that make an average of $50,000 a year or less. Employers must also contribute at least 50% of the insurance premium for their employee's health coverage. Calvin's company is just too big to qualify, as it employs far more than 25 full-time employees.
Let's review what we've learned. The Patient Protection and Affordable Care Act was enacted in 2010 as a major reform to the American healthcare system. Human resource professionals have become well-versed in the ACA because it may impose certain obligations on employers and may offer some tax incentives for certain small employers.
The ACA does not require employers to provide insurance to its employees, but it does provide both incentives for providing coverage and disincentives for not providing coverage. Generally speaking, if an employer employs the equivalent of 50 full-time employees, it may have to pay an Employer Shared Responsibility payment if at least one employee receives a federal subsidy to purchase individual insurance. The insurance provided by an employer must be both affordable and offer a minimal level of value under the regulations. On the other hand, employers employing the equivalent of less than 50 full-time employees are not subject to the Employer Shared Responsibility payment provisions.
Employers employing the equivalent of less than 25 full-time employees may be entitled to a tax credit up to 50% of the cost of the employer's contribution to its employees' insurance premiums. Employers do have to purchase the insurance through SHOP Marketplace to receive the credit. Smaller employers are entitled to the largest credits.
After competing this lesson, you should be able to:
- Define the Patient Protection and Affordable Care Act
- Identify employer requirements and factors involved in providing employees' health insurance coverage
- Explain what the ACA's Employer Shared Responsibility provisions refer to
- Describe the tax breaks offered to certain companies who cover their employees
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