Commercial Lending Report: 10 Facts Borrowers Should Know About Health Care Reform

The cost of health insurance is the biggest concern small businesses face, according to a recent poll by the National Federation of Independent Business. Part of the problem is that few businesses fully understand how the Affordable Care Act (ACA) works. Here are 10 useful facts lenders can pass along to their customers:

1. Large companies with the equivalent of 50 or more full-time employees that don’t share in the cost of their employees’ coverage in 2015 will risk penalties.

The so-called “shared responsibility” or “play or pay” provision was deferred for one year. Starting on Jan. 1, 2015, employers with the equivalent of 50 or more full-time employees will face potential penalties if they fail to provide minimum essential health insurance coverage for full-time employees and their dependents.

2. Only “affordable” plans that provide “minimum value” completely protect an employer from penalties.

Generally, plans are affordable if the employee’s share of the premium is less than or equal to 9.5% of his or her annual household income.

To provide “minimum value,” plans must generally cover 60% or more of the employee’s total allowed benefit costs.

Numerous safe harbors apply for both these requirements. Many large employers will need to change their current policies and beef up their recordkeeping practices to protect themselves from potential penalties next year.

3. Part-time employees count — at least partially — in a borrower’s headcount.

Some borrowers mistakenly think they can get around play-or-pay by using part-time help. While, for the purposes of the shared-responsibility provision, the IRS defines full-time employees as those who work an average of at least 30 hours per week, it also combines hours worked by part-time employees to arrive at an employer’s full-time-equivalent employees (FTEs). FTEs are then added to the number of full-timers to determine whether the employer has the equivalent of 50 or more full-time employees.

For a given calendar month, FTEs are computed by totaling the hours worked by all part-timers and dividing the total by 120. Seasonal employees who work 120 days or fewer per year may be exempt, however.

4. Related entities are combined to determine a borrower’s health plan obligations.

Borrowers can’t create a new entity to get around the large employer threshold. For play-or-pay purposes, all companies that are part of a controlled group are aggregated and treated as a single entity.

5. Penalties for noncompliance are steep.

Employers who fail to provide coverage will incur penalties of $2,000 per full-time employee in excess of 30 full-time employees, if just one employee receives a premium tax credit for purchasing his or her own insurance from a public marketplace. Plans that are unaffordable or fail to provide minimum value will generally incur penalties equaling the lesser of:

• $2,000 per full-time employee in excess of 30 full-time employees, or
• $3,000 for every full-time employee who receives a premium tax credit.

When evaluating coverage costs, remember that health insurance premiums are tax deductible, but penalties are not.

6. Small employers with the equivalent of fewer than 50 full-time employees aren’t subject to the shared-responsibility provision.

But the ACA encourages small employers to offer coverage by providing affordable options on the government-run Small Business Health Options Program (SHOP) marketplace. This marketplace will be open Oct. 1, 2013, through March 31, 2014. SHOP will open to companies with the equivalent of up to 100 full-time employees in 2016.

7. Tax credits are available to small companies that purchase coverage through the SHOP marketplace.

In 2014, small businesses with 10 or fewer FTEs that pay an average of no more than $25,000 per FTE per year may be eligible for a 50% tax credit for coverage purchased through the SHOP marketplace. (The credit is lower for nonprofit organizations. Also, FTEs are computed differently for tax credit purposes than for play-or-pay purposes.)

The health care coverage tax credit is nonrefundable. But borrowers with insufficient taxable income in 2014 can carry the credit back or forward until it’s fully used.

8. Tax credits are complicated and limited.

The ACA small-employer tax credit works on a sliding scale and is completely phased out when a company reaches 25 FTEs or average annual wages of $50,000 per FTE.

Beginning in 2014, the credit can only be taken for two years, regardless of whether you received tax credits for providing coverage from 2010 through 2013. Borrowers also cannot take a tax credit for health insurance premiums paid for owners of more than 2% of the company — or their family members.

9. Private insurance marketplaces are still viable.

Some borrowers eligible for SHOP will continue to use private marketplaces in 2014 and beyond. Reasons employers may prefer private marketplaces to public ones include greater familiarity, expanded product choices (including ancillary products), greater design flexibility and improved customer service. Some companies also express a general wariness of government-run entities.

10. Do-it-yourself ACA compliance can be risky, time-consuming and costly.

The long-term effects of the ACA on your borrowers are hard to predict. But one thing is certain: Borrowers need help sorting out this evolving legislation. A financial professional can help with recordkeeping, cost comparisons and other advisory services.

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