Affordable Care Act Taxes: Time to Pay or Play (OPINION)

In 2015, large employers will receive penalties for failure to provide affordable health coverage to employees, in keeping with the “pay or play” rules of the Affordable Care Act.

Internal Revenue Code §4980H identifies the penalties as shared responsibility payments.

A penalty is given if an employer either does not offer health insurance coverage or if the coverage does not meet the minimum cost requirements, and at least one full-time employee receives a health coverage subsidy, in the form of a tax credit.

The penalty applies to large employers, while small employers have the opportunity to obtain a tax credit. 

Application to Large Employers

A large employer is one with 50 or more full-time employees (working at least 30 hours a week).  Part-time employees’ hours are collectively counted to ascertain full-time equivalent positions.

Even if an employer fails to provide minimum essential coverage to all but 5 percent of full-time employees (or five employees, if staff has fewer than 100) and their dependent children, then the penalty applies. Minimum essential coverage includes most private health insurance plans that an employer would offer its employees, but certain limited benefits will not qualify.

The coverage offered must also meet certain minimum value requirements. The plan must pay at least 60 percent of the expected health care costs. The employee would pay the other 40 percent through copayments, deductibles and coinsurance. 

To determine affordability, the Internal Revenue Service released Revenue Procedure 2014-37 to index the ACA’s affordability contribution percentage for 2015.  Employer sponsored health care coverage will generally be considered affordable if the employee’s portion of the premium for self-only coverage does not exceed 9.56 percent of the employee’s household income. 

One should note that, under the ACA, employees who qualify for coverage under an affordable, employer-sponsored plan are generally ineligible for the premium tax credit. This is important because the penalty is only triggered when a full-time employee receives a premium tax credit or subsidy for health care coverage obtained through a health insurance exchange. 

The penalty for noncompliance is $2,000 per year, multiplied by the number of full-time employees, minus the first 30. This penalty applies to the total number of employees, including those who are offered coverage, and is assessed on a monthly basis, although it is only paid annually. 

Application to Small Employers

There are benefits to small businesses offering health care coverage to their employees. A small business employer is defined as having fewer than 25 full-time equivalent employees, whose average annual wage is less than $50,000 (adjusted annually for inflation), and who pays at least half of employee health insurance premiums.

For tax years 2014 and later, small business employers are eligible for tax credits of up to 50 percent of premiums paid for employee health insurance. To qualify for the credit, the small employer must ensure that the coverage is a qualified health plan offered through a Small Business Health Options Program.  The credit is then available for two consecutive, taxable years. 

The good news is that even if the small business did not owe tax during one of the tax years, the credit can be carried either forward or backward to other tax years.  Plus, the employer can still claim a business expense deduction for the cost of the premiums which are in excess of the credit amount.  Thus, the employer may both earn a credit and take a deduction. 

Whether you fall within the definition of a large or a small employer, being aware of the ACA tax consequences is necessary for proper business management. 

P. Delanna Padilla is a partner with Wright, Lindsey & Jennings LLP. Padilla practices in the areas of tax law and heath care. She counsels in the areas of LLC and partnership taxes, corporate taxation and personal taxation and assists clients with health care regulatory and compliance issues. Padilla can be reached at 479-631-3278 or [email protected].