Understand provisions of the Patient Protection and Affordable Care Act.
In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act (PPACA), which resulted in the most far-reaching changes to the U.S. healthcare delivery system since Medicare’s inception in the 1960s. The Act significantly impacts insurers and healthcare providers, but the most controversial and misunderstood aspects—which will take effect over the next few years—impact individuals and employers.
The Act seeks to expand healthcare access and long-term affordability while preserving the solvency of Medicare and Medicaid. This could have a positive impact for construction companies since construction workers generally pay a higher health insurance rate due to the dangerous work environment.
A Historical Perspective
The Act and the former American Recovery and Reinvestment Act of 2009 included provisions such as the nearly $19 billion to fund incentive programs to encourage electronic health record (EHR) use by providers and hospitals and increased payments and access to primary care physicians. Other provisions affecting insurers include:
- Eliminating annual and lifetime coverage caps and insurance denials for preexisting conditions
- Reducing/eliminating copays and deductibles for certain preventive healthcare services
- Requiring insurers to spend a certain percentage of premium revenues on healthcare improvement
The Act’s most controversial provision is also one of its most critical funding mechanisms and requires nearly every U.S. citizen to be covered by acceptable health insurance by 2014 or pay a penalty (known as the individual mandate).
As a result, litigation challenging the Act’s constitutionality has made it to many circuit courts, which have separately ruled that the Act and individual mandate are constitutional. This debate has now reached the Supreme Court. According to CNN Health, medical bills prompt more than 60 percent of all individual U.S. bankruptcies, which means this mandate could be beneficial.
The Supreme Court heard arguments on the constitutionality of the PPACA—specifically the individual mandate—in March 2012 and will likely issue its opinion in early summer. If the Supreme Court upholds the Act, healthcare insurance premiums will continue to increase as insurers adapt to the increased coverage requirements and pass along those costs. Also, individuals with employer-provided insurance may see a reduction in the employer’s portion of the overall policy premiums.
Individuals without healthcare insurance can expect coverage access to become more readily available, but it may be costly. Before the individual mandate takes effect, most states will create a federally subsidized healthcare insurance exchange enabling individuals to gain more cost-effective access to healthcare policies.
Many experts anticipate that a widespread implementation of the insurance exchanges may drive some individuals to drop their employer-offered policy and obtain coverage through an exchange to reduce premium costs. This may be especially true for younger, healthier employees who typically require fewer healthcare services.
The result: The average employees remaining on an employer’s policy will be more frequent and costly, which means construction companies will pay higher premiums.
Some experts believe that an increasing number of employers and business owners may drop their healthcare policies once a cost-effective public insurance option is available. But the Act contains provisions requiring larger employers to offer healthcare coverage to employees—or share in the cost with employees who gain insurance through the exchange.
The Act contains provisions offering small employers a tax credit (i.e., a dollar-for-dollar tax reduction) for non-elective contributions to encourage employers to provide healthcare coverage options. The credit can offset an employer’s regular tax or alternative minimum tax (AMT) liability.
Which businesses are eligible?
To qualify, businesses must offer health insurance to employees as compensation and contribute at least half of the total premium cost. They cannot have more than 25 full-time equivalent employees (FTEs) with annual wages averaging $50,000 or less. The full credit amount is only available to employers with 10 or fewer FTEs who have average annual wages of $25,000 or less.
When will the credit be available?
The credit has been available since 2010 and will continue to be available through 2013. Claiming the credit for the first phase requires health insurance coverage purchased from an insurance company licensed under state law.
For tax years after 2013, the credit will only be available for two years to eligible small employers purchasing health insurance coverage for employees through a state exchange. The maximum two-year coverage period does not take into account any tax years beginning before 2014. This means that an eligible contractor could potentially qualify for this credit for six tax years—four years under the first phase and two years under the second phase.
How do I calculate the credit amount?
For tax years 2010 through 2013, the credit is generally 35 percent (50 percent for tax years after 2013) of the employer’s non-elective contributions toward the employees’ health insurance premiums. The credit phases out as company sizes and average wages increase.
Are most small businesses exempt from penalties for not offering employee coverage?
Most small businesses with fewer than 50 employees are exempt. For businesses with at least 50 employees, potential penalties vary depending on whether the employer offers employee health insurance. If the business does not offer coverage and has at least one full-time employee receiving a premium tax credit, the business will be charged a fee of $2,000 per full-time employee—excluding the first 30 employees.
For example, a construction company with 51 employees not offering health insurance will be subject to a penalty of $2,000 multiplied by 21 employees for a total of $42,000. Employers that offer coverage and have at least 50 employees but have at least one full-time employee receiving a premium tax credit will pay $3,000 for each employee receiving a premium credit (some additional restrictions apply). These provisions take effect January 1, 2014.
In addition to these federal provisions, some state legislation helps businesses provide health insurance premiums to employees.
Both the federal and state legislatures constantly update laws. Check with your CPA to get the latest information in your state regarding healthcare reform and best practices to deal with healthcare for your business.
Construction Business Owner, May 2012