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Business Law

The Affordable Care Act & Your Small Business

In light of the U.S. Supreme Court ruling on June 28, 2012, many small business owners are wondering what the Affordable Care Act ("ACA") will mean for their business and their employees. The court held, in a 5-4 split decision, that the ACA is constitutional, including the provision that requires Americans to carry health insurance or pay a penalty because the payment is in fact a tax, which is allowed under Congress's power to tax in Article One of the Constitution. The implications for your small businesses are two-fold. First, what should you know about health insurance for you and your employees? And second, what are the tax consequences of the decision?

Employee Insurance Coverage
The most controversial measure of the ACA is that as of January 1, 2014, all Americans must carry health insurance or face a penalty (in the form of a tax) of up to 2.5% of household income on individuals, with exceptions for economic hardship, religious beliefs, and other situations. The extent to which the ACA will affect your business by requiring you to provide insurance for your employees depends upon how many employees you have. As of January 1, 2014, employers with more than 50 employees must offer affordable health insurance for their employees or be fined per employee. The ACA includes a requirement that states establish an American Health Benefit Exchange as of January 1, 2014 that facilitates the purchase of qualified health plans and includes an Exchange for small businesses. A qualified health plan offered through a health insurance exchange will be a qualified benefit under a cafeteria plan of a qualified employer.

Many of the ACA's changes to health care have already taken effect since the ACA was passed in 2010, and the Court's decision simply allows them to continue. For example, adults with pre-existing conditions are able to buy coverage from temporary high-risk pools until January 1, 2014, when adults with pre-existing conditions can no longer be denied coverage or have their insurance cancelled due to pre-existing conditions. Likewise, children under age 19 can no longer be denied insurance coverage because of pre-existing conditions, and all plans offering dependent coverage are required to allow children to remain under their parents' plan until age 26. Additionally, insurers are not permitted impose lifetime caps on insurance coverage and cannot cancel or deny coverage if you are sick except in cases of fraud.

Tax Consequences
Similar to the insurance requirements, many of the tax consequences of the ACA can already been seen. Effective in 2011, the additional tax on distributions from a Health Savings Account (HSA) or an Archer medical savings account (MSA) that are not used for qualified medical expenses is increased to 20% of the disbursed amount. In addition, amounts paid for over-the-counter medications are no longer reimbursable from HSAs, Archer MSAs, health flexible spending accounts (FSAs), or health reimbursement arrangements. Finally, effective in 2011, an eligible small employer (employing 100 or fewer employees over the past two years) is provided with a safe harbor from the nondiscrimination requirements for cafeteria plans as well as from the nondiscrimination requirements for specified qualified benefits offered under a cafeteria plan.

Currently in effect for 2012, employers are required to disclose on each employee's annual Form W-2 the value of the employee's health insurance coverage sponsored by the employer. Effective October 1, 2012, a fee will be imposed on each specified health insurance policy in a health plan. Here is a summary of the upcoming changes in 2013 and 2014:


  • The medical expense income tax deduction threshold will be increased from 7.5% to 10% of adjusted gross income.
  • The employee portion of the Medicare hospital insurance tax part of FICA is increased by 0.9% on wages that exceed $200,000 for individuals ($250,000 for married couples), and a new 3.8% Medicare tax will be assessed on some or all of the net investment income for these higher-income individuals.
  • If you utilize FSAs, beginning in 2013, the maximum amount available for reimbursement of incurred medical expenses under a health FSA for a plan year (or other 12-month coverage period) must not exceed $2,500.


  • Small businesses (those with 25 or fewer employees and average annual wages of $50,000 or less) will be eligible for a credit of up to 50% of non-elective contributions the business makes on behalf of their employees for insurance premiums.
  • Eligible taxpayers can use refundable tax credits to help cover the cost of health insurance premiums for individuals and families who purchase health insurance through a state health benefit exchange.
  • Insurers (including employers who self-insure) that provide minimum essential coverage to any individual during a calendar year will be required to report certain health insurance coverage information to both the covered individual and to the IRS.

Further down the road, in 2018, there will be an excise tax on coverage providers if the aggregate value of employer-sponsored health insurance coverage for an employee (including, for purposes of the provision, any former employee, surviving spouse, and any other primary insured individual) exceeds a threshold amount.

Given the insurance and tax ramifications of the Affordable Care Act ("ACA"), many small business owners are wondering what the Affordable Care Act ("ACA") will mean for their business and their employees. One important consideration is whether your workers are classified as employees or as independent contractors. If you have questions or concerns about worker classification or the ACA, contact us. We can also assist with employee manuals, employee contracts and tax planning.

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