I describe myself as a moderate Republican. I served as an Army officer. No wars were won or lost because of me. I have spent most of my career serving the small business owner market. As a tax and estate planning attorney I try to think about creative ways for business owners to lighten their tax burden. I also like to listen to talk radio, but lately I have gotten to the point that I want to scream when I hear Fox News and El Rushbo cover the Republican Party talking points on Obamacare 24-7.
Furthermore, I am clearly stating that I am not a proponent of Obamacare either. One thing is certain, the system that we had was not working either. And do we need to shut the Government down to make a point? The fact of the matter is that Obamacare is the law. After 41 or 42 attempts to repeal the law, it seems to me that you either need to move on or or come up with a better proposal than the current law and make your case to the People.
Earl Nightingale’s classic The Strangest Secret is a motivational message that says that you become what you think about. The Republican Party has been lambasting The Affordable Care Act (ObamaCare) principally on the grounds that it will put the small business owner out of business. Most people oppose the law without even understanding it. The more that I understand about ObamaCare and some of the planning uses involving the law, I am struck by the “strangest secret” that Obamacare may actually be a windfall for small business owners rather than the thing that puts the small business owner out of business.
I have previously established that I know squat (and I do. I was a big squatter in my powerlifting days) but I am increasingly able to identify a pathway towards employee benefit cost reduction for small business owners. This is the Strangest Secret.
A quick primer on the basics of ObamaCare.
In 2010, President Obama signed the “Patient Protection and Affordable Care Act” and companion “Health Care and Education Reconciliation Act of 2010.” Together, those two pieces of legislation – better known by Republicans and Democrats alike as “Obamacare” — represent the biggest change in how we finance healthcare since Medicare was created in 1965.
In 2012, the U.S. Supreme Court ruled that the Act’s controversial “individual mandate” was a constitutional exercise of the government’s power to tax. On the tax side, small businesses with up to 25 employees earning $50,000/year or less qualified for a new tax credit of up to 35% of the cost of providing health benefits to their employees. On the healthcare side, insurance companies can no longer deny coverage to children for pre-existing conditions. Insurers can’t set lifetime limits on plan coverage. Plans must let children stay on their parents’ plans through age 26.
Next year brings the most controversial changes. Most individuals who aren’t covered through their employer will have to maintain “minimum essential coverage” or pay individual penalties. This is the so-called “individual mandate” you’ve heard so much about. Let’s be clear, the people who wanted to keep their coverage and had their policies had coverage that did not meet the essential coverage requirements. The problem is that under Murphy’s Law, someone ends up getting sick with something that is not covered by the limited policy that covers me for straining my back on Tuesday only while deadlifting!
2014 was the year when it was originally scheduled that employers with more than 50 employees have to offer health benefits or pay a penalty of up to $2,000 per employee. (If they offer coverage that doesn’t meet minimum standards, the penalty could jump to $3,000. ) The Obama administration has since postponed this requirement to 2015.
Next year (2014) is the year when the biggest insurance changes go into effect. Specifically:
(1) Insurance companies can’t deny coverage to anyone for pre-existing conditions.
(2) Plans can’t set annual limits on coverage. Tax subsidies become available on individual coverage.
This is important.
(3) States can choose (or not choose) to expand Medicaid eligibility to non-elderly, non-pregnant individuals with incomes up to 138% of the federal poverty level. For 2014-2016, the federal government will pick up 100% of those costs.
Small business owners that provide coverage their employees may qualify for tax credits. In order to qualify for the credit, the business owner has to pay at least 50% of the “employee-only” premium amount for your employees’ coverage. The business owner can’t have more than 24 “full-time equivalent” employees, or FTEs. The average wage in the business can’t be more than $50,000 per year.
For tax years 2010 through 2013, the maximum credit is 35% of the amount of premium the business owner pays in premiums (not including his own premium. The credit goes down if business owner have more than 10 employees or average wages of more than $25,000.
Starting in 2014, the maximum credit goes up to 50% of premiums paid. If the credit is more than the business owes, the business owner can carry it back against previous taxes paid, or carry it forward to offset future taxes.
The law says that by 2014, all Americans have to maintain “minimum essential coverage.” If not, individual taxpayers face a penalty. That penalty starts at $95 per adult or $47.50 per child, up to a maximum of $285 per family or 1% of income in 2014. It rises to $695 per adult or $347.50 per child, up to a maximum of $2,085 per family or 2.5% of income in 2016. After 2016, those dollar amounts are indexed for inflation.
The penalty is assessed through the Internal Revenue Code and accounted for as an additional amount of Federal tax owed. However, it is not subject to the enforcement provisions of subtitle F of the Internal Revenue Code. The use of liens and seizures otherwise authorized for collection of taxes does not apply to the collection of this penalty.
Non-compliance with the personal responsibility requirement to have health coverage is not subject to criminal or civil penalties under the Internal Revenue Code and interest does not accrue for failure to pay such assessments in a timely manner.”
The insurance exchanges offer four levels of coverage: bronze, silver, gold, and platinum. There will also be a bare-bones “catastrophic-only” plan for those under age 30.
(1) The bronze plan is designed to cover 60% of the average insured’s healthcare costs.
(2) The silver plan is designed to cover 70%.
(3) The gold plan is designed to cover 80%.
(4) Finally, the platinum plan is designed to cover 90%.
Each level offers different premiums, co-pays, deductibles, and other out-of-pocket expenses. The law limits out-of-pocket expenses to $6,350 for individuals and $12,700 for families.
Individuals will qualify for subsidies under two conditions:
A. The insured’s “household income” has to be less than 400% of the federal poverty level, or “FPL.” For 2013, the FPL is $23,550 for a family of four, which means subsidies are available for incomes up to $94,200. “Household income” includes income from the employee, employee’s spouse, and any dependents.
Comment – Play around with the Kaiser Permanente calculator and you will see that the tax subsidies are significant . This is part of the “secret sauce” of how to deal with Obamacare. If an an employer offers group health coverage to his employees, the employee is unable to qualify for tax subsidies. With individual coverage, the employee is able to qualify for tax subsidies.
B. Second, if the employee has an employer who offers coverage, the employee’s share of the premium has to be more than 9.5% of your household income.
The goal of the subsidy is to make sure the individual does not spend an unreasonably high percentage of personal income on health insurance. The range is 2 percent of income up to 133 percent of the federal poverty level (FPL) and 9.5 percent at 400 percent of the FPL. The subsidies are based on the cost of a “silver” plan. Premium will vary according to where the employee lives, and the subsidies will always cap your premium at the appropriate percentage.
The subsidy itself takes the form of a “refundable tax credit.” That means you can use the subsidy to offset your total tax bill for the year and, if the subsidy is more than your tax, the IRS will send you a check for the difference. The law lets the taxpayer apply for the tax credit when he applies for the insurance, and the government will pay the subsidy directly to the insurance company.
The Strangest Secret – Making Obamacare Work for You!
The best solution is for the small business (in my view) is for the business owner to get out of the group health insurance business. No more being held hostage by the amount of annual rate (15-40%) increases. No more haggling from employees that Mrs. Potts’ medical claim didn’t get paid and a collector is calling.
Get out there on the insurance exchange and let your employee’s purchase individual coverage. Of course, this assumes that you can actually get on the exchange website!
Your Action Plan
Step 1 – Drop Group Health coverage beginning on January 1, 2014
Step 2 – Have all employees (including the business owner) purchase individual coverage. Remember, no more preexisting conditions and no more limits on benefits. Workers who have household income between $23,500-94,500 will qualify for tax subsidies.
Step 3 – The Individuals purchase Bronze-level coverage. The cheaper, the better!
Step 4 – The employer creates a medical expenses reimbursement plan (MERP) to cover out of pocket expenses not covered under the individual plan. A second medical card provided by the third party administration company administering the MERP will pay medical providers directly for the employee. The employer will provide a uniform annual allowance to employees under the MERP that the employer determines. The payments are tax deductible to the employer and non-taxable to the employee. FICA and FUTA withholding do not apply.
Step 5- The employer will establish a Sec 125 cafeteria plan and pay the premiums directly to the various insurer’s for individual health plans on a pre-tax basis.
The Bottom Line
If a business owner follows the approach outlined above, the business will reduce its cost for health insurance by 40-80 percent. The business will have the same or better benefits than it previously had under the group plan. It does not matter how many employees the company has on its payroll, the cost will be a lot lower. Why? The benefit of tax subsidies is powerful. Secondly, it many cases (but not all) the cost for those who do not qualify for tax subsidies is much lower than the cost for group health.
The company will no longer remain hostage to annual rate increases of 15-40 percent. The company that had a self-administered health plan will have much lower financial exposure than it had with “stop-loss” coverage. Employees who had pre-existing conditions and large claims will receive the same coverage as any one else without any benefit limits or additional ratings.
Most importantly, the financial risk is now off of the employer.
Why does a tax attorney care about employee benefit costs? First, I do some benefits work. Second, the U.S. Supreme Court called ObamaCare a tax. As a result, it is now my part of my professional responsibility as a tax attorney to help business owners in this area.
I am working with a specialty third party administrator that implements and administers the solution outlined above. You owe it to yourself to compare what you are doing versus what you could be doing. If this analysis provides no benefit, keep your group plan. If as I suspect, the proposal provides annual savings of 40-80 percent in your second largest expense after payroll, you need to think seriously about making a change.
For financial advisors or insurance agents working with small business owners, you need to bring this solution to your clients. You will be compensated well for a successful transition on an ongoing basis. The savings will provide capital for investment or insurance purchases.
What are you waiting for?
Remember to count your blessings today!