The Affordable Care Act: Very Soon, Businesses Need to Decide if They Are Going to “Play or Pay”April 11, 2013
Andrew S. Lattimer, CPA
Come the start of next year, hundreds of businesses across Connecticut will have to have answered a critical question when it comes to healthcare – do they want to play or pay?
That is the decision so many Connecticut employers will have to make prior to January 1, 2014, the date that the Patient Protection and Affordable Care Act (PPACA or, as it is more commonly known, “ObamaCare”) takes effect. The PPACA could have a significant impact on Connecticut businesses, which is why the time to start planning – if they haven’t already – is right now.
The PPACA is the most significant regulatory overhaul of our nation’s healthcare system since the passage of Medicare and Medicaid in 1965, and its two main goals are to decrease the number of Americans without insurance and to reduce the overall cost of healthcare. Employers and individuals alike will feel its impact, but it is the employers who will face the biggest penalties for choosing not to participate.
So with this historic change looming, how can businesses get ready?
Medicare Contribution Tax
For starters, there needs to be an understanding as to how the PPACA is being funded. The largest funding mechanisms are a 3.8% Medicare contribution tax and a Medicare payroll tax increase from 1.45% to 2.35%. These are tax increases for those earning $200,000 or more a year (or for joint filers earning $250,000 or more), and they will have a substantial impact on anyone who provides or receives a paycheck. A variety of other smaller excise taxes and tax credits will help to cover the expansive cost of the PPACA.
That is how the bulk of the PPACA is being funded. Now, who has to participate? And what happens to those who refuse?
Play or Pay
Businesses with more than 50 full-time equivalent employees are the ones that are required to participate in the PPACA. Businesses with fewer than 50 full-time equivalent employees do not have to participate, and there are no penalties attached if they fail to participate in the PPACA.
While the definition and parameters seem simple, the reality is a bit more complicated.
For businesses with hundreds, or even thousands, of employees, this will likely not be a concern. But for those small-to-midsized businesses that are hovering close to the 50 mark with full-time equivalent employees, some key decisions need to be made.
Could the PPACA make a company reluctant to hire more employees if those hirings increase the full-time size to more than 50? Will companies seek to change the classification of certain employees to avoid that magic number of 50? And what about companies that are on the cusp of that number and want to remain competitive with other such companies? If a rival company with 50 employees is offering a more attractive compensation package than a company with only 45 employees, again, critical decisions will need to be made.
Add to that equation the impending creation of the Connecticut Health Care Exchange, which is being formed as a result of the PPACA. This is essentially a state-sponsored market where individuals and certain small businesses are able to purchase health insurance. But even if an employee chooses to purchase healthcare through the Connecticut Health Care Exchange, the employer could still face a penalty for refusing to participate in the PPACA.
The penalties attached to the PPACA could prove to be costly. For employers who do not partake in the PPACA and who have 50 or more full-time equivalent employees (even if some of them are enrolled through the Health Care Exchange) the penalty is $2,000 a year per employee over 30 employees. Simple mathematics indicate that could mean tens or even hundreds of thousands of dollars a year in penalties.
Penalties also exist for those businesses of 50 or more full-time equivalent employees that do offer healthcare plans that are deemed unaffordable. Despite offering healthcare, if these businesses fail to also offer a plan through the PPACA, the penalty is either $2,000 a year for each full-time employee over 30 employees or $3,000 for each full-time employee receiving credits through the state’s health exchange. (In these instances, the penalty will be whichever of these two options is less costly to the businesses.)
Obviously there is a lot for businesses to decide between now and January 1, 2014, and the sooner they reach a decision, the better. They need to collect and organize employee data to determine if they are large enough to be required to participate in the PPACA. It may be helpful for these businesses to create financial models that meet their business needs come January 1 of next year, because by that date, businesses will have to decide if they are going to “play or pay.” Each option could very well have a significant cost attached – it will be up to them to determine which works best for them.
Andrew S. Lattimer, CPA, is a partner with BlumShapiro, the largest regional accounting, tax and business consulting firm based in New England, with offices in Connecticut, Massachusetts and Rhode Island. The firm, with 340 professionals and staff, offers a diversity of services which includes auditing, accounting, tax and business advisory services. In addition, BlumShapiro provides a variety of specialized consulting services such as succession and estate planning, business technology services, employee benefit plans, litigation support and valuation and financial staffing. The firm serves a wide range of privately held companies, government and non-profit organizations and provides non-audit services for publicly traded companies.