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SMC Business Councils Government Relations
A Short Guide to the Affordable Care Act – Part II
By Eileen Anderson

Q. What do I need to know about the Individual Mandate, the Employer Mandate and the Free Rider Penalty?

A. Beginning in 2014, all U.S. citizens and legal residents will be required to have  “minimum essential coverage” for themselves and dependents or face a penalty. Employers with more than 50 employees who do not offer coverage will be subject to fines.

Those individuals without coverage will pay a penalty phased in according to the following schedule:

  • $95 in 2014 or the flat fee of 1% of taxable income (e.g. an individual earning more than $9,500 would pay a penalty greater than the minimum flat fee of $95) 
  • $325 in 2015 or the flat fee of 2% of taxable income,
  • $695 in 2016 or 2.5% of taxable income.

The maximum  penalty per family is capped at no more than 300% of the minimum penalty (e.g. $695 x 300% = $2,085) Children under 18 are assessed at 50% of the minimum penalty. 

If the cost of the lowest available plan is greater than 8% of income there is no penalty for not having coverage. There are additional hardship and religious exclusions.

If the household “modified adjusted gross income” is greater than specified levels, the penalty is greater. 

After 2016, the penalty will be increased annually by the cost-of-living adjustment.

Employer Mandates - Effective January 1, 2014, there are large employer mandates. Employers with fewer than 50 employees are exempted from the coverage penalties.

Definition of Large Employer - An employer is a large employer if they employed an average of at least 50 full-time employees (FTEs) during the preceding calendar year. The law defines an FTE as having worked an average of 30 hours or more for at least one week in a month.  In calculating the average, in addition to the number of FTEs for that month, an employer should calculate a number of FTEs determined by dividing the total number of hours of part-time employees for the month by 120.

Free Rider Penalty for Employers Who do not Offer Coverage - Employers with more than 50 employees who do not offer coverage will pay a penalty if they have at least one FTE who receives a premium tax credit. The annual assessment is $2,000 times all FTEs minus the first 30 FTEs from the payment calculation (e.g., an employer with 51 workers who does not offer coverage would pay a total annual penalty of $42,000 (51-30 = 21 x $2,000 = $42,000) a year.

The law permits businesses to exceed the 50 employee limit for 120 days when using seasonal employees without triggering a penalty.

Employers Who Do Offer Coverage - Employers who have more than 50 FTEs and offer coverage will pay a penalty if they have at least one FTE who buys coverage through a health insurance exchange and receives a premium tax credit. For each such employee the employer is assessed a penalty of $3,000 or $750 for each FTE.  The overall exposure is capped. 

For example, an employer with 51 FTEs who has two employees taking advantage of the premium assistance program, would pay a penalty of  $6,000 annually because the penalty per employee who gets assistance is lower than the penalty assessed per FTE (2 x $3,000 = $6,000 which is less than $750 x 26 = $19,500). An employer with 51 FTEs who has 25 employees taking advantage of the premium assistance program would pay a penalty of $19,500 annually because 26 x $750 = $19,500 is less than 25 x  $3,000 = $75,000).

Penalties are not tax deductible for the employer. If the cost of the employer plan is greater than 9.5% of the employee’s income or if the actuarial value of the employer’s plan is less than 60% of the minimum essential coverage required by the new law, an employee will be eligible for a premium tax credit.

Large employers’ plans must meet the minimum essential coverage requirements to be a “qualified employer sponsored plan.”

Employers with more than 200 employees must enroll all employees in their plans.
The new law creates a Free Choice Voucher program that requires large employers to offer vouchers to employees who have incomes less than 400% of the Federal Poverty Level (FPL) and whose share of the premium is greater than 8% but less than 9.8% of their income. The voucher would be equal to what the employer would be paying for the employee’s coverage. The employee must use the voucher to buy coverage through an exchange. Since the employer is providing the voucher, the employer would not be penalized if the employee receives a federal premium tax credit in the exchange.

ACTION - Remember that businesses with fewer than 50 employees are not required to provide health insurance to their employees. Understand what the individual mandate means for your employees and your business.

Q. What do I need to know about Health Insurance Exchanges and Individual Subsidies?

A. The ACA creates state-based exchanges where individuals and small businesses can purchase health insurance. In addition the exchanges will administer the tax credit system.

State Health Insurance Exchanges - States are required to establish a health insurance exchange by 2014 to be administered by a governmental agency or non-profit organization. Individuals can purchase qualified coverage through these exchanges.  Generally, small businesses with up to 100 employees will also be able to purchase coverage through the exchanges. 

In 2017 states may allow businesses with more than 100 employees to purchase coverage in the exchange. States may allow more than one exchange to operate in the state as long as each exchange serves a distinct geographic area.
State exchanges are required to maintain a call center for customer service, and establish procedures for enrolling individuals, businesses, and for determining eligibility for tax credits. They must also develop a single form for applications for state health subsidy programs that can be filed online, in person, by mail, or by phone.

Individual Subsidies - Individuals who obtain their coverage through an exchange may be eligible for a premium tax credit.

If an employer offers coverage but the employee’s contribution would exceed 9.5% of income or if the plan pays for less than 60% of covered expenses, the employee is eligible for the premium credit.

There is a sliding scale based on a percent of the Federal Poverty Level (FPL). Individuals and families will receive a credit so that families at the 400% of FPL will pay no more than 9.5% of their incomes. (The 2009 Poverty Guidelines for a one-person family is $10,830, for two is $14,570, for three is $8,310, or for four is $22,050).  A family of four with household income of $88,000 (400% of $22,050) would be eligible for a premium tax credit.

ACTION - If you would like to know how an exchange functions visit the Massachusetts Community Connector at Click on the “find insurance” link.

Q. What do I need to know about Changes to Flexible Spending Accounts, Health Savings Accounts and other Deductions?

A. Under the new law there will be fewer tax deductions for purchases and contributions will be limited.

Flexible Spending Accounts (FSA) - In 2011 all non-prescription over the counter drugs, with the exception of insulin, are excluded from eligibility for Section 125 FSAs.

In 2013 all Section 125 FSA spending account contributions are limited to $2,500 per year.

Health Savings Accounts (HSA) - In 2011 the tax for non-eligible expenses increases to 20% of distribution.

In 2011 all non-prescription over the counter drugs, with the exception of insulin, are not eligible for reimbursement.

ACTION - Educate your employees about changes for over the counter drugs. Make sure Section 125 contributions are limited to $2,500 per year in 2013.

Q. What do I need to know about taxes and paperwork including W-2’s and Form 1099–MISC?

A. Be prepared for new reporting requirements in 2011 and new taxes in 2013.

W2 – New Information Required - This new rule applies to benefits provided after December 31, 2010. All employers must include the aggregate cost of employer sponsored health benefits on their employees’ W2s. If an employee receives health insurance coverage under several plans, the employer must report the aggregate value of all such health coverage. All contributions to HSAs and Archer MSAs and salary reduction contributions to FSAs are excluded.

Form 1099 - Expanded Corporate Information Reporting - The ACA makes several changes to how 1099s are issued which will result in businesses distributing millions of additional 1099s each year. The new requirements apply to payments made after December 31, 2011. They expand the scope of 1099s by using them to track payments not only to individuals, but also to corporations, and expand the reporting from services to services and tangible goods. Starting in 2012, all companies must issue a 1099 to any individual or corporation if they buy more than $600 in goods or services in a year from that person or corporation. In addition, a 1099 must be filed with the IRS and the business must obtain the vendor’s taxpayer identification number (EIN). If the EIN is unavailable 28% withholding taxes must be sent to the IRS. 

New Income Taxes - In 2013 the new law increases the Medicare Hospital Insurance (HI) trust portion of the payroll tax by 0.9% to 2.35% from 1.45% on wages or self-employment income over $200,000 for individual returns and $250,000 for a joint return.

There is no limit on the amount of wages or self-employment income that is subject to the tax. The employer will continue to pay 1.45% tax on the employee’s wages.
In 2013 The ACA also establishes a new “Unearned Income Medicare Contribution” tax. This applies to “net investment income” which includes interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property (other than property held in a trade or business). The tax rate is 3.8% and it applies to those with modified adjusted gross income greater than $200,000 on a single return or $250,000 on a joint return.

Contact your member of Congress to explain what the 1099 change means to your business. Set up systems now to track all purchases of goods and services from vendors and the cost of health benefits.

Helpful Resource:

Eileen Anderson is Government Relations manager at SMC Business Councils. Her personal experience with health insurance as a small businesswoman compelled her to become an outspoken advocate for affordable health insurance for small businesses. She joined SMC in 2004 specifically to work on health care reform and support their legislative agenda aimed at health care cost containment and saving job-based insurance coverage. SMC has spent many years at the forefront of the fight for affordable health care for small employers. She can be reached at 412-342-1606 or

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