Healthcare Reform: Key Takeaways
In 2014, convenience store businesses employing more than 50 workers will be required to provide health coverage and most people will be required to have health insurance. The tax on high-cost “Cadillac” policies will not go into effect until 2018; the increase in Medicare payroll taxes begins in 2013; while the tax credits available to small employers for health-care related expenses starts in 2010.
“Exchanges” will be established that let individuals and small businesses purchase insurance from a menu of different providers. These providers will not be able to turn you away.
The healthcare reform bill as signed won’t go into effect until 2014 at the earliest because several states have vowed to sue the federal government over the constitutionality of the bill.
The massive and controversial overhaul of the health insurance and health delivery systems created by the recently-enacted “Patient Protection and Affordable Care Act,” and the “Healthcare and Education Reconciliation Act of 2010,” included more than $400 billion in so-called revenue raisers and new taxes on employers and individuals. The centerpiece in the health reform laws is the mandate for most Americans to obtain health insurance.
The new reform laws contain a number of new rules, such as new penalties for individuals who choose to remain uninsured, tax credits and other sweeteners for employers participating in new insurance pools, new penalties for larger employers that don’t provide insurance (or provide insurance deemed inadequate or unaffordable), plus a voucher system for certain lower income employees who choose not to be covered by their employer’s health plan.
The big question many c-store owners have is, “What impact will this massive overhaul of healthcare have on our businesses?”
The Small Business Health Tax Credit
The Internal Revenue Service (IRS) has already begun encouraging small businesses to explore and, if qualified, claim the new small health insurance coverage credit. The credit was created for eligible small businesses to either maintain their current health insurance coverage or to begin offering health insurance coverage to their employees.
Small employers (no more than 25 employees and average wages below $50,000 annually) are eligible for a federal tax credit, a direct reduction of the convenience store operation’s tax bill, for the amount spent on health insurance for their employees—up to 35%. The full amount of the credit is, however, available only to an employer with 10 or fewer full-time equivalent employees (FTEs) and whose employees have average annual full-time equivalent wages from the employer of less than $25,000.
Self-employed convenience store operators, franchisees and suppliers, including partners and sole proprietors, 2% shareholders of an S corporation and 5% owners of the employer are not treated as employees for purposes of the Small Employer Health Insurance Credit. In fact, a special rule prevents sole proprietors from receiving the credit for the owner and their family members.
Penalty for Remaining Uninsured
Starting in 2014, the new law will require nearly all Americans to have health insurance through an employer, a government program or by buying it directly. That year, new insurance markets will open for business, health plans will be required to accept all applicants and tax credits will start flowing to millions of people, helping them pay the premiums.
Those who continue to go without coverage will have to pay a penalty to the IRS, except in cases of financial hardship. Fines will vary by income and family size. For example, a single person making $45,000 would pay an extra $1,125 in taxes when the penalty is fully phased in, in 2016.
Prior to the passage of this reform, there was no federal requirement for employers to offer health insurance coverage to employees or their families. The new law imposes penalties on certain businesses for not providing coverage to their employees—the so-called “pay or play” provision.
Fortunately, many convenience store businesses will not have to worry about the provision because employers with fewer than 50 employees aren’t subject to the pay or play penalty. The new law exempts all small firms with fewer than 50 employees from the employer responsibility requirements that begin in 2014. This means, according to lawmakers, that 96% of all firms in the U.S., or 5.8 million out of six million total businesses, will be exempt from the requirement to provide health coverage for employees.
The penalty for any month would be an excise tax equal to the number of full-time employees over a 30-employee threshold during the applicable month (regardless of how many employees are receiving a premium tax credit or cost-sharing reduction) multiplied by one-twelfth of $2,000.
“Free Choice” Vouchers
After 2013, employers offering minimum essential coverage through an eligible employer-sponsored plan and paying a portion of that coverage would have to provide qualified employees choosing not to participate in the employer’s health plan with a voucher, whose value could be applied to the purchase of a health plan through the Insurance Exchange. The value of the voucher would be equal to the dollar value of the employer contribution to the employer offered health plan.
Health Insurance Exchanges
Beginning in 2014, the new law creates state-based Health Insurance Exchanges to make health insurance affordable and accessible for small businesses and the self-employed. With the option of joining a large pool, small independent convenience store businesses will have access to the same type of quality, affordable coverage that only large firms currently have.
Employees of small businesses will be able to do one-stop comparison shopping for an affordable insurance plan that offers lower rates, stable pricing from year to year and a choice of quality plans.
Those who are employed by small businesses but who do not receive insurance through their employer and are on the exchange will have access to sliding-scale tax credits to help pay their premiums. Effective in 2014, for those with access to the exchange, sliding scale tax credits are provided to individuals and families up to 400% of poverty. That means the tax credits phase out completely for an individual with $43,320 in income and a family of four with $88,200 in income.
Simple Cafeteria Plans
To encourage more employers to offer tax-free benefits to their employees, including those related to health insurance coverage, the new law relaxes the cafeteria plan rules. It does so by carving out a safe harbor from the nondiscrimination requirements for cafeteria plans, those arrangements under which employees can choose their own benefits.
For tax years beginning after 2010, a new employee benefit cafeteria plan to be known as a Simple Cafeteria Plan would be established. This plan would be subject to eased participation restrictions so small businesses could provide tax-free benefits to their employees; it would include self-employed individuals as qualified employees.
Additional Tax on High Wage Earners
To help pay for making health insurance affordable for small businesses and the middle class, the new law includes an increase in taxes for high earners. Specifically, for tax years beginning after Dec. 31, 2012, the hospital insurance or “HI” tax rate will be increased by 0.9 percentage points on an individual taxpayer earning over $200,000 ($250,000 for married couples filing jointly); these figures are not indexed for inflation.
Also added is a hospital insurance tax on unearned income.
New Limit on Health Plan Contributions
The owners, operators, managers and executives of many convenience store businesses, as well as their employees, have long utilized both flexible spending accounts (FSAs) and health savings accounts (HSAs) to pay for medical expenses with pretax dollars.
An HSA goes along with a high-deductible insurance policy and gives individuals a tax deduction for money saved that can be used for healthcare expenses. An FSA has similar tax advantages, but contributions to it are deducted from an employee’s salary. Money in the account must be used by the end of the year.
The new law modifies the definition of qualified medical expenses for health FSAs and HSAs to conform them to the de
finition used for the medical expense itemized deduction (excluding over-the-counter medicines unless prescribed by a healthcare professional) beginning in 2011. The law also caps health FSA contributions at $2,500 per year after 2012, which is indexed annually for inflation after 2013.
There are also increases in the additional tax on non-qualified distributions from health savings accounts from 10-20% and from Archer MSAs from 15-20%. And as mentioned, the amount of contributions to health FSAs will be limited to $2,500 per year, effective for tax years beginning after Dec. 31, 2012. The dollar amount would be inflation indexed after 2013.
New Reporting Responsibilities
For tax years beginning after Dec. 31, 2010, employers will have to disclose the value of the benefit provided by them for each employee’s health insurance coverage on the employee’s annual W-2 form. Plus, a convenience store chain, franchise or independent paying any amount greater than $600 during the year to incorporated suppliers would have to file an information report with each provider and with the IRS effective for payments made after Dec. 31, 2011.
Many of the changes in the new law’s more than 2,400 pages, such as requiring most people to have health insurance and employers to provide coverage, will take at least two years to go into effect. Will you and your c-store business be ready?