The Affordable Care Act — Tax Implications For Employers

Almost every employer will have to make substantive changes to its group health plan — changes to the benefits, changes to the eligibility rules, changes to the amount of premium paid by the employer, or some combination of these — in order to comply with the Affordable Care Act (the “ACA”).

Virtually all of these changes will have some tax implications. In addition, there are some provisions of the ACA that are purely tax related. This is a brief overview of the key tax issues in the ACA, with those that generate the most questions from my employer-clients presented first.

Pay-or-Play.
A large employer (one with at least 50 full-time equivalent employees) must offer minimum value, affordable health coverage to all of its full-time employees or pay a penalty. This is popularly known as the “employer mandate” or the “pay-or-play” rule.

Most employers will find that the most appealing option is to partly play and partly pay. These employers will offer group health coverage and subsidize it by making some contribution to the premiums for some employees, knowing that if the contribution is not enough to make the coverage “affordable” for some employees, the employer may incur a penalty. Because of a recently delay in the pay-or-play rules, penalties will begin to accrue in 2015.

Tax Points:

• Employer contributions to health plan premiums generally are tax-deductible business expenses for the employer.

• In contrast, employer penalty payments are not tax-deductible.

• For-profit employers should take note: paying $3,000 in premiums is a lower net cost than paying $3,000 in penalties.

• Employers will have new reporting requirements that will allow the IRS to calculate the penalties. The IRS has not yet issued guidance on those requirements, but it is expected during the coming year.

Coverage Mandates.
Under the ACA, employer group health plans must contain certain provisions. For example, there can be no annual or lifetime limits on essential health benefits. If a plan fails to comply with these mandates, one of the penalties is an excise tax. Some of the coverage mandates are effective now, and some take effect later, with variations for grandfathered and non-grandfathered plans.

Tax Points:

• The excise tax is $100 per affected person per day during the period of noncompliance.

• The employer has an obligation to self-report any excise taxes due.

• There are some exceptions to the excise tax, as well as provisions setting the minimum and maximum amount of the tax. (The maximum amount is really high.)

PCORI Fees.
Most employer group health plans must pay fees (a.k.a. taxes) to help fund the Patient-Centered Outcomes Research Institute (“PCORI”). The first PCORI fees for calendar-year plans were due on July 31, 2013, in the amount of $1 times the average number of covered lives.

Tax Point:

• PCORI fees are tax-deductible business expenses for the employer.

Transitional Reinsurance Fees.
Most employer group health plans must pay fees to help fund reinsurance for insurance companies as they transition to covering high-risk individuals without adjustments for pre-existing conditions. The first Transitional Reinsurance fees will be payable in late 2014 or early 2015, in the amount of $63 times the average number of covered lives.

Tax Point:

• Transitional Reinsurance fees are tax-deductible business expenses for the employer.

Small Business Tax Credits.
Nonrefundable tax credits are available to employers with 25 or fewer full-time employees, if the average wages do not exceed $50,000 and if the employer contributes at least 50 percent of the cost of health coverage. The credits are on a sliding scale, depending on the number of employees, the amount of the employer contributions, and whether the employer is a for-profit or non-profit entity. Small employers will want to determine, with their tax advisor, whether the tax credit will be to their financial advantage.

Tax Points:

• For 2013, the maximum credit is 35 percent of employer-paid premiums. For 2014, the maximum credit is 50 percent of employer-paid premiums, and purchasing coverage from the exchange is required.

• The credit reduces the amount that the employer would otherwise be able to claim as a deductible expense.

Additional Medicare Tax.
This is not a tax that the employer has to pay, but the employer does have to calculate it, withhold it from the employee’s pay, and forward it to the IRS along with other payroll taxes. Effective Jan. 1, 2013, the general rule is that the employer must withhold an additional 0.9 percent on earnings over $200,000 for single filers and on earnings over $250,000 for joint filers.

Form W-2 Reporting. (This is not a tax — it is only a reporting requirement — but W-2s are so intimately associated with taxes that it seems appropriate to include.) If an employer issued 250 or more W-2s for one year, then for the following year, the employer must include the cost of certain health plans on all W-2s.

Cadillac Tax. Effective in 2018, if health plan premiums exceed a certain dollar amount, the enrollee will be taxed 40 percent on the excess amount. Although this tax is not borne by employers, employers should be aware of the threshold and should devise a communication plan so that employees are not caught unaware.

Nondiscrimination. Under the ACA, fully-insured plans must not discriminate in favor of highly compensated employees. (Self-funded plans have been subject to a similar rule for many years.) The penalty for violating this rule is likely to be the loss of favorable tax treatment for the coverage. The IRS has indicated that it will not be enforcing this provision until after it issues regulations on the topic.