Overview

The combination of the federal government shutdown along with the roll out of Obamacare is a once in a lifetime event - sort of like a Lunar Eclipse or Haley's Comet. Or is it is more like the time that you had hemorrhoids? Few things have proven to be as controversial as this law. Who would have known that a health insurance bill could have been more controversial than abortion or gay marriage. Neither of those issues shut down the government.

I saw an interview on TV the other day where a TV journalist was randomly interviewing regular citizens on Main Street regarding their opinions on Obamacare. Universally, all of those interviewed expressed an immense dislike for Obamacare. On the other hand, when asked about the Affordable Care Act (the same thing as Obamacare but the official name), all of the same people interviewed who disliked Obamacare unanimously endorsed the Affordable Care Act.

 I was even surprised that some of the people being interviewed were familiar with some of the better known provisions such as guaranteed insurability and dependent coverage until age 26.  The power of marketing and propaganda can't be underestimated. The point is that the people were talking about the same thing but weren't even aware of it.

Could Obamacare be  a situation where the Messenger was killed right out of the starting blocks?  Time will tell!  Obamacare is the law of the land but not if the Republicans have anything to say about. The House Republicans have tried forty different times to repeal or defund Obamacare and now have shut down the federal government over a health insurance program. As a moderate Republican, I can't even think of what the Republican alternative was.

The reality of the situation might be that the cure for the small business owner and the employees may be much better than previously thought. Group health insurance became an entitlement of employment in America right after World War II. Anywhere else in the World, most people are covered by national healthcare and if you are rich, you probably have some private health insurance on top of that coverage.

Regardless of the stories about the Canadians coming to the U.S. for medical treatment, we are stuck with Obamacare for now and it may not be that bad for the business owner as previously thought from a cost and coverage standpoint.  Personally, I was spending a fortune for mediocre coverage. We have quality healthcare but it is too unaffordable for most folks.

The reality is that most business owners never wanted to be in the health insurance business. First, how about employees complaining about claims not being paid and collection agencies calling as a result? How about healthcare being the second biggest cost after payroll increasing by 15-30 percent per year?

This article is focused on a possible solution for small business owners that have felt those most vulnerable in this discussion.

Obamacare Basics

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.

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.

(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.

(4) The law requires states to establish insurance “exchanges,” or join a federal exchange, where individuals and small businesses can comparison-shop for coverage. This part of the law went into effect on October 1.

As of May 28, 2013, 16 states and the District of Columbia had announced they would establish their own exchange, 7 announced plans for a partnership exchange, and 27 planned to default to the federal exchange

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:

1. 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.
2. 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. So, if the employee's household income is $50,000, and the  premium is more than $395.83/month, the employee will qualify.

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 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.

A Simple Solution

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 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!

A. Keeping Your Coverage

If the small business owner insists on purchasing group coverage or individual coverage, Employee's premiums can be arranged and paid on a pre-tax basis using a IRC Sec 125 Plan.  IRC Sec 125(f)(3) does not allow for individual insurance purchased on the exchange to be purchased with pre-tax dollars as it receives a subsidy.  Individual coverage not purchased on the exchange is not subject to this rule.

The business owner can purchase group coverage with a high deductible coordinated with a Medical Expense Reimbursement Plan (MERP) for the business. Premiums up to a $2,500 annual limit may be paid with pre-tax dollars for the employee portion using the IRC Sec 125 Plan.

A Section 125 Plan is an employer-provided benefit where the employee can choose from a range of different benefits and pay for them with pre-tax dollars. The premium is deducted from the employee’s taxable income, thereby reducing the employer's federal and state withholding obligations for  FICA, FUTA and Medicare taxes.  The Patient Protection and Affordable Care Act of 2010 (PPACA) amended Section 125 of the Internal Revenue Code (Code) to place a $2,500 limit on salary reduction contributions to health flexible spending arrangements (health FSAs).

The $2,500 limit applies only to salary reduction contributions under a health FSA. As such, the limit will not apply to the following types of contributions:

1. Employer non-elective contributions (sometimes referred to as "flex credits") made to an employee's health FSA.
2. Contributions to a health savings account or health reimbursement account. The contribution limit in 2013 is $3,250 or $6,450 for a family.
3. Contributions to other types of FSAs, including dependent care assistance and adoption assistance.
4. Salary reduction contributions made by employees to pay their share of health coverage under the employer's group health plan.

Each eligible employee of an employer may elect the $2,500 limit, regardless of the number of other individuals whose medical expenses are reimbursable under the employee's health FSA (i.e., the number of dependents covered by the health FSA does not affect the limit). If two spouses employed by the same employer are each eligible to participate in the employer's health FSA, each spouse may separately elect the $2,500 limit.

B. Medical Expense Reimbursement Plans 

IRC Sec 105 provides a small business owner with the ability to reimburse an employee and his family members for medical expenses not covered by health insurance. The business is able to deduct the reimbursement expense as a business expense while excluding the payment for the benefit of the employee without treating the payment as wages subject to income and the employer portion of FICA (7.655) and FUTA (0.8%) payments. The employee is not taxed on these reimbursement payments from the employer and not subject to the employee portion of FICA or the additional Medicare tax. .

The range of medical reimbursements can be quite comprehensive including dental and vision -related treatment expenses. The reimbursements may include prescription drugs as well medical equipment and travel and lodging. Additionally, long term care is fully deductible versus partial deductibility as an individual when taken as an itemized deduction. Generally, a C Corporation can provide reimbursements for the entire family.  A LLC would need to hire the spouse in order to provide reimbursements for the spouse and dependents.

C. Eliminating Your Group Coverage

The other approach is for employees to purchase individual coverage on the Exchange and apply for premium subsidies where applicable.  The business owner can establish a MERP to provide a reimbursement equal to the annual amount previously provided to the employee in the former group insurance arrangement or the individual deductible under a Silver or Bronze Plan.

Example

A business owner in Dayton, Ohio previously provided group coverage for his existing 22 employees. The monthly  premium under the existing group was $23,900 per month or $1,086 per employee. Family rates were as high as $2,100 per month, Individual rates  were as high as $762 per month. The existing  plan had co-payments up to $1,000/$2,000 Out-of-Pocket. The average age of employees  is 45  with a $50,000 average salary.

The premium under Obamacare  for a family of four including two children is outlined in this paragraph. The average salary is 212 percent of the federal poverty level. The unsubsidized premium is $10,099 or $841 dollar. The maximum percentage of income to be spent on health insurance per employee is 6.73 percent. The amount of the subsidy is $6,733 or 67 percent of the premium. The employee's cost for coverage after subsidies is $3,365 or $280 per month. Bronze coverage would drop the annual premium to $2,633 or $232 per month.

The  provides business owner provides a MERP annual benefit equal to the difference or the prior monthly premium 0f $1,086 and the premium under the Silver Plan. The difference is $806, or $9,672. The maximum family  out of pocket expense under the Silver Plan coverage is $10,400. The MERP will cover virtually all of the employee's out of pocket expenses. The bottom line is that the employee has a stronger benefit at a lower personal cost as does the business owner.

Summary

It is simply amazing how a health insurance (among other things) debate could shut down the federal government. Of course, the Devil is in the details. What about reduced physician networks et al? The bigger point is that small business owners under the old system were already being crushed and passing more and more of the cost of health care onto the employee anyhow. Health insurance premiums are the largest expense after payroll. Why not take that cost under control and eliminate the risk by taking advantage of other tax-subsidized benefit programs such as IRC Sec 125 and IRC Sec 105 along with individual coverage subsidies.

If you are a small business owner with very few employees, you may be in for the surprise of your life with the personal favorable cost of coverage under Obamacare. The ability to integrate the MERP on top of the coverage may turn medical expenses that were previously non-deductible as medical expenses due to the phase out of miscellaneous itemized or the deduction threshold for medical expenses into deductible expenses without limitation.

As the cliché goes, "When life deals you lemons, you need how to make lemonade"!

On a different note, remember to count your blessings today!