The Affordable Care Act (ACA) is one of the more complicated pieces of legislation passed in recent years, consisting of over 20,000 pages of regulations. It has added almost two dozen new taxes and changes to existing tax laws—and imposes hefty fines and penalties for noncompliance.
Many businesses in our area are small enterprises. Therefore, proper compliance with the ACA impacts not only their business operations, but most likely their individual tax obligations as well.
The employee mandate
One of the most confusing parts of the ACA to small business owners is the mandate to provide health insurance for their employees. Many small business owners erroneously believe that the ACA mandate only applies to “big companies.”
It’s true that the number of full-time employees, or FTE’s, determine who falls under the mandate. The actuality of how the government determines how many FTE’s a company has is not simple. A company may be an “applicable large employer,” or ALE, and subject to the mandate—and not even know it!
The total number of FTE’s an employer has includes not only all employees a company might consider “full time employees”—the company also needs to take into account part-time employees, seasonal employees, leased employees, employees that were terminated during the year and any employees covered under a collective bargaining agreement.
Companies with fewer than 50 employees, who have multiple small business entities under common owners, could also end up subject to the ACA and the employer mandate if the total number of employees in the combined controlled or affiliated service group exceeds 50.
Noncompliance with the ACA mandate carries hefty fines and penalties should just one full-time employee receive a premium tax credit through a state exchange. Failure to offer full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan had fines/penalties at $2,000 per applicable employee in 2015.
There are increases to $2,160 in 2016, prorated by month and if the employer offers its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan.
The eligible employer-sponsored plan must be for a full-time employee who has been certified as having enrolled in a qualified health plan for which there is an applicable premium tax credit or cost-sharing reduction. If either is unaffordable or doesn’t provide minimum value the penalty, which was $3,000 in 2015, will be $3,240 in 2016, prorated by month. Depending on the number of employees, the penalties could add up to a substantial amount. Additionally, any penalties for noncompliance are treated as a nondeductible excise tax to the employer.
The ACA’s rules are very complex, and the record keeping is demanding. Every small business owner needs to be aware of the impact that even unintentional noncompliance with ACA could have on their business and, ultimately, on them personally.
Beyond the mandate
There are other changes mandated by the ACA that small businesses need to be aware of. These include some new reporting and new forms to be filed. However, the ones most likely to impact a company, beyond the mandate, are the new taxes created to fund the ACA. One of these is the 0.9 percent additional Medicare tax. Another tax created by the ACA is the 3.8 percent tax on net investment income.
Is the ACA “good” or “bad” for small business?
Ultimately, whether the ACA is “good” or “bad” for small business is a hotly contested question. It does have quite a few negative impacts, and also some positive ones.
On the negative side, it does increase costs, and can decrease the bottom line of small businesses that may already be struggling. The FTE mandate could cause small businesses to cut back on hiring to stay below the mandate threshold. And there is the impact on productivity of the additional time and effort it takes to ensure ACA compliance.
On the positive side, small businesses with fewer than 25 FTE may obtain a tax credit of up to 50 percent of the premium cost they pay toward their employees’ insurance. Also, eligible small employers can purchase health insurance through the Small Employer Health Insurance (SHOP).
We are only in the first years of mandated compliance with the ACA, and can only begin to assess how it is impacting small business in our area and across the country. It is imperative that every small business owner understands the potential effects the ACA could have on their operations. They should therefore consult with tax professionals who are well-familiar with the ACA and all of its implications.
Steven Blumenthal, CPA is the Principal of MBAF CPA’s LLC, located on 440 Park Avenue South, New York, NY 10016. He can be reached by telephone at (212) 931-9254 or email at firstname.lastname@example.org. Compliance with and understanding the difference between scams and legitimate income tax problems, can be complex. If you would like to benefit from MBAF CPA’s LLC’s expertise in these areas, or if you have further questions on this advisory, do not hesitate to contact their tax & accounting specialists at (212) 576-1400.