How does Obamacare affect my company? The answer to the Employment Law Question for July 2012

The answer to this question will largely depend on the size of your business.

The Patient Protection and Affordable Care Act of 2010, commonly referred to as Obamacare, goes into full effect in 2014; however, employers are already struggling to comply with its many mandates, some of which are already in effect.

Starting in 2014, every individual with annual income over $9,500 for whom health insurance is considered affordable based on family income must be insured or face a penalty. Individuals can turn to government-run “insurance exchanges” for coverage, and low-income employees may receive tax credit subsidies if their employers provide no health insurance, or unaffordable/insufficient health insurance. (“Unaffordable” health insurance requires an employee to pay premiums or co-pays of more than 9.5% of wages, and insufficient benefits fail to cover at least 60% of costs). The Government will finance these subsidies, however, by penalties assessed against the individuals’ employers if they have 50 or more full-time employees (or part-time equivalents).

Medium-to-Large Businesses. Under Obamacare, many medium-to-large businesses will need to adjust health insurance or staffing to comply with the law’s requirements. Obamacare requires businesses with 50 or more employees to offer affordable and sufficient health care coverage to each full-time employee or pay a penalty. This penalty is assessed if even one full-time employee receives a subsidy. The penalty varies depending on whether the employer offers no health insurance, or unaffordable/insufficient insurance. If it provides no health insurance, the penalty equals the total number of full-time employees, minus 30, times $2,000. If it provides unaffordable or inadequate insurance, the penalty is the lesser of either (i) the total number of full-time employees, minus 30, times $2,000; or (ii) the number of subsidized employees times $3,000.

For example, if a 50-person employer provides no health insurance and only two full-time employees receive government subsidies, then that employer would be charged $40,000 in penalties. If it provides unaffordable or insufficient insurance, it would only pay $6,000 in penalties (2 x $3,000 = $6,000, which is less than 20 x $2,000 = $40,000).

Despite these penalties, however, the likely increases in health care costs under Obamacare may make it cheaper for medium-to-large companies to stop providing health care coverage to employees. Obamacare will increase health insurance costs because it will add millions of people to Medicaid (including households below 133% of the Federal Poverty Level), which will likely cause hospitals and doctors to increase costs for private insurers. Additionally, Obamacare imposes expensive new mandates on employer benefits, including:

1. requiring that employee dependents remain covered until age 26;

2. eliminating caps of annual and lifetime reimbursement limits; and

3. imposing new burdens on employers when it comes to reporting costs, including that employer-sponsored insurance report costs on employees’ W-2 Forms beginning in the 2012 tax year.

For many medium-to-large employers, the best course of action will be to adjust wages and staffing. Many employers hovering at the 50-employee threshold can lower their workforce size to below 50 employees by replacing full-time positions with part-time employees. (Obamacare does not penalize employers for uninsured employees working less than 30 hours per week.) Employers can also use independent contractors to stay under the 50-employee threshold. Alternatively, employers can increase salaries or provide alternative benefits to prevent employees from receiving a government subsidy, rather than provide insurance, or reduce wages to recoup any penalties paid. The National Federation of Independent Business provides a useful resource in analyzing the impact of the law.

Small Businesses. Employers with fewer than 50 full-time employees or their equivalent are exempt from penalties, and thus have less incentive to provide health insurance to employees in 2014 and after. To counter this dynamic, the law provides that businesses with 25 employees or less that do provide insurance can qualify for a tax credit if their employees’ average wages are below $50,000. Currently this tax credit is 35 percent (set to increase to 50 percent in 2014). In addition, small businesses with up to 100 employees will have access to government-based Small Business Health Options Program (SHOP) Exchanges to expand their purchasing power with insurance companies. Nevertheless, many small businesses will likely find it cheaper and easier to leave employees on their own to buy insurance through the government-run exchanges.

Increased Medicare Withholding. After December 31, 2012, employers will also be required to withhold additional Medicare tax from the wages of high-earning employees. The Medicare tax is set to increase from 1.45 percent to 2.35 percent for an employee who receives wages of more than $200,000. Businesses are only required to withhold this additional tax if the employee receives over $200,000 from that employer. (Businesses need not consider a spouse’s earnings or earnings from a second job.) This additional tax also applies to wages over $250,000 for joint filers, and wages over $125,000 for separate filers who are married.

To ease the impact of these changes, employers should seek legal guidance and discuss with a qualified employment lawyer the effect of Obamacare’s provisions on their businesses.

This is intended for educational purposes only, and is not intended to provide legal advice nor is it intended to create an attorney client relationship with the recipient of this email.