The Affordable Care Act, signed by President Obama on March 23, 2010, signified a landmark shift in the American healthcare system. The Supreme Court affirmed the constitutionality of the decision in June of 2012. For small businesses, this decision was particularly relevant because Obamacare both imposes stiff penalties on businesses who do not provide health insurance for their employees and provides tax credits for small businesses who do provide health insurance.
News outlets abound with speculations about Obamacare and its potential effects on small businesses. Some small business owners are celebrating the new tax credits they can use to provide health coverage for their employees, while others are lamenting the fact that they are now forced to either pay for employee health coverage or pay stiff penalties. While the left and right argue about the best way to encourage small business growth and boost job creation, NerdWallet seeks to give small businesses a breakdown of the Affordable Care Act and its restrictions and benefits.
Fees and Penalties for Larger Employers
The Affordable Care Act will not go into full effect until 2014, but businesses are preparing for its changes now. The implications of the law are determined by the size of the business and the number of full-time employees. The penalties are as such:
- 0-25 employees: The business will receive a tax credit to offset the cost of purchasing healthcare coverage for their employees, and the business will not be penalized if they do not provide healthcare coverage
- 25-49 employees: The business will not be penalized if they do not provide coverage, nor will they receive a tax credit if they do provide coverage
- 50+ employees: The business will have to pay a fine ($2000-3000 per employee) if they do not provide affordable care.
Tax Credits and Government Initiatives
The Affordable Care Act provides government-based financial help for small businesses so that they can afford healthcare policies for their employees. This aid is applied through three programs: a tax credit, the Early Retiree Reinsurance Program, and Affordable Insurance Exchanges.
1. Tax Credit. In a description of the Small Business Health Care Tax Credit, the IRS outlines the criteria for receiving this credit. Employers qualify for a tax credit if they fit three conditions:
- They cover at least 50% of the cost of single health care coverage to each employee
- They have fewer than 25 full-time employees
- They pay average annual wages below $50,000
This tax credit currently covers up to 35% of health insurance expenses for small for-profit businesses and up to 25% of health insurance expenses for non-profits. In 2014, this maximum limit on the tax credit will increase to 50% of health insurance expenses for small for-profit businesses and 35% for non-profits. The Health Care and You Coalition provides a tax credit calculator that small businesses can use to estimate the value of their tax credit.
2. Early Retiree Reinsurance Program. Additionally, employer-based plans providing health insurance to retirees between 55 and 64 can get financial reimbursement through the Early Retiree Reinsurance Program. Applications closed on May 5, 2011, but the Department of Health and Human Services is still approving applications received before the deadline.
3. Affordable Insurance Exchanges. The U.S. Department of Health and Human Services states that small businesses pay 18% more than large firms for the same health insurance policies. The Affordable Care Act allows businesses with fewer than 100 employees to shop and compare healthcare costs in Affordable Insurance Exchanges that will be established by 2014, enabling employers to purchase healthcare policies for similar prices as the large firms.
For more information on the Affordable Care Act, check out NerdWallet’s posts, How Much Would Losing Obamacare Cost Unemployed Young Adults? and Is “Obamacare” Just A Tax?