The True Meaning of Obamacare Implementation of Affordable Care Act Brings Benefits and Costs

The Patient Protection and Affordable Care Act, passed by Congress in 2010, contains numerous provisions which have and will become effective through 2018. A significant focus of the last presidential election, the act is also often referred to as Obamacare.

The Commonwealth of Massachusetts underwent healthcare reform statewide in 2006, under the term of Gov. Mitt Romney. Massachusetts has the lowest rate of uninsured residents of any state, at only around 2{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5}. Implementation in the state caused more than 400,000 to be newly insured. President Obama and his advisors, in developing the federal act, took the Commonwealth’s Health Care Reform Act into account due to its success.

There are, of course, some inconsistencies between the state and federal laws. Residents and businesses will have to reconcile these differences as the federal provisions roll out.

There are several controls regulating the behavior of insurance companies that have already been in effect in Massachusetts and will not change under Obamacare. Children under 19 must be covered regardless of pre-existing conditions, and dependents up to 26 years of age may stay on their parents’ medical insurance. Insurance companies are not permitted to place lifetime limitations on certain essential coverage, require co-payments for preventive care such as annual physicals, or cancel coverage due to illness. In addition, the price of coverage may vary only based on the size of the family and each covered person’s age, location, and tobacco use. These restrictions on business practices were built into the law in order to prevent discrimination.

Employees have already seen some changes under the Affordable Care Act. W-2 forms for large employers began reporting health benefits provided to the employee, and small employers will follow suit for 2014. Also in the move toward transparency, employees should see more detailed explanations of their plan provisions. In order to generate revenue to pay for the act, the benefits of popular tax-free methods of medical savings have been reduced. Over-the-counter medications are no longer eligible for flexible spending accounts and other health reimbursements. Beginning in 2013, contributions to flexible spending accounts are limited to $2,500 per year. The threshold will be indexed for inflation. Contributions had previously been limited only by the employer.

Both Obamacare and the Massachusetts reform include an individual mandate requiring that all citizens must carry health insurance or pay a penalty. In Massachusetts, the penalty is calculated based on age and income, and the maximum is $1,260 per individual per year. The federal mandate begins in 2014, and the maximum penalty will be $285, or 1{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of the family’s income, whichever is greater. The penalty will increase from year to year.

Under both laws, short gaps in coverage up to three months are excluded. People with religious objections, who are incarcerated, or who have other specific hardships are exempted from the mandate. As in Massachusetts, each state will be charged with setting up insurance exchanges for individuals and small businesses to purchase affordable care.

Business Impacts

Healthcare reform significantly impacts businesses under both the federal and Massachusetts laws.

The Affordable Care Act assesses penalties on employers with more than 50 full-time equivalent employees that do not provide the opportunity to enroll in an employer-sponsored plan. The number of employees must be aggregated for a controlled group of entities. The plan must be affordable, cover the employees and their dependents, and provide minimum essential coverage and minimum value. The federal penalty is $2,000 per employee who receives federal health subsidies, not including the first 30 employees. This is sometimes referred to as the ‘play or pay’ mandate.

Massachusetts law requires employers with as few as 11 employees to sponsor plans and pay a fair and reasonable share of the cost. The maximum penalty in the Commonwealth is $295 per employee. Since the state law was stricter in this regard, many businesses will already have acceptable plans in place. However, the fine print of the two laws shows disparities in what are considered full-time employees as well as what is considered affordable. Consulting a benefits advisor is recommended to ensure compliance.

A federal tax incentive for small employers to provide healthcare coverage to their employees has been in effect since 2010. The Small Business Health Care Tax Credit is available for employers of fewer than 25 full-time equivalent workers with average wages of less than $50,000 per year. For the purposes of determining average wages, the owners of the company and their family members are excluded. The employer must also cover more than 50{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of the cost of a single (not family) healthcare plan for the employee.

The credit is calculated as a percentage of the healthcare premiums paid by the employer, and the rate is on a sliding scale based on the size of the employer. The maximum rate is 35{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} through 2013. Beginning in 2014, the maximum rate increases to 50{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} for employers with fewer than 10 employees and average annual wages of less than $25,000. Employers required to provide insurance by the state but not by federal law have enjoyed and will continue to benefit from this credit.

Revenue needs to be generated by the federal government in order to fund this expansive program. Two new taxes will be imposed on individuals beginning in 2013 specifically to pay for Obamacare’s provisions. The first is an additional 0.9{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} surtax on wages and self-employment income. The surtax applies when a taxpayer earns in excess of $200,000 ($250,000 for joint returns of married filers). Employers are required to withhold the additional surcharge only when the employee’s wages exceed the $200,000 threshold, without regard to their spouse’s income. Thus, there may be some taxpayers with unexpected amounts due at the end of the year.

The second additional tax is a new 3.8{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} tax on unearned income. This tax is imposed when the adjusted gross income of a single individual exceeds $200,000, or $250,000 for married joint filers. Unearned income includes that from investments, most rentals, and businesses in which the taxpayer is not active. Additional taxation of high-income tax payers is necessary to support the healthcare coverage provided by the act.

Benefits to Massachusetts

The Commonwealth of Massachusetts is expected to benefit from the Affordable Care Act taking the regulation of health care to the federal level. The Commonwealth reportedly spends about $800 million per year subsidizing healthcare for those who qualify for state assistance. Massachusetts increased its sales tax rate in 2009, partially to fund its healthcare burden.

Upon implementation of Obamacare, however, the responsibility will partially shift to the federal government. The act expands Medicaid to families below 133{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of the poverty line and comes with federal support to the states of 100{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of the costs in the first year, gradually dropping to 90{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} for 2019 and thereafter. Some states have elected not to participate in this provision of the law and voted to decline the funding.

In Massachusetts, however, coverage was already expanded under MassHealth to families under 150{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of the poverty line. Federal spending on the healthcare expansion will be funded through the taxes and penalties previously discussed. The question remains whether Massachusetts taxes will decrease as a result of the healthcare savings.

The Commonwealth will see some changes under the Affordable Care Act. The state budget will benefit from federal assistance, which could boost the local economy. Businesses could see an increase in administrative costs due to the additional reporting requirements, but many small businesses will be able to claim the available tax credit.

Providers of plans in Massachusetts may find it frustrating to learn the rules all over again and will need to ensure that their plans meet the specifications of the federal law. Still, the state will have a smoother transition than those that did not undergo previous healthcare reform. v

Charlotte Cathro is a tax manager with the Holyoke-based CPA firm Meyers Brothers Kalicka, P.C.; (413) 536-8510; ccathro@mbkcpa.com