To Your Health Costs

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David Hilgers
Photo by Mark Matson

The Patient Protection and Affordable Care Act passed in March is as long on controversy as it is in pages. Distilled, the 2,800-page, $950 billion health care reform legislation imposes administrative requirements, along with coverage obligations, on employers in mandating that Americans buy insurance or pay an annual penalty.

Together with the PPACA, the Health Care and Education Reconciliation Act executed on March 30 affects both fully insured and self-insured employer-sponsored health plans.

“The immediate financial impact of complying with the legislation is slight for most law firms as employers. Reasonable-size law firms already have a health plan for their employees, so the serious impact will be in 2014,” says David Hilgers, chair of the ABA’s Section of Health Law and a partner at Brown McCarroll in Austin, Texas. “Small firms currently without coverage will find the subsidies or tax credits help offset their immediate financial commitment for compliance.”

Firm size and wages paid determine an employer’s 2010 tax credit eligibility. Firms with fewer than 25 full-time employees should crunch the numbers with the eligibility formula on the IRS website. But don’t count:

• Summer associates, since seasonal workers are disregarded.

• A sole proprietor, a partner in a partnership, a shareholder owning more than 2 percent of an S corporation, or any owner of more than 5 percent of other businesses.

• Family members of an owner.

A “qualifying” premiums calculation determines the amount of the credit. The maximum credit is 35 percent of premiums paid. By 2014, this increases to 50 percent, and states must have Small Business Health Options Program exchanges, where businesses pool together to buy insurance (though states have the option of limiting pools to businesses of 50 or fewer employees).


Tax-deductible contributions to flexible spending accounts are reduced to $2,500 by 2013, and nonprescription items will no longer be a qualified FSA expense in 2011. Calculate whether these limits push you into a higher tax bracket.

Plan for a tax hit if your individual earnings exceed $200,000 ($250,000 if married), because the Medicare tax on your wages increases from 0.9 percent to 2.35 percent in 2013.

A complex penalty calculation greets firms with more than 50 employees who offer no coverage or “unaffordable” coverage. An annual penalty of $2,000 applies for each full-time employee not covered, effective 2014.

Guidelines from the Department of Health and Human Services will follow with definitions, but coverage is considered unaffordable if you have one employee paying more than 9.5 percent of the employee’s household income for it.

“The regulatory aspects of the mandate are significant because of the oversight that will be necessary,” Hilgers says. “Employers will see the added paperwork required to keep up with both the new federal and state requirements as the immediate and possible long-term problem.”

In 2011, employers must report the value of each employee’s health plan on their W-2 statement and, starting in 2012, complete 1099s for all payments of $600 or more to any business.

The tax returns are where you’ll report acceptable coverage. A $750 pen alty applies per uncovered employee.

Expect IRS scrutiny. President Barack Obama’s fiscal year budget mentioned an $8 billion allocation backing IRS target areas of non compliance.

And though the devil is in the details, so is the execution of the legislation. “A positive aspect of this legislation is that it could bring fair play to insurance markets that we haven’t had,” Hilgers says. “Most in the health care industry believe this system was about to self-destruct and there had to be some significant change.

“This legislation is not great,” he says. “There are many problems that still need to be worked out, … which is why there are still so many unknowns about how it will actually work or the results, negative or positive, to businesses and consumers.”

Hilgers adds that “we won’t know for a while, until 2014, how all these provisions ultimately shake out.”


While Republican legislators seek repeal and constitutional challenges exist, plan for implementation.

First, learn from your employees what type of insurance coverage is reasonable for their particular needs. Second, explore options.

“Law firms can find savings in self-insurance, which offers better cash flow, improved risk management and control over the health plan’s design,” Hilgers says. With 500 or more employees, he says, the risk pool “is sufficiently large and losses sufficiently predictable to allow you to assume some or all of the risk yourself instead of getting an insurance company to do it for you.” Self-insurance potentially reduces cost of coverage.

David Edman, founder and managing partner of Risk Management Partners, a Wayne, Pa.-based health care consulting and brokerage firm, adds that “self-insurance generally isn’t viable for firms with less than 200 employees. A state exchange may make better economic sense to consider when 2014 arrives than get hit with a noncompliance penalty or insurer’s mark-up through premiums.”

And protect your cash flow. This law will impact capital outlays; the question is when. In uncertain times, fast access to capital can sustain your business.

Congressional Budget Office estimates put the 2014 monthly health insurance costs for firms with less than 100 employees at $650 for individual coverage and $1,333 for family coverage.

View a timeline (PDF) of changes health reform will bring.

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