This month the nation’s health-care reform law (the Patient Protection and Affordable Care Act) begins unfolding in earnest, and contractors need to make certain they are ready for the changes.
Before we address the new realities, however, it might help to explain how the law actually affects small contractors, which has been a source of confusion. The facts are: Before the final vote, Sen. Jeff Merkley, D-Oregon, attached an amendment requiring contractors with five or more employees and payrolls of more than $250,000 to provide health coverage. However, the amendment did not survive the reconciliation process between Senate and House versions of the bill. Moreover, it is highly unlikely the amendment will be reinstated. The AFL-CIO’s Building and Construction Trades Department, which was the driving force behind the amendment, and Sen. Merkley appear to have lost interest in rekindling the amendment.
As it stands today, only companies with 50 or more employees will have to provide insurance, which means the law applies mainly to the largest construction firms. For those companies that employ 49 or fewer employees, no health-care coverage is required. In fact, some contractors and construction companies might be tempted to drop their coverage to better compete against larger competitors. Contractors should think long and hard before doing this. Brian Turmail, a spokesman for Associated General Contractors of America recently said: “If you cut benefits, you cut your ability to perform as a company. Everyone has the same construction equipment. There’s no secret front-end loader that’s going to beat out the competition. Where you’re going to compete is on the strength of your employees.’’
Turmail makes a good point.
For those who do provide benefits, there are a few important changes that will take place over the next four months, the first occurring this month. Employers with fewer than 25 employees may now take advantage of tax credits in exchange for providing health-care benefits. Only firms that pay their workers an average of $25,000 or less are eligible for the full credit. The credit is reduced as the average wage goes up, with complete phase out when the average wage reaches $50,000. Only firms covering 50% or more of insurance costs will be eligible, and the credit is only available for a maximum of six years.
There is another important change that goes into effect this month. From June 23 through Dec. 31, 2013, employers will be able to participate in an incentive program to provide coverage for retirees over the age of 55 who are not eligible for Medicare. A temporary high-risk insurance pool will be created to provide health coverage to individuals with pre-existing medical conditions who have been uninsured for at least six months.
Because of these requirements, and others that will follow, contractors who have not reviewed the law with their accountants need to do so. A litany of changes will arrive incrementally over the next four years and contractors need to keep up.
For those who have lost track of what health-care reform will create over the next few years, here are the key features:
Tax Years 2010-2013: Employers with fewer than 25 employees may take advantage of tax credits in exchange for providing health-care benefits.
June 23, 2010 through Dec. 31, 2013: In addition to the retiree program I’ve already discussed, a temporary high-risk insurance pool will be created to provide health care to individuals with pre-existing medical conditions who have been uninsured for at least six months.
For Plan Years Beginning Sept. 23, 2010 or for calendar year plans beginning Jan 1, 2011: 1) Insurers will not be able to deny coverage to children who have pre-existing medical conditions. 2) Insurance companies will have to provide coverage for dependent children up to age 27, as long as the adult child is not eligible to enroll in another eligible employer-sponsored health plan. 3) Polices cannot be cancelled for those who are sick. 4) Plans can no longer set lifetime limits on essential benefits. 5) Plans will be required to cover preventative services such as immunizations for children.
Jan. 1, 2011: 1) The federal tax on individuals who spend money from Health Savings Accounts on ineligible medical expenses will double to 20%. 2) The aggregate cost of applicable employer-sponsored coverage must be reported annually on the employee’s Form W-2.
Jan. 1, 2013: 1) The limit on how much individuals can contribute to flexible spending accounts will be set at $2,500. 2) The Medicare tax rate will increase from 1.45% to 2.35% on earnings over $200,000 for individuals and $250,000 for families.
Jan. 2, 2014: 1) Companies with 50 or more employees will be required to pay a penalty of $2,000 annually for each employee if the company does not provide a health insurance plan. (The threshold for construction companies was increased from five to 50 as part of the reconciliation process.) 2) Companies with 50 or more employees will pay a fine if any of their full-time workers qualify for federal health-care subsidies. 3) A state-based health care exchange will be created as a marketplace for uninsured individuals and small businesses. 4) Adults with pre-existing conditions can no longer be denied coverage. 5) Employers must automatically enroll employees in the company’s health plan. Employees may opt out later.
Jan. 1, 2018: 1) A 40% tax will be imposed on health-care plans that cost more than $11,850 for individual coverage and $30,950 for family coverage. This amount is higher for construction employers than most other industries because construction is one of many high-risk industries and excludes the value of dental and vision benefits. 2) States may choose to allow large companies with 200 or more employees to purchase coverage through the exchanges.
Health-care reform is about to create a lot of accounting changes, and no doubt more than a few tax changes. It all creates a new learning curve for business owners, but not one that should feared. It’s all quite manageable. Don’t delay in seeking guidance from construction industry accountants.