Senate Small Business Committee examines tax consequences of ACA
By Jessica Watkins, Wolters Kluwer News Staff
The Senate Small Business and Entrepreneurship Committee held a hearing on May 18 to discuss the impact of thePatient Protection and Affordable Care Act (ACA) (P.L. 111-148) on small businesses. Lawmakers examined various taximplications of the healthcare law and how IRS regulations have affected small business growth.
Small employer health arrangements. “Last year, small employers that offered to pay their employee’s medical expenses directly through a health reimbursement arrangement were told by the IRS they couldn’t do that anymore, and if they did, they would be penalized $100 per day per employee, up to $36,500 per year”, Chairman David Vitter (R-La) said. “That $36,500 penalty is 18 times greater than the $2,000 penalty on a large employer that doesn’t provide any insurance at all for their employees,” he continued.
Many small businesses have traditionally provided a health benefit to their employees through a health reimbursement arrangement (HRA). In Rev. Rul. 61-146, 1961-2 CB 25, the IRS determined that if an employer reimburses an employee’s substantiated premiums for non-employer sponsored hospital and medical insurance, the payments are excluded from the employee’s gross income. The exclusion also applies if the employer pays the premiums directly to the insurer.
Following passage of the ACA, the IRS released Notice 2013-54, I.R.B. 2013-40, 287, which described these arrangements as employer payment plans. Therefore, they are considered to be group health plans subject to the ACA’s market reforms, including the prohibition on annual limits for essential health benefits and the requirement to provide certain preventive care without cost sharing. Failure to comply with the ACA’s market reforms triggers excise taxes under Code Sec. 4980D.
Tom Kunkel, president and CEO of Full House Market & Print, testified as to how his business has suffered because of the ACA and IRS regulations. Several employees were unable to keep their insurance plans because they could not meet their premiums no longer being permitted to have employer reimbursement, Kunkel said. “IRS Notice 2013-54 has essentially taken us back to the situation before the Affordable Care Act where a small business cannot afford to offer health benefits to its employees,” he added.
Kunkel urged lawmakers to pass the Small Business Healthcare Relief Bill (Sen 1697), predicting that the legislation “would protect small businesses from catastrophic penalties and restore my business’s ability to help our employees afford individual market health insurance.” Sen 1697 is a bicameral, bipartisan measure introduced by Sen. Charles E. Grassley (R-Iowa) in 2015. The bill would generally allow an employer with fewer than 50 employees that does not offer group health insurance coverage to establish a health reimbursement arrangement that would not run afoul of the ACA’s market reforms.
Kevin Kuhlman, director of Legislative Affairs with the National Federation of Independent Business, too, agreed the treatment of some small business health plans is harmful to many small businesses. “Penalties of this magnitude would be catastrophic for small businesses, forcing many to close their doors,” Kuhlman testified.
House. The House introduced a related bill, HR 2911, in 2015. The bill is cosponsored by Rep. Charles Boustany (R-La) with 85 cosponsors. The bill was promoted at the House Ways and Means Health Subcommittee hearing on May 17. The hearing welcomed 14 bipartisan members’ presentations of tax-related proposals to increase healthcare options.
Tax credit. “The ACA provides a small business tax credit to for-profit and nonprofit organizations with fewer than 25 full-time employees (FTEs), phasing out as firm size increases,” said Vitter. He added that the Obama Administration originally estimated 4-million small businesses would be eligible for the Code Sec. 45R credit but only 181,000 claimed the credit in 2014. “The credit has too many limitations to be effective, including a size limitation, an average-salary limitation, an additive structure limitation (adding average wages and number of employees together), an average state small group market cap limitation, a temporary duration, and a limited market availability,” Kuhlman said.
On the other hand, Mike Brey, owner of Hobbyworks, credited the health care law’s cost-containment provisions for allowing premiums to stabilize, per his observation. “I believe I am finally starting to have the certainty and stability I need when it comes to health insurance premiums and choices of plans,” Brey testified.
Companies: Full House Market & Print; National Federation of Independent Business; Hobbyworks
Legislation: CongressionalHearings EmployerMandateNews SmallBusinessNews SmallEmployerTaxCreditNews TaxExemptionNews
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