The New Health Care Legislation — Decoded

While the new health care legislation signed into law on March 23 is indeed large, complex and far-reaching, we’re happy to report that it does not appear to be cause for serious concern for business owners. At least not the heightened concern that it seems to have stirred among business owners.

There are no mandates whatsoever on businesses that employ 50 or fewer. Moreover, employers of 25 or fewer that choose to provide health care insurance benefits to their employees may be eligible to receive assistance in the form of tax credits. This aid to small businesses begins immediately (2010 tax year). The accompanying table provides some of the details.

The law does not appear to have any broad impact on employers of 51 or more until tax year 2014. Then, they may be subject to financial penalties if they do not provide a reasonable health care benefit to their employees. How big a penalty? Well, the quick answer is up to $2,000 per employee, but this is an absolute maximum case that would almost certainly never occur.

First, most large employers already provide health care benefits — many because they must to be competitive in the job market. Second, if a large employer does not provide health care benefits to its employees — or provides only a minimal benefit — any penalty likely would be assessed only on employees who:

• decline the company plan (if there is one), and
• obtain coverage through one of the newly formed state health insurance “exchanges,” and
• qualify for federal health coverage tax credit based on their (low) income level

Big One-Time Charges

Soon after the new health care legislation was signed into law, some large public corporations announced they would take a one-time hit to earnings to recognize future costs they expect to incur as a result — Caterpillar, Deere & Company and AT&T, to name a few.

The charges do not stem from any employer mandate to provide health care coverage. It’s related to elimination of a tax break provided to them in 2006. In short, the government has been reimbursing these large employers for offering prescription drug benefits to their retired workers (under what is known as Medicare Part D) and, beginning with the 2006 legislation, allowing them to “hide” the federal subsidies from income. The new law removes the loophole. That is, these employers must now count the cash they receive from the federal government as revenue (as is normal under the federal tax code).

As a case in point, Caterpillar recently announced a $100 million one-time charge for expenses related to the legislation, but according to the Wall Street Journal, Caterpillar’s annual cash flow will decline by only about $7 million per year — less than 1 percent of its 2009 cash flow — and it will continue to receive $10 million in subsidies from the federal government.

Basically, these companies complain because the net benefit of subsidies they receive has declined.

Mandated Coverage for Dependents up to 26 years of age

The new legislation mandates that insurance companies allow insured parties to include dependents up to 26 years of age. Will this cost employers money? Well, to the extent …

covered employees have dependents aged 21 to 26 that are uninsured (or underinsured) and choose to add them, and

employers are paying all or a part of the insurance benefits of employee dependents

…costs will rise.

Not all covered employees will add their dependents ages 21 to 26 to their policies, and moreover, many employers don’t pay the premiums for dependents. The salient point, though, is some employees will, and some employers do, so costs could rise for some. Of course, employers could choose to lower the amount they pay for dependents. Also, so long as all of a firm’s competitors also bear the added burden the competitive landscape should remain level. The new law should not be too disruptive. But, to be sure, employers will have to raise prices lest they suffer operating profit erosion.

Tax Increases

Included in the new federal law are two surtaxes on individuals with taxable incomes over $200,000 ($250,000 for couples filing jointly), 0.9 percent additional tax on Medicare payroll and 3.8 percent on income from investments (capital gains, dividends and interest). Both begin in 2013. It’s a bitter pill. But unless and until we elect politicians that will reduce spending we’ll face either higher taxes or the continued buildup of federal debt (which will have to be dealt with, at some time, in one way or another).

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Again, it’s true that the new health care legislation is voluminous, complex and far-reaching, but the employer-related provisions are but a subset and it will be months before all the detailed provisions are even written, much less communicated clearly to the populace. But we do know now that there is absolutely no mandate on employers of fewer than 51 employees. Even more, employers of fewer than 25 may receive financial assistance if they offer a health care benefit to their employees. We also know that for employers with more than 50 employees there are provisions that ensure that the 51st employee is not a “trip wire.”

So, in spite of the alarming rhetoric coming from politicians and talk show hosts, there appears to be, at least at this time, “nothing more to fear than fear itself” for employers of 50 or fewer. For employers of more than 50 there are added burdens stated to go into affect in 2014 but we don’t think they’ll be too disruptive. At least that’s our stance based on the information we have today.

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¹This maximum credit is available to firms with 10 or fewer employees and average annual employee wages of less than $25,000. The tax credit phases out as the employer’s employee count and average wages rise above these levels. Total phase-out occurs when employee count exceeds 25 or average annual wages exceed $50,000.

² This is for tax years 2010 through 2013. In 2014 and 2015, all provisions remain the same except the tax credit maximum rises to 50% and applies only to employers that purchase their coverage through an “Exchange.”

³The rules are complex and not even fully developed yet. In short, since this provision of the law does not go into effect until 2014, there is plenty of time to wait for the details to be developed and communicated.

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“It is just not responsible to suggest that the new health care law is bad business. Study after study indicates that this new law will create certainty, stability and reduced costs for American business.”

Gary Locke, U.S. Secretary of Commerce