By William J. McDevitt, CPA, and Karolis Matulis
Wilkin & Guttenplan, P.C.

William J. McDevitt

Karolis Matulis

The Affordable Care Act (ACA) includes new laws and regulations that impact every aspect of our nation’s health care system: physicians, hospitals, insurance companies and many others. It imposes requirements on individuals to obtain health insurance coverage or pay a penalty. It also contains the new Employer Shared Responsibility Provisions – employer penalties imposed under certain circumstances.

Many small business owners are worried about how the ACA will impact their employees and bottom lines. A significant percentage of them continue to misunderstand the law and, therefore, feel unprepared. In a recent Paychex survey of small business owners with 50 or fewer employees, 48 percent said they feel their business is totally prepared for the changes imposed by the ACA; 16 percent feel somewhat prepared, but still need more assistance; and 36 percent feel that they are not prepared at all.

It is difficult to educate oneself on details of the ACA due to information overload (much of it wrong), together with the high emotions involved. Add to the confusion a rollout full of glitches and numerous changes to the law since its passage and it is no wonder why small business owners are left scratching their heads.

A Brief History of Employer-Provided Health Insurance

How did Americans end up with a system in which employers basically control our health insurance? In the early 1900s, medical care was essentially medieval, and health care spending was a very small part of the average person’s annual budget. As health care became more effective, it also became more expensive. In the early 1940s, laws were passed to encourage employers to provide insurance for their employees in an effort to promote access to health care. The basic system resulted in people with good jobs getting health care through work, while almost everyone else had to look to the government.

Today, the vast majority of individuals still get their health insurance through an employer-sponsored plan, and the employers in many cases pay a significant portion of the cost. The Kaiser Family Foundation reports that 99 percent of businesses with 200 or more workers provide employee health insurance. That figure drops to 57 percent when the business has between three and 199 workers.

Employer Shared Responsibility Penalties

Small companies with less than 50 full-time equivalent employees (FTEs) are not required to offer health insurance and will not be subjected to any penalties for not offering health insurance to their employees. A full-time equivalent is a combination of employees, each of whom is not individually treated as a full-time employee because he or she is not employed on average at least 30 hours per week with an employer.

Beginning Jan. 1, 2015, employers with 100-plus FTEs must offer an “affordable” and “qualified” group health insurance plan. Failure to offer this coverage may result in penalties. The requirement for employers with 50-plus FTE employees does not go into effect until Jan. 1, 2016. Employers that fail to offer insurance or that offer insurance that is “inadequate” or “unaffordable” while exceeding the FTE threshold will be subject to the penalties. If the employer does not offer coverage, the penalty is $2,000 per full-time employee, not counting the first 30 employees. If the employer does offer coverage, but it is deemed to be unaffordable (self-only coverage exceeds 9.5 percent of an employee’s W-2 wages from the employer) and any full-time employee is certified to receive a premium tax credit or subsidy, then the employer penalty will be $3,000 per full-time employee who receives assistance in the form of the credit or subsidy. The penalty is the lesser of the $3,000 per employee mentioned above or $2,000 for each full-time employee (not counting the first 30 employees). The penalties will be calculated and paid via the business tax return and are nondeductible.

One of the single most misunderstood aspects of the penalties is that employers are not required to pay for the health insurance to avoid the penalty. They are only required to offer affordable and adequate coverage.

Employer Health Care Tax Credits

Certain employers may qualify for employer health care tax credits if they have fewer than 25 full-time equivalent employees making an average of $50,000 a year or less. To qualify for the Small Business Health Care Tax Credit, the employer must pay at least 50 percent of the full-time employees’ premium costs. The employer does not need to offer coverage to its part-time employees or to dependents. The tax credit is worth up to 50 percent of the employer contribution toward employees’ premium costs.

SHOP Program

In order to make it easier for small businesses to comply, the marketplace also contains the Small Business Health Options Program (SHOP). The SHOP Marketplace works similarly to the individual marketplace and allows employers to choose different levels of coverage and how much they wish to pay toward employee premiums. For 2014, the SHOP Marketplace is open to employers with 50 or fewer FTEs. You can start coverage any time. Enroll by the 15th of the month, and coverage can begin on the first of the following month. You can use your current licensed agent or broker to buy health insurance in the SHOP, provided your agent or broker signs an agreement with the SHOP Marketplace.

The fundamental questions that small business employers must answer were, are and will continue to be: Should we offer health care coverage to workers to attract and retain the employees we need? And, if we do, how benefit-rich should the plan be, and how do we pay for it?

William J. McDevitt, CPA, shareholder, and Karolis Matulis, are with Wilkin & Guttenplan, P.C. McDevitt is a member of the New Jersey Society of CPAs Business Valuation Forensic Litigation Services and Federal Taxation interest Groups. Matulis is a CPA Candidate member. Contact the authors at 732.846.3000.

Reprinted with permission from New Jersey CPA Magazine. Visit