The Patient Protection and Affordable Care Act (the “Act”, as amended) was recently signed into law. The Act will affect nearly every individual and business in the U.S.

 The Act generally requires most individuals to have at least a minimum level of essential health care coverage (or imposes penalties on individuals who fail to do so). Under the new law, lower income individuals (with income up to 400% of the poverty level) may be entitled to receive tax credits and cost-sharing reductions to help pay for the coverage.

 Employer Responsibilities

The Act also contains numerous provisions affecting employers.

 Employer Shared Responsibility. While the Act does not require employers to provide minimum essential health coverage to employees, it encourages them to do so by offering penalties and incentives.

Employer Penalty. The new law exacts a penalty on larger employers (at least 50 full-time or full-time equivalent employees during the prior year) who fail to provide adequate coverage. If the employer doesn’t offer minimum essential coverage to employees and at least one employee receives a premium tax credit or cost-sharing reduction, it will be assessed a penalty of $2,000 per full-time employee per year. The Act excludes the first 30 employees from the penalty.

For those employers offering coverage where the coverage is “unaffordable” or where the coverage has an “actuarial value” of less than 60% of the cost of benefits, a penalty will apply if at least one employee receives a premium tax credit or cost-sharing reduction. The penalty is the lesser of $3,000 for each employee receiving the credit or reduction or $2,000 multiplied times the total number of full-time employees. Employers with fewer than 50 full-time employees are exempt from the penalty assessment.

 SHOP Exchanges. The Act creates state-based exchanges (known as Small Business Health Options Program, or “SHOP”, Exchanges) through which small businesses (up to 100 full-time employees) can buy health care insurance coverage for employees (and possibly save money by doing so).

 Small Employer Tax Credit. The Act offers small employers (generally those with no more than 25 full time employees and paying average annual wages of no more than $50,000 per employee) that purchase health insurance coverage for employees a sliding-scale income-tax credit to help them pay for the plan.

 Free Choice Vouchers. Employers that offer coverage to their employees will be required to provide a “Free Choice Voucher” to certain employees whose income is not more than 400% of the federal poverty level under specified circumstances. The voucher is generally equal to an amount the employer would have paid to cover the employee under the employer’s plan.

 Grandfathered Coverage. The Act allows personal or employer-provided health benefit coverage existing at the time of enactment to stay in place under a “grandfather” provision. The Act considers the grandfathered coverage to meet the law’s individual coverage mandate, if certain requirements are met.

 Medicare Tax Increases

The Act imposes Medicare tax increases on higher income taxpayers.

 Additional Medicare Tax on Earnings. Individual taxpayers who earn more than $200,000 a year, married taxpayers filing jointly who earn more than $250,000, and married taxpayers filing separately who earn more than $125,000 will have to pay an additional Medicare tax equal to .9% of their wages over the relevant threshold amount for their filing status. Self-employed individuals will be liable for an additional
tax of .9% on self-employment income over certain thresholds. The additional self-employment tax is not deductible.

Surtax on Investment Income. A 3.8% surtax will be imposed on the investment income of higher income individuals, estates, and trusts. For individuals, the tax is equal to 3.8% of the lesser of (1) net investment income for the year or (2) the amount by which modified adjusted gross income exceeds the annual threshold amounts specified above for the additional Medicare tax on earnings. The thresholds are not inflation-adjusted. The 3.8% surtax does not apply to qualified retirement plan and individual retirement account distributions.

 For More Information

The new law contains many more provisions that may affect you and your business. The good news is that, while some provisions of the Act take effect in 2010, most of the employer provisions go into effect later this decade. We would be happy to consult with you on what the new law means to you —today and tomorrow. Please let us know if we can be of assistance.