For the New Year, the implementation of the 2010 health care reform law continues apace. And with the arrival of 2012 there are some new (and some old) provisions that small businesses should consider when both planning for the upcoming year and filing taxes for the prior one. (To review a broad list of the health care reform changes, check out the Small Business section of the Healthcare.gov website.)
Small Business Health Care Tax Credit
For small businesses that already provide health coverage to their employees, the tax credit provision in the new health care law could lighten their burden by tens of thousands of dollars this spring. For tax year 2011—as was the case for the prior year and the next two years as well—the law allows qualifying small businesses to claim a tax credit of up to 35 percent of the employer-paid health care premiums. To qualify, a business must have fewer than 25 full-time equivalent employees, pay an average annual salary of less than $50,000, and cover at least half of the cost of their employees’ health care premiums. (For a few basic examples, check out the IRS’s small business tax credit scenarios. To plug in more specific details, use the NFIB’s Health Insurance Reform tax credit calculator.)
This credit may be a welcome, but unexpected, windfall, as many small businesses don’t realize that they’re eligible to claim it. In fact, fully a year after the new health care law’s passage, a March 2011 survey discovered that 57 percent of small businesses weren’t aware of its tax credit provisions. And because many small businesses may have overlooked claiming the credit last year, there’s an opportunity to get that cash back by amending their 2010 filings.
However, the health care credit offers other potential benefits for this tax year, as well as tax years past and future. “Even if you are a small business employer who did not owe tax during the year, you can carry the credit back or forward to other tax years,” the IRS points out on its health care tax credit fact sheet. In addition, since the tax credit only covers up to 35 percent of the premiums paid by the employer, “eligible” small businesses can still claim a business expense deduction for the premiums in excess of the credit. That’s both a credit and a deduction for employee premium payments.”
Of course, you should seek the services of a qualified tax professional if you are interested in the Small Business Health Care Tax Credit.
State Insurance Exchanges
Small businesses that have recently dropped health care coverage for their employees or have been priced out of offering it altogether may have some new alternatives in 2012. As part of the ongoing implementation of the new health care reform law, all states are mandated to establish non-profit or state-run health insurance exchanges that are specifically geared serve individuals and businesses with fewer than 100 employees. Though, according to the law, these new SHOP exchanges (Small Business Health Options Programs) need not be until in place until 2014, 13 states had already established exchanges by the end of 2011 and seven more states either have legislation pending or ongoing plans in the works. (To view the progress of these exchanges state-by-state, check out this online map from the Kaiser Family Foundation.)
The advantage of these exchanges is that they let smaller consumers pool their resources together to increase their buying power and lower their premiums. This is a particularly important pain point for small businesses, which were hit hardest by the past decade’s dramatic increases in health insurance premiums.
In addition to affording more choices and lowering the cost threshold of health care coverage, these exchanges offer valuable back-office benefits. “[M]ost small employers—particularly those with fewer than 10 employees, which comprise 80 percent of American small businesses—have no human resources department,” a recent Small Business Majority study points out. “Exchanges may provide a variety of administrative services that can help small businesses cope with the administrative work of providing health benefits and address their other human resources needs.”
Thanks to these appealing aspects, early interest in these exchanges has been positive. A recent survey of small businesses in New York, for example, found that 84 percent of respondents rated the description of a SHOP exchange as a “good idea.” Another nationwide study, conducted by Small Business Majority, discovered that 33 percent of companies who do not currently offer insurance would be more likely to add it thanks to the options provided by exchanges. Likewise, 31 percent of those small businesses that already offer health care coverage said they would continue to do so because of the presence of exchanges.
Health Insurance Rate Review and Premium Rebates
As of September 2011, health insurers are now required to alert consumers when they plan to increase annual premium rates by more than an average of 10 percent. Part of these new rate review rules includes a stipulation that health insurers must provide a transparent justification for these increases, which either state or federal officials will then scrutinize for “reasonableness.” So far, almost every state has launched some form of a premium review mechanism—through the end of 2011, 44 states and the District of Columbia had least one insurance market subject to rate review. (To check out proposed insurance premium increases by state or by insurance provider, go to the Healthcare.gov’s rate review search tool.)
A key part of this rate increase review is a new medical loss ratio rule, which stipulates that insurers must spend at least 80 percent of all premiums collected from individual or small business health plans directly on health care services. “Starting in 2012,” the Healthcare.gov site explains, “an insurer that does not spend enough on health care or quality-improving activities must give a rebate to people enrolled in the plan or the small business that purchased it.”
Annual reports detailing these premium expenses will begin to be posted on the Healthcare.gov website this summer, so small businesses should be able to find out by August 1, 2012 if they have money coming back to them. Any medical loss ratio (MLR) rebates that result from these disclosures may come as a credit toward the employer’s next premium payment, a direct refund check, or a reimbursement to the credit card account used for payment. And these rebates could add up to a substantial sum—initial Department of Health and Human Services estimates put the 2012 MLR rebate total at anywhere from $600 million to $1.4 billion.
New Annual Coverage Limits
Thanks to the new health care reform law, lifetime coverage limits were eliminated on any plan issued after September 2010, but annual health care coverage limits are still being phased out. As of September 2011, any new policy issued had an annual coverage limit of no less than $1.25 million. This annual coverage limit will rise to a minimum of $2 million a year next September and then be completely phased out 15 months later, on January 1, 2014. However, because the law continues to allow for lifetime and annual limits on “grandfathered” health policies and on health benefits not deemed “essential,” it’s best to double-check with one’s insurer to know which limits do or do not apply.