Pond Business | 2015 Tax Season Coming

Published on October 26, 2015

Thanks to the Supreme Court’s late-June decision in King v. Burwell, many garden pond professionals will escape at least some of the sharply escalating costs of the Affordable Care Act (ACA). That Court decision should, however, be a wake-up call for all retailers, distributors, builders, installers and manufacturers to get their ducks in a row if they are to have any hope of managing healthcare costs and complying with the ACA’s many rules.

In King v. Burwell, the U.S. Supreme Court ruled the tax subsidies for health insurance provided by the federal government to citizens in the 34 states that have not established the health insurance marketplaces or exchanges were legal. That means some six million people, including the nearly 3.5 million people in small-business plans and small business owners, self-employed professionals and early retirees who depend on subsidized health care costs, will continue to receive them.

The ACA Today

The ACA requires almost everyone to have health insurance. Large businesses are required to provide their employees with health insurance while small businesses not only escape this requirement but may, in fact, have a financial incentive to provide healthcare to workers.

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 Thanks to the ACA, every garden pond professional and his or her business now has insurance options, increased buying power via the government sponsored marketplace — all the while facing an overwhelming amount of confusion and paperwork. First, it should be understood that the ACA’s taxes and tax credits are based on the number of full-time equivalent employees (FTE) and their average annual wages, not solely on the number of full-time employees.

In simple terms, FTE, or “full-time equivalent,” equals the total number of full-time employees plus the combined number of part-time employee hours divided by 30. Seasonal employees, contractors and business owners don’t count toward the total.

The Downside

Much of the ACA’s negative impact is centered on the looming “Employer Mandate,” the requirement that larger employers must provide health insurance to workers. Much of that negativity stemmed from employers who reportedly cut hours in order to avoid becoming “large” employers. Although the negative side effects of the ACA are very real for some pond construction businesses, many of the earlier radical claims were over-dramatized and used as a talking point.

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As mentioned, only truly large businesses that don’t currently offer benefits and employ many low-wage, full-time workers face truly hard decisions. Those businesses offering higher wages typically already provide benefits, while smaller businesses (with between 100 and 50 FTE) will benefit greatly from penalty exemptions on the first 30 employees. So, a business with 100 FTE and 60 full-time workers will only owe the fee for 30 employees — assuming, of course, that they currently insure no full-time employees.

The Upside

It’s safe to say, “the smaller the businesses, the better the tax breaks.” Small businesses with fewer than 50 FTE employees can use the Small Business Health Options Program (SHOP) to get better deals on employee insurance, but aren’t mandated to do so.

Consider a few of the ACA’s other applicable rules:

  • Small pond-related businesses can see up to a 50 percent reduction in their share of the cost of employee premiums. Employers with fewer than 25 FTEs, paying average annual wages below $50,000, qualify for tax credits to help pay employee healthcare premiums. Employers with 10 or fewer full-time employees, paying annual average wages of $25,000 or less, qualify for the maximum credit of 50 percent. The amount employers do pay is tax-deductible and can be carried forward or backward.
  • Form 8941, Credit for Small Employer Health Insurance Premiums, must be filed to claim the tax credit — all the way back to 2010, since the credit is retroactive.
  • Thanks to the ACA, employers can offer more and better-quality benefits. In fact, because small businesses are able to shop for group health plans on their state’s Health Insurance Marketplace via the SHOP, a garden pond business now has the same buying power as larger businesses. Along with tax credits and increased buying power, many retailers, distributors, builders, installers and manufacturers may now be able to provide benefits to their employees.
  • The self-employed with no employees can get health coverage through the Health Insurance Marketplace for individuals, but not through SHOP.
  • Retroactive to January 1, 2014 and through at least 2015, two percent shareholders in a garden pond business operating as an S corporation can receive reimbursement for their individual health insurance premiums. Even better, the S corporation will not be subject to the excise tax penalty if it correctly includes the health insurance premiums on the two-percent shareholders’ W-2. The two-percent shareholder must report the income as wages, but will be allowed to take a self-employed health insurance deduction.
  • Effective for 2015, every garden pond business providing self-insured health coverage to employees must file an annual return reporting certain information for each employee covered. This rule was optional for 2014.
  • Last year, many small employers were shocked to learn that employee payment plans under which employees were reimbursed for the cost of obtaining individual health insurance violated the ACA rules. Facing a $100-per-day-per-affected-employee excise tax if they continued using the arrangements, many were relieved as recently provided IRS guidance cleared some of the earlier confusion.
  • Don’t forget there is an additional cost for some small businesses: a $63 pre-existing conditions fee. That’s right: for some employers purchasing insurance, there is an annual $63 fee. The ACA small business fee decreases each year until 2017, when pre-existing conditions are phased out.

The Medicare Tax Hike

The Medicare Part A tax is paid by both employees and employers. Often overlooked, however, is the fact that a garden pond professional or business with profits over $250,000 faces a .9 percent increase (from 2.9 percent to 3.8 percent) on the current Medicare part A tax.

Since this tax is split between the employer and employee, they will both see a .45 percent increase. Small businesses making under $250,000 are exempt from the tax. Employees making less than $200,000 as an individual, or $250,000 as a family, are also exempt.

Optional Strategies

Instead of shifting to the individual markets, some garden pond businesses have opted for a high-deductible group plan and set up a health reimbursement arrangement (HRA) to help offset employees’ medical expenses. An employer can dictate the expenses they will reimburse, thus limiting their out-of-pocket exposure.

The advantage of an HRA over a Health Savings Account (HSA) is that the plan can be structured so that if an employee does not use the money in an HRA, the money will still belong to the business. An HSA is another option, but it gives employers less control over how the money in an account is spent; the funds are made available to employees whether or not they incur any medical expenses.

2015, 2016 and Later

On the horizon is an excise tax on high-cost plans (also known as the “Cadillac Tax”) that kicks in for employers starting in 2018. Employers may have to pay up if their group health plans exceed a certain dollar limit. The limit for 2018 is $10,200 for individual coverage and $27,500 for family coverage.

For self-insured plans that exceed these limits, the employer will pay a 40 percent nondeductible excise tax on every dollar above the limit. This penalty can be significant even for a plan that exceeds the limits by only a few hundred dollars per year, making now the time to think about changing an existing plan.

The Subsidies

Before the ACA became fully effective in late 2013, small businesses were much less likely to offer health insurance plans to workers than larger companies. Self-employed garden pond professionals and workers in small businesses have, at least since late 2013, been able to buy subsidized individual health insurance plans on government-run exchanges.

This has reduced the uninsured rate among nonelderly workers at businesses with fewer than 50 employees from 23.5 percent in June 2013 to 13.2 percent currently. The uninsured rate among self-employed workers fell from 30.4 percent in mid-2013 to 19.6 percent.

The subsidies, available to anyone who earns between 100 and 400 percent of the poverty level, have helped reduce the cost of insurance — at least until recently. Escalating insurance costs have already begun impacting garden pond businesses and others who do not qualify for subsidies.

While supporters of the ACA tout its success in providing insurance to millions of Americans, recent rate filings from large insurers reveal the law may have been built on a shaky foundation. In recent weeks, large insurers selling coverage under the ACA have proposed massive rate increases for 2016 — some exceeding 40 percent —’ because they haven’t been able to sign up enough young and healthy customers.

Skyrocketing healthcare costs are not, however, the only reason every garden pond professional — and business — should seek professional assistance. Keeping abreast of the available benefits, the ever-changing rules and the potential pitfalls of the ACA is also extremely important.

25 years of professional experience in the fields of taxes and finance enable Mark Battersby to write on unique and topical subjects. Although no reputable professional should ever render specific advice at arm’s length, he does craft unbiased, interesting, informative and accurate articles. Mark currently writes for publications in a variety of fields. He also writes columns for trade magazines and has authored four books.

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