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Health care costs will keep dogging woodworkers

The attempt to repeal and replace the Affordable Care Act, commonly called Obamacare, recently failed. Since everyone must have basic health insurance that meets the government’s standards and larger woodworking businesses are required to provide their workers with that coverage, that means — fortunately or unfortunately — the ACA remains, warts and all, the law of the land for the foreseeable future.

The ACA continues to offer professional woodworkers and their businesses a number of options -– and an overwhelming amount of confusion and paperwork. What can a woodworking business owner and manager do to keep health care costs manageable while complying with the ACA’s rules?

Individual mandate

Independent contractors, professional woodworkers and business owners classified as self-employed usually don’t qualify for employer-provided health coverage. In the past, some received coverage through a spouse’s employer, while others often went without any type of insurance. The ACA changed the playing field.

Today, the ACA’s individual Mandate means that previously uninsured independent contractors and business owners are required to purchase insurance or face annual penalties. Of course, at the same time, insurers can’t deny policies or charge more for a pre-existing condition.

Whether the penalty on individuals who fail to obtain health insurance is labeled a tax or not, it is equal to the larger of 2.5 percent of household income or $695 per adult ($347 per child under 18), up to a $2,085 maximum.

Self-employed woodworking professionals and business owners can, of course, deduct the cost of health insurance for themselves and their spouses and dependents. Thus, if an S corporation pays accident and health insurance premiums (under a plan established by the S corporation) on behalf of a more-than-2 percent shareholder who is also its employee and who must include the value of the premiums in his or her gross income, the shareholder is permitted to deduct the cost of the premiums paid on his or her behalf.

The employer mandate

Much of the ACA’s negative impact stems from the so-called employer mandate that requires businesses with more than 50 full-time equivalent employees (FTE) provide health coverage to full-time workers. The penalty is generally equal to $2,260 divided by 12 for each month an employer fails to provide coverage, multiplied by the number of eligible employees (minus the first 30 employees).

However, while many of the ACA’s taxes and tax credits are based on the number of FTEs and their average annual wages, it’s not solely based on the number of full-time employees. In simple terms FTE 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 generally don’t count toward the total.

Net investment income tax

A net investment income tax (NIIT) of 3.8 percent applies to the net investment income of individuals, estates and trusts that have income above $200,000 for single filers and $250,000 for joint filers. Net investment income includes capital gains, dividends, interest and most investment earnings — and income from businesses that are considered passive activities to the taxpayer.

Fortunately, NIIT does not include operating income from a non-passive business or self-employment income, although gains from the sale of interests in partnerships and S corporations (to the extent the partner or shareholder was a passive owner) are included.

Additional payroll tax

Under the ACA, a surtax on earnings above $200,000 (or $250,000 for joint-filing taxpayers) went into effect beginning in 2013. At that earnings threshold, the portion of the FICA health insurance tax paid by employees increases by 0.9 percentage points to a total of 2.35 percent. The surtax does not apply to the portion of the health insurance tax paid by employers, which remains at 1.45 percent of earnings, regardless of how much the worker earns.

An additional Medicare tax went into effect in 2013 that applies to wages, compensation and self-employment income above a threshold amount received in taxable years. The 0.9 percent Medicare Part A tax is paid by both employees and employers. Often overlooked, however, is the fact that a woodworking professional or business with profits of more than $250,000 faces a 0.9 percent increase (from 2.9 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.

The exchanges

The ACA continues to offer small woodworking businesses affordable insurance options, cost assistance and increased buying power via the Small Business Health Options Program (SHOP). Small businesses employing fewer than 50 can use SHOP to get better deals on employee insurance, but aren’t mandated to do so.

The SHOP marketplace is for small employers who want to provide health and dental insurance to their employees — affordably, flexibly and conveniently. While it is not necessary to wait for an open enrollment period to use the SHOP marketplace, a woodworking business must have 50 or fewer FTEs, but at least one FTE other than owners, partners or family members.

The SHOP marketplace introduced new features that make it easier to choose, manage and get support when buying SHOP plans. Starting with 2017 plan-year coverage, a business using the SHOP marketplace can:

Offer employees more choices. In some states, the business can now select any insurance company offering SHOP marketplace plans in its area and allow employees choose any available plan from that company, in any category (bronze, silver, gold or platinum).

• As was the case last year, employees can be offered a single health insurance plan or allowed to choose any available plan within a single coverage category selected by the business.

• Every business can now see a breakdown of premium costs by employee and dependent (if applicable), instead of seeing only their total monthly premium.

• Finding an agent or broker is easier. Employers, now have more SHOP-registered agents and brokers to choose from in their area.

Small-business tax credit

Plans offered by each state’s exchange are classified in four primary tiers — bronze, silver, gold and platinum — with higher premiums, but better coverage as the levels ascend. The ACA offers a tax credit for so-called lower-wage small businesses that buy insurance coverage through SHOP. Small businesses that provide health care coverage can see up to a 50 percent reduction in their share of the cost.

Employers with fewer than 25 FTEs with salaries averaging $50,000 or less per year, paying at least 50 percent of their full-time employees’ premium costs on coverage obtained through the SHOP marketplace, 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 pay is tax-deductible and can be carried forward or backward.

On the downside, many woodworking business owners have snubbed the exchanges because of the small size of the tax credits and administrative challenges in securing them. In fact, very few states have set up the promised small-business health insurance exchanges and the few existing exchanges offer arrangements that weren’t available before the law.

While supporters of the ACA tout its success in providing insurance to millions of Americans, escalating insurance costs are impacting many businesses as well as those who do not qualify for subsidies and others who buy health insurance directly. Last year’s bipartisan legislation allows small businesses to avoid fines for contributing to their employees’ health insurance in the individual market.

DIY option

Despite the failure of the ACA repeal-and-replace legislation, tax-favored, flexible spending accounts such as health savings accounts (HSAs) remain a great way for the self-employed and small-business owners to cover health care costs. Health savings accounts are a tax-advantaged medical savings account available to taxpayers who are enrolled in a high-deductible health plan offered by banks, insurance companies, brokers and credit unions.

In 2017, anyone (and his or her employer) can contribute up to $3,400 to an HSA for individuals and $6,750 for families. Account holders age 55 and older can contribute an extra $1,000. Unfortunately, in 2017, only health plans with a deductible of at least $1,300 for single people or at least $2,600 for family coverage qualify.

Future of the ACA

Beginning in 2020, employers will be taxed on the so-called high-dollar plans that currently cover more than half of all employer-provided plans. When the cost of qualified employer-sponsored health insurance coverage (known as Cadillac plans) exceeds certain dollar amounts, the ACA will impose a 40 percent excise tax on premiums exceeding $10,200 for individual policies and $27,500 for family plans.

With talk of further attempts to repeal and/or replace the Affordable Care Act, keeping abreast of the many benefits and potential pitfalls of the ACA is more important today than ever. It is, however, the skyrocketing cost of health care that makes professional guidance a necessity for every woodworking business and its owners.

This article originally appeared in the May 2017 issue.

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