Miller Health Care Law Attorneys on Health Care Reform and How it Affects Employers

The Patient Protection and Affordable Care Act (P.L. 111-148) and the Health Care and Education Reconciliation Act of 2010 (P.L. 111-152), which became law in late March 2010; contain a number of provisions that will affect employers in the short and long term.

Three areas of great interest (and concern) for employers are (1) the tax credit for small employers, (2) potential coverage requirements and penalties for larger employers, and (3) the likely impact of health care reform on insurance premiums. Each of these areas is discussed below.

Tax Credits for Small Employers

Small employers, who provide qualifying health insurance for their employees and pay for at least 50 percent of the cost of such coverage, will be eligible for a tax credit starting this year (2010) and continuing through 2016. The tax credit is claimed on the employer’s annual income tax return.

For the tax years 2010-2013, employers with fewer than 25 full-time equivalent (FTE) employees and with an average annual employee compensation of less than $50,000 per FTE, are eligible for a tax credit of up to 35 percent of the employer’s premium expense (not to exceed the average premium for the small group market in the employer’s state). The number of FTEs is calculated by dividing the total number of hours for which the employer pays wages to employees during the year, by 2,080.

The Internal Revenue Service’s website ( has a helpful “Frequently Asked Questions” section regarding the small employer tax credit. (For those who want more detail, see the IRS’ Notice 2010-44.) The IRS uses the following example of how the credit will work in 2010-2013: A qualified employer in the 2010 tax year has nine FTEs with average annual wages of $23,000 per FTE. The employer pays $72,000 in health care premiums for those employees (and meets other requirements for the credit). The credit for 2010 equals $25,200 (35 percent X $72,000). Please note that the credit is reduced if the number of FTEs exceeds 10, up to a maximum of 25, and average compensation exceeds $25,000, up to a maximum of $50,000.

Because eligibility for the credit is based, in part, upon the number of FTEs, it is possible for an employer with more than 25 employees to qualify. In an example cited by the IRS, an employer with 46 half-time employees (meaning they are paid wages for 1,040 hours) has 23 FTEs and may qualify for the credit.

For tax years 2014-2016, the tax credit will increase to up to 50 percent; but qualifying employers may claim the credit for a maximum of two years.

Generally, the tax credit can only be used to offset an employer’s actual tax liability. Since many professional services corporations “zero out” at the end of the tax year and have limited tax liability, the tax credit may be of little value to such employers. Further, the amount an employer can deduct for health insurance premiums is reduced by the amount of the credit. There are special rules for tax-exempt employers.

Mandatory Coverage and Penalties

Beginning in 2014, with limited exceptions, all individuals and their dependents will be required to have health insurance with “minimum essential coverage.” Those who do not obtain health insurance are subject to annual penalties which begin at the greater of $95 per person or 1 percent of applicable income in 2014, $325 per person or 2 percent of applicable income in 2015, and rise in 2016 to $695 per person (adjusted for inflation after 2016) or 2.5 percent of applicable income.

Individuals and families below 400 percent of the federal poverty level may be eligible for tax credits to purchase health insurance from the plans to be offered through the state exchanges which are to be operational by 2014 for individual and small employer plans.

The new law does not directly require that employers provide health insurance for their employees. However, beginning in 2014, employers with at least 50 full-time employees who do not provide coverage will be subject to a penalty if at least one full-time employee receives a premium credit as described above.

The penalty is $2,000 per full-time employee excluding the first 30 employees. For example, if an employer has 100 full-time employees (at least one of whom qualifies for the tax credit) and does not offer qualifying coverage, it is subject to an annual penalty of 100-30 x $2,000 = $140,000.

For employers of at least 50 full-time employees who do offer coverage, but have at least one employee receiving the premium credit, the penalty is the lesser of $3,000 for each full-time employee who receives the credit or $2,000 for each full-time employee in excess of thirty. For example, if the employer has 75 full-time employees, ten of whom receive the tax credit, the annual penalty would be $3,000 x 10 = $30,000.

For purposes of the penalty, a full-time employee is an employee who averages at least 30 hours per week of service. This may result in some employers trying to reduce the number of employees who work 30 or more hours per week.

Beginning in 2015, employers with more than 200 full-time employees that offer coverage must automatically enroll all new full-time employees in a plan and continue coverage for current employees; however, new employees have the right to opt-out of the coverage.

Health Insurance Premiums

It is difficult to predict the impact of health reform on the insurance premiums employers are likely to pay. Some observers believe that premiums will increase dramatically because of new restrictions on insurance companies such as on exclusions for pre-existing conditions, rescissions, and annual and lifetime caps.

Others believe the impact will be more modest, particularly for larger employers. Interestingly, in a recent survey conducted by Mercer, employer’s listed the excise tax on so-called “Cadillac” plans as their top concern even though the tax does not go into effect until 2018.


The rules governing employer responsibilities under the new law are extremely complex, and the impact of health reform is uncertain. However, it seems clear that employers will have less flexibility under the new law when it comes to making insurance coverage decisions, and that the compliance requirements will be an added cost.

Finally, depending upon how the political winds blow, significant changes might be made before coverage mandates and penalties are scheduled to begin in 2014.

Jeremy N. Miller, J.D., is the founder of Miller Health Law Group in Los Angeles, California ( Mr. Miller and his firm specialize in the representation of clients in the health care industry. Mr. Miller can be reached at 310-277-9003 or at

FOCUS Healthcare Industry Practice Group: If you are interested in more information about the FOCUS healthcare industry practice group or would like to subscribe to the group’s healthcare newsletter, please contact Jonathan Wilfong at or at 404-963-8252.

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