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Emac's Bottom Line

IRS Tries to Rescue Small Business From Health Reform

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The IRS and Treasury just put out for public feedback a new rule to help businesses contend with a big penalty under health reform that could potentially smack them with tens of thousands of dollars in costs, a fine that could hit already cash-strapped small businesses.

Submarined in the new health-reform law is this big onerous penalty, called a shared responsibility payment, that the government can slap against businesses with more than 50 workers if they dont provide affordable health benefits to their full-time employees, which the government gets to define.

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The health-reform law exempts all small businesses with fewer than 50 employees from the laws shared responsibility requirement, which begins in 2014.

But beginning in 2014, employers with 50 or more employees that do not offer health insurance coverage will pay an assessment of $2,000 per full-time worker if any of their employees obtain premium tax credits through the new health insurance exchanges.

Even if the small business has 51 workers, and that one worker gets a tax credit to help them buy insurance -- a tax credit provided under health reform -- the small business still has to pay a fine. Beginning in 2014, the government will slap businesses with a higher $3,000-per-employee penalty if the government finds they provide workers unaffordable health insurance.

And who gets to define unaffordable? The government.

How is it defined? The government will assess the $3,000 penalty if any worker has to take a tax credit or has to enroll in state health exchanges because his or her boss pays less than 60% of the full value of the coverage, or the premium the employee pays is more than 9.5% of household income.

But now the Treasury Department and the IRS are asking for input from the public on a proposed safe harbor that says small businesses wouldnt have to pay the new fine, so long as they can prove to the government their health insurance is really affordable.

So how can companies qualify for this safe harbor? Watch this -- because health reform has raised serious privacy issues about what the government can know about your household income.

The small business has to prove to the IRS that its insurance is affordable by showing the government the wages that it paid to employees, instead of reporting to the government the employees household income.

Meaning, the IRS would deem a businesss coverage affordable so long as a workers premium costs did not exceed 9.5% of his W-2 wages.

The IRS said in a statement: By allowing employers to base their affordability calculations on each employee's W-2 wages (which employers know) instead of each employee's household income (which employers generally would not know), the safe harbor could provide a more workable and practical method for measuring the affordability of an employer's coverage.

Want to see the headaches the small business has to go through to figure out the penalty owed to the government?

The penalty is $2,000 per employee, but the business must first knock out from the math here the first 30 workers -- part-timers dont count.

EXAMPLE: If you have 51 full-time employees and 15 part-time employees throughout the year, and one full-time employee is receiving a tax credit to help them buy health insurance, your business will have to pay:

51 (the number of full time employees) - 30 (the first 30 employees are excluded) 21 x $ 2,000 = $ 42,000

The issue matters for small business. Less than half of small businesses insure workers, says a House Committee on small business. About 60% of Americas uninsured -- or 28 million -- are small business owners, workers, and their families, it says, adding insurance costs for small businesses have increased 129% since 2000.

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