Introducing: The Creative Edge

HOW WILL HEALTH INSURANCE REFORM AFFECT MINNESOTA'S CREATIVE AND SOCIAL ENTREPRENEURS?

Unless you've been living in a cave, you know health insurance reform is now the law of the land. After months of acrimony, it's time to set aside the rhetoric and begin the analysis of what the law actually says. I've taken the time to review the new law giving special attention to how the law will impact creative and social entrepreneurs. My summary of the law and its impact on creative and social enterprises follows.

Health Insurance Exchanges

The new law requires states to create health insurance exchanges by January 1, 2014, one for individuals called American Health Benefit Exchanges, and another for small businesses, called the Small Business Health Options Program (SHOP). The exchanges will be administered by a state government agency or non-profit entity. Until 2017, small businesses with up to 100 employees will be allowed to purchase insurance through a SHOP exchange. After 2017, companies with more than 100 employees will be allowed to purchase insurance through a SHOP exchange.

Insurers will be required to offer plans conforming to one of four benefit categories (e.g. gold plan, silver plan, etc.), each offering a different combination of coverage and out-of-pocket limits. Out-of-pocket limits for each plan will be reduced on a sliding scale for low-income persons (up to 400% of the federal poverty line).

Also beginning on January 1, 2014, the law provides premium credits on a sliding scale to individuals and families with incomes up to 400% of the federal poverty line. The law also provides additional "cost-sharing" subsidies on a sliding scale to individuals and families with incomes between 100% and 400% of the federal poverty line.

To take advantage of the credits, consumers purchasing insurance directly through an exchange must report their income to the exchange. The federal government will then directly pay the insurance provider the amount of the premium credit or cost-sharing subsidy. The consumer will pay to the insurer the amount of the premium less the premium credit and cost-sharing subsidy amount to which they are entitled.

CO-OPs and Wellness Grants

The law creates and funds a "Consumer Operated and Oriented Plan" (CO-OP) intended to foster the creation of non-profit, member-run insurance companies. Funding for such new companies is not available to any existing health insurer. All profits from such companies must be used to lower premiums, improve benefits, or improve the quality of health care delivered to its members. $6 billion is appropriated to fund grants for health insurance CO-OPs. Grants and loans are to be awarded by July 1, 2013.

The new law also creates a $200 million, 5-year grant program for small employer workplace wellness programs. Eligible employers are those with less than 100 employees working 25 hours or more per week.

Coverage Requirements

Starting in 2014, all American citizens, with limited exceptions, will be required to hold a health insurance policy for themselves and their dependents. Those citizens who do not hold a health insurance policy by January 1, 2014 will face penalties of $95 in 2014, $325 in 2015, $695 (or up to 2.5% of income) in 2016. The penalty for failing to hold health insurance for children is half of these amounts. After 2016, penalty amounts are tied to the Consumer Price Index.

Also beginning in 2014, all companies with 50 or more employees must offer health insurance coverage for employees. Companies that fail to do so face penalties of $2,000 per employee per year. However, the first 30 employees are not counted in calculating this penalty.

Beginning 6 months after the effective date of the new law:

Insurance companies may not impose lifetime coverage limits on health insurance policies, nor may insurance companies impose "unreasonable" annual coverage limits on health insurance policies.
Insurance companies may not rescind any health insurance plan except in cases where a consumer has defrauded the insurance company.
All health insurance policies must provide preventive care coverage without co-pays.
Any health insurance plan covering dependents must continue to offer dependent care coverage (as long as the dependent in unmarried) until the dependent is 26 years old.

With respect to denial for pre-existing conditions for children, there is already controversy over the new law. The Obama Administration has touted the new law as prohibiting denials of coverage for children based on pre-existing conditions starting this year. However, some insurance industry representatives argue, and a spokeswoman for the House Energy and Commerce Committee seems to agree, that the new law would not prohibit insurance companies from denying access to coverage based on pre-existing conditions until 2014. Insurance companies argue the new law only immediately prohibits them from excluding coverage for pre-existing conditions for policies already in effect on the day the law was passed. The insurance industry's position has drawn outrage from politicians. The Obama Administration has said it will issue new regulations pursuant to the new law to ensure that the ban on pre-existing conditions for child access to insurance coverage takes effect within 6 months.

By 2014, insurance companies will be prohibited from denying anyone coverage based on a pre-existing condition.

Taxes

Small Business and Non-Profit Tax Credits.

There are two phases to the small business tax credit under the new law.

Phase I. Starting with the 2010 tax year through 2013, the law provides a small businesses tax credit for firms with 25 employees or less. For those employers contributing at least 50% of the premium cost for employee health insurance, the law provides a tax credit of up to 35% of the premium cost contributed by the employer. Tax-exempt businesses meeting either of the above criteria receive a tax credit of up to 25% of the premium cost contributed by the employer. For non-profits, the tax credits can be applied to reduce employer or employee payroll taxes. The tax credits decrease as the number of firm employees and average wages increase. The full tax credit (either 35% for for-profit or 25% for tax-exempt companies) is provided to firms with 10 employees or less with average wages of less than $25,000 per year.

Phase II. For tax years 2014 and beyond, businesses with 25 or fewer employees who purchase insurance through a health insurance exchange (explained below) will receive a tax credit of up to 50% of the premium cost. Tax-exempt businesses meeting either of the above criteria receive a credit of up to 35% of the premium cost contributed by the employer. The tax credits decrease as the number of firm employees and average wages increase. The full tax credit (either 50% for for-profit or 35% for tax-exempt companies) is provided to firms with 10 employees or less with average wages of less than $25,000 per year. The credit under Phase II is available only for two consecutive tax years beginning on the first year the employer offers an employee insurance plan procured through a health insurance exchange.

Increased Medical Expense Deductions.

The new law increases the threshold for the deduction of itemized unreimbursed medical expenses from 7.5% of adjusted gross income (AGI) to 10% of AGI. For those who have taken advantage of this deduction in the past, this change results in a tax increase. Under the current law, a person earning $80,000 per year with $7,000 in unreimbursed medical expenses would receive a $1,000 Schedule A deduction. Under the new law, the same taxpayer would receive no deduction.

W-2 Reporting Requirements.

Under the new law, employers are required to report the value of each employer provided health insurance plan on each employee's W-2 form.

Medicare Hospital Insurance Tax.

Beginning in 2013, for individuals earning over $200,000 per year, or for couples with more than $250,000 per year, the Medicare Hospital Insurance Tax on wages increases by .9%, from 1.45% to 2.35%. In addition, there is a new 3.8% tax on unearned income for taxpayers at these income thresholds.