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Copyright 2015 by Stephen L. Nelson, CPA, PLLC

Small Businesses and the Affordable Care Act (Obamacare)

What Tax Advisors Need to Know to Help Clients Stay Compliant

By Stephen L. Nelson, CPA and Elizabeth C. Nelson, CPA



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About the Authors Stephen L. Nelson is the managing member of a Seattle area public accounting firm that provides tax accounting services to small businesses and their owners. A CPA for over three decades, Nelson holds an MBA in Finance from the University of Washington and an MS in Taxation from Golden Gate University. He is the author of dozens of best-selling books about accounting and finance, including Quicken for Dummies (which sold more than 1,000,000 copies) and QuickBooks for Dummies (which sold more than 500,000 copies). He’s also taught business taxation in the graduate tax school at Golden Gate University.

Elizabeth C. Nelson is a tax senior with Stephen L. Nelson CPA PLLC and specializes in small multistate and international S corporations and partnerships. She holds a Bachelor of Science in Accounting from Western Governors University and is the co-author of Excel Data Analysis for Dummies, a popular how-to book about using Microsoft Excel for big data analysis and the monograph Preparing the 3115 Form for the New Tangible Property Regulations.

Notice This monograph was written to share basic information about tax law implications of the Patient Protection and Affordable Care Act. The e-book is not intended to replace the services of a competent legal, tax, or business advisor. If legal or other expert assistance is required, the services of a professional should be sought. Furthermore, while both the publisher and authors have made every effort to offer the most current, correct, and clearly-expressed information possible, inadvertent errors can occur and the rules and regulations governing accounting standards and tax laws often change. Further, the application and impact of rules and laws can vary widely from case to case based upon the unique facts involved. Be careful!



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Table of Contents About the Authors ............................................................................................................................ i Notice ............................................................................................................................................... i Introduction ..................................................................................................................................... 1

What is a Full-Time Equivalent Employee? ................................................................................... 2

The Short Definition ................................................................................................................... 2

The Complete Definition ............................................................................................................ 2

Determining Which Employees Count ................................................................................... 2

Calculating Hours of Service .................................................................................................. 2

What If My Client Has More Than 50 FTEs? ............................................................................ 3

The New SHOP Exchanges ............................................................................................................ 4

A Rocky Start .............................................................................................................................. 4

Exchange Basics ......................................................................................................................... 4

When Does the Exchange Make Sense? ..................................................................................... 5

When Does the Exchange Not Make Sense? .............................................................................. 5

The Small Business Health Insurance Credit .................................................................................. 5

Illegal Healthcare Reimbursement Policies .................................................................................... 7

The Logic of Notice 2013-54 ...................................................................................................... 7

Health Reimbursement Arrangements .................................................................................... 8

Employer Payment Plans ........................................................................................................ 8

Health FSAs ............................................................................................................................ 9

The Impact of Notice 2015-17 .................................................................................................. 10

Nondiscrimination Rules .............................................................................................................. 11

Eligibility Testing ..................................................................................................................... 11

Benefits Testing ........................................................................................................................ 12

How Does the Affordable Care Act Affect HSAs? ...................................................................... 12

New Taxes .................................................................................................................................... 13

New Reporting Requirements ....................................................................................................... 14

Conclusion .................................................................................................................................... 15

Appendix A: Example Employee Health Plan Information Packet for a Small Business ............... I

Plan Overview ................................................................................................................................. II

Some Quick Definitions .................................................................................................................. II

What is a high deductible health plan? ....................................................................................... II

What is a health savings account? .............................................................................................. II



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Why should I even bother with an HSA? This seems like a lot of work! ....................................... II

Example 1: The Tax Benefits of Traditional Plans ..................................................................... II

Example 2: The (Much Better) Tax Benefits of HDHPs paired with HSAs .............................. II

Free money sounds great! But how do I even begin to sign up? .................................................. III

How to sign up for a HDHP using Washington Health Plan Finder ........................................ III

How to sign up for an HSA....................................................................................................... III

Appendix B: Example W-2 for a Small Business Employee ....................................................... IV

Appendix C: Example W-2 for a Shareholder-Employee of a One-Person S Corporation .......... VI

Appendix D: Sample Client Letter regarding non-compliant Health Insurance Plans .............. VIII

Purpose and Overview ................................................................................................................. XII

Background .................................................................................................................................. XII

A. Health Reimbursement Arrangements ................................................................................ XII

B. Employer Payment Plans .................................................................................................. XIII

C. Health Flexible Spending Arrangements (Health FSAs) .................................................. XIII

D. Affordable Care Act Guidance ......................................................................................... XIV

1. Market Reforms — In General ...................................................................................... XIV

2. Prior Guidance on the Application of the Market Reforms to HRAs .............................. XV

3. Prior Guidance on the Application of the Market Reforms to Health FSAs ................. XVI

4. Prior Guidance on the Application of Code §§ 36B and 5000A ................................... XVI

Guidance ................................................................................................................................... XVII

A. Guidance on HRAs and Certain other Employer Healthcare Arrangements, Health FSAs, and Employee Assistance Programs or EAPs Under the Joint Jurisdiction of the Departments............................................................................................................................................... XVII

1. Application of the Market Reform Provisions to HRAs and Certain other Employer Healthcare Arrangements.................................................................................................. XVII

Integration Method: Minimum Value Not Required ....................................................... XVIII

Integration Method: Minimum Value Required .............................................................. XVIII

Example (Integration Method: Minimum Value Not Required) ....................................... XIX

Example (Integration Method: Minimum Value Required) .............................................. XIX

2. Application of the Market Reforms to Certain Health FSAs ........................................... XX

3. Guidance on Employee Assistance Programs ............................................................... XXII

B. Guidance Under the Sole Jurisdiction of the Treasury Department and the IRS on HRAs and Code § 125 Plans ............................................................................................................ XXII

Appendix F: IRS Notice 2015-17 - Guidance on the Application of Code § 4980D to Certain Types of Health Coverage Reimbursement Arrangements ...................................................... XXV

Purpose and Overview ............................................................................................................ XXVI



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Guidance ................................................................................................................................. XXVI

For Further Information ............................................................................................................ XXX

Drafting Information ................................................................................................................. XXX

Appendix G: Sample Client Handout - Ten Obamacare Facts Small Business Owners Must Know ...................................................................................................................................... XXXII

Ten Obamacare Facts Small Business Owners Must Know ................................................. XXXIII

Mandate Kicks In at 50 Employees for 2016 ............................................................. XXXIII

Seasonal Employees Often Don’t Count ..................................................................... XXXIII

Employers with Same Ownership May Be Combined .............................................. XXXIII

Nearly All ACA Rules Still Apply to Employer Group Plans ................................... XXXIV

Self-employed Health Insurance Deduction Still Exists ......................................... XXXIV

Coverage Required for Full-time Employees ............................................................ XXXIV

Health Plans Must Meet Minimum Coverage Requirements ................................. XXXIV

Health Plans Must Meet Affordability Requirements ............................................... XXXV

Small Businesses and Self-insurers Need to File New Returns ................................ XXXV

Small Businesses Tax Credit May Work for Some Employers................................ XXXVI



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Introduction The Patient Responsibility and Affordable Care Act, more commonly known as Obamacare and referred to here as the ACA, creates lots of risks and potential costs for small businesses and their tax advisors.

Accordingly, tax advisors need to understand how the law applies to small businesses.

This short monograph should help tax advisors gain this understanding—an understanding that should help advisors to help their clients sidestep catastrophic penalties—by explaining and describing the following subjects:

• The full-time equivalent employee rules and why they’re important • The new SHOP exchanges and what they offer • The small business tax credit • The new rules for healthcare reimbursement arrangements • The new nondiscrimination rules for employee group health plans • The interplay between the ACA and Health Savings Accounts (HSAs) • The ACA’s new taxes • New reporting requirements for employers (small business focus)

The monograph also provides, five Appendixes to supplement the discussion and help you communicate effectively with clients, including

• Appendix A which gives an example of an Employee Health Plan Information Packet for a small business

• Appendix B which shows an example of a standard W-2 for a small business employee • Appendix B which shows an example of W-2 for a shareholder-employee of a one-person

S corporation • Appendix D which supplies you with a sample client letter you can either use as is or as a

first “starter” draft for the letter you firm sends to clients • Appendix E which is a copy of the IRS Notice 2013-54 (the notice that how the

Affordable Care Act applies to health reimbursement arrangements) • Appendix F which is a copy of IRS Notice 2015-17 (the most up-to-date information on

the $100-per-day penalty) • Appendix G which provides another client-targeted document, “Ten Obamacare Facts

Small Businesses Owners Must Know” that came from our blog but which you might want to print as a client hand-out from your firm.

Note: You may reprint and use as your own the sample client letter and the “Ten Obamacare Facts…” piece, but please don’t post either item at your website. The search engines (Google, Microsoft Bing, and so forth) will quickly spot the duplication of text and then penalize all the sites that provide it—including yours.



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