Now that 2010 is complete, I can see what kind of help Obamacare — sorry, the Patient Protection and Affordable Care Act — will give me with my health insurance bills. I mentioned in a previous post that my insurance rates for 2011 were a little lower than they had been in 2010 (although I expect them to resume their regular upward march next year). I own a small, struggling manufacturing company that has been providing health care to my people even though it’s a stretch. Surely the Affordable Care Act will come to my rescue! But the devil is always in the details, particularly when Congress decides to “help.” So the first thing to check: Am I eligible for the tax credit? Here’s what I found in the guidelines issued by the Internal Revenue Service:
“In order to be a qualified employer, (1) the employer must have fewer than 25 full-time equivalent employees (‘F.T.E.’s) for the tax year, (2) the average annual wages of its employees for the year must be less than $50,000 per F.T.E., and (3) the employer must pay the premiums under a ‘qualifying arrangement’ described in Q/A-7.”
Hmmm. This might not be so simple. Let’s take these one step at a time:
How many full time employees do I have? I ended the year with 12 on the payroll, including myself, but I started the year with eight. So here’s the guideline: “The number of an employer’s F.T.E.’s is determined by dividing (1) the total hours of service for which the employer pays wages to employees during the year (but not more than 2,080 hours for any employee) by (2) 2,080.” This raises a question: Do I include myself? The answer is no:
“A sole proprietor, a partner in a partnership, a shareholder owning more than 2 percent of an S corporation, and any owner of more than 5 percent of other businesses are not considered employees for purposes of the credit. Thus, the wages or hours of these business owners and partners are not counted in determining either the number of F.T.E.’s or the amount of average annual wages, and premiums paid on their behalf are not counted in determining the amount of the credit.”
O.K., that’s clear. I don’t count. And if I had any family on the payroll, they wouldn’t either. As usual, the guy who pays the bills is excluded from any tax break for health insurance.
On to the employees. They get personal days and holidays and overtime, and the guys who have been working all year have well more than 2,080 hours each. But the hours exceeding 2,080 won’t count toward the total, as we saw. What about the others? There’s a large clump of verbiage in section 16 of the I.R.S. document that boils down to this: If the employee worked or was paid for less than 2,080 hours a year (including vacation and holidays), add the actual hours to the total. If salaried, add 40 hours for each week worked or paid for. If it’s an hourly worker, and you paid for more than 2,080 hours, just add 2,080. Then divide all of that by 2,080 to get your F.T.E.’s. And don’t forget to round down to the next whole number. That’s right: 4.99 F.T.E.’s is rounded down to 4. Which might help you if you are trying to scrape under the 25 F.T.E. limit, and might hurt you when you calculate average wages.
I paid for 21,168 hours of work in 2010, including overtime, personal days and holidays. When I subtract hours in excess of 2,080 per employee, that leaves me with a total of 19,008. Dividing by 2,080, I get 9.13 F.T.E.’s. Round that down to 9. Looks like I’m under the 25 limit. So far, so good.
On to the average wage calculation. What’s included? The I.R.S. says:
“The amount of average annual wages is determined by first dividing (1) the total wages paid by the employer during the employer’s tax year to employees who perform services for the employer during the tax year by (2) the number of the employer’s F.T.E.’s for the year, as calculated under Q/A-16.”
Uh oh. The total wages will include what I paid for all of the overtime, holidays and personal days, even if that exceeds 2,080 hours. Since many of my highest-paid shop guys work the most hours, that means the average is going to be bumped way, way up. I paid $451,662.50 in wages and salaries. Divide that by 9 F.T.E.’s and I get $50,184.72 per employee, which is just over the $50,000 per F.T.E. limit to qualify for the tax credit. I’m cooked.
The Affordable Care Act will not help me. I will have to deal with the burden of health insurance costs on my own. Some further thoughts:
- I understand the concept of means testing for government benefits. However, the means being tested by the Act are probably the wrong ones. The ability of the employer to pay for health insurance isn’t considered at all. After going through the calculation I have to conclude that I would be a heck of a lot better off if I cut my people’s pay dramatically. Not only would I save on the wages, but also I would get some help with the costs of insurance. Was the Affordable Care Act intended to be an assault on middle class wages? It does incentivize the hiring of more lower paid workers instead of increasing the productivity and pay of a smaller work force. But how does that work if you have high pay, high skill workers? Of course, I could sidestep all of this by shipping production to China.
- I now have every reason to dramatically increase the amount that my employees contribute to their insurance costs. The Affordable Care Act pegs the tax credits available to the amount of employee co-pays — but since I don’t qualify anyway, there’s no reason to hold back. I don’t see why I shouldn’t raise their portion from the current 33 percent contribution to 50 percent or more, with the eventual goal of getting rid of the health insurance benefit entirely. Every dollar they contribute would increase the profit of the company and by extension my own pay. After 25 years of being a generous boss, my willingness to insulate my workers from the broader shifts in the economy is almost gone. Maybe if we’d been profitable for years I would feel differently, but I’m ready to put the financial health of my company before the rewards of being Mr. Nice Guy.
- If health insurance costs were falling, rather than rising, we wouldn’t be having this discussion. Even though the Affordable Care Act will not help me immediately, I support it. As far as I know, it has provisions that are intended to rein in the continuing growth of medical spending. The existing system, if unmodified, will put me in the same bind, probably faster. Keep in mind that my insurance costs have risen an average of 10 percent a year for every year I have offered insurance. The Act also promises to create a market for individuals and families to purchase their insurance themselves, at reasonable cost to them, so I can get out of the health insurance business entirely. I look forward to that day.
I’m curious if anyone else has done this calculation — and what you found for your own company.
Paul Downs founded Paul Downs Cabinetmakers in 1986. It is based outside of Philadelphia.