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Modified Obamacare Definition of "Small Business" Indirectly Affects Cafeteria Plans.

(Parker Tax Publishing October 26, 2015)

A change to the non-tax definition of "small businesses" under the ACA, intended to head off expected increases in insurance premiums for some employers after December 31, 2015, indirectly affects qualified benefits under cafeteria health plans. H.R. 1624.

On October 7, 2015, President Obama signed into law H.R. 1624, the Protecting Affordable Coverage for Employees Act (PACE Act), which amended the Affordable Care Act's (ACA) non-tax definition of a "small business."

Originally, under the ACA, the definition of a "small business" was scheduled to change from employers with up to 50 employees to include employers with up to 100 employees after December 31, 2015. This change would have required many mid-sized businesses to be subject to different insurance rating rules and requirements./

The PACE Act prevents this scheduled change, keeping the ACA definition of a "small business" to employers with up to 50 employees. The law does, however, grant states the option to treat businesses with up to 100 employees as small employers.

OBSERVATION: The PACE Act does not modify the definition of an "applicable large employer" for purposes of the employer mandate and penalties under Code Sec. 4980H.

The bill is intended to protect businesses with 51 to 100 employees from potential healthcare premium increases. A report found that if the small group definition increased to 100 employees, healthcare premiums for mid-sized employers could increase by 18 percent. Subsequently, such employers may have chosen to self-insure instead of being subject to the ACA's requirements for small employers, thus further increasing premiums.

Although not designed as a tax measure, the PACE Act does have an indirect effect on cafeteria plan benefits. Under Code Sec. 125(f)(3), certain qualified health plans may be offered through cafeteria plans if the employee's employer is a qualified employer under the ACA. Because a "qualified employer" in this context is defined as certain small employers, the PACE Act's modification of the definition of "small employers" will affect qualified benefits under Code Sec. 125. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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