Bookkeeping – Employee Health Insurance Mandate (Lesson 89)

After three decades of discussion, in-fighting and wrangling, Congress passed a health insurance mandate along party lines of vote.  This health insurance mandate changed the rules for employers and affects the accounting department and in particular, the proper bookkeeping for the respective amounts paid by both the employer and employee.  To acquire the advanced bookkeeping skills for this issue, this lesson first covers the legal issue and then the payroll process for the benefit.  The last section covers the actual accounting entries and follow-up issues for the employer.

Legal Requirements of the Public Health Service Act

The goal of the act is to provide as much health insurance coverage in an affordable manner to the general public as possible.   The idea is to force those without health insurance to participate and therefore lower the overall cost of insurance to the public.  A key to success is forcing employers to offer insurance to their employees under a group plan.  The primary rule is that any employer with more than 50 full-time employees (effective in 2016) must offer health insurance.  So the first issue is to define the 50 full-time employee requirement.

50 Full-Time Employees

This particular requirement is essentially all employees less those with existing military coverage through TRICARE or the Veteran’s Administration.  This includes spouses that have this coverage.  To continue to the next test, all employees are counted and then those with TRICARE or VA coverage are subtracted.  If there are less than 50 employees, the employer has not met the threshold and is therefore exempt from the law.

Full-time employees (FTE) means any employee employed on average for 30 hours a week or 130 hours per calendar month.  The critical element deals with part-time employees.   How are their hours counted?

Part-time employees are grouped as one pool and their total hours are added up for the month.  The total is then divided by 120 to determine the equivalent number of FTE’s.   Here is an example:

Apollo Press has 118 part-time employees that completed 2,091 hours of work during the month of October.   The equivalent number of full-time employees is 17.7 (2,091/120) or rounded up to 18.   The full-time staff equals 38.   The total number of FTE’s for October is 56 (38 + 18).  Therefore, Apollo Press legally had to offer health insurance in October to its employees.

Of course there are variations to this formula for seasonal employers and for businesses that reasonable expect to meet the requirement in the near future.  Consult with the company’s CPA for guidance.

The second requirement relates to properly offering coverage to employees.

Offering Coverage

Offering coverage means the employer offers the plan to at least 95 percent of all eligible employees.  It is in the best interest of the human resources officer to get either an acceptance or denial form signed by all eligible employees.  This offer of coverage must occur at least once a year.

*Eligible employees refer to those employees not covered by TRICARE or the Veteran’s Administration.

Failure to offer coverage warrants a penalty from the IRS for approximately $167 per month for any employee in excess of 30.  In addition, the plan must be affordable and offer minimum coverage.

Affordability means the plan cost to the employee cannot exceed 9.66% of the lowest paid rate of an employee’s wages.  As an example, employee Sara is the lowest paid employee at $10 hour.  Her wage is multiplied by 120 hours for the calculation.  Therefore, the plan cannot cost Sara more than 9.66% of $1,200 or $115.82 per month.  Any difference between her minimum affordability and actual cost must be covered by the employer.

Minimum value means that the plan should at least meet the requirements for metal level coverage in the small group market, referring to the bronze, silver, gold or platinum plans.

Many employers simply pay a flat amount per full-time employee on a respectable percentage of the health insurance premium to comply with the law.   In effect, the employer provides a plan and along with the employee pays for the plan.  Now it is time to do the accounting.

Accounting For Health Insurance

All insurance is prepaid and this includes health insurance.  Once a plan of coverage is purchased, the plan provider is customarily prepaid at least 15 days in advance of the first day of the month of coverage.  So March’s premium is paid by February 14th.

In a typical prepaid expense accounting, the debit is posted to a current asset account.  Once the month starts in March, an entry is posted that moves the employer share of the cost to the income statement under labor benefits.  The employee’s share is technically still a receivable from the employee until satisfied via payroll deductions.  I encourage accountants to transfer the employee amount to be reimbursed to the accrued liability – employee benefits account.  In a typical set of books, this debit value will appear as a contra value if the balance sheet is printed during the month of March prior to month’s end.  When the employee pays the benefit as a payroll deduction the credit value offsets the debit balance no differently than a credit (payment) would reduce a receivable.

Take a look at this payroll register for an employer and notice the account for the employee’s share of health coverage:

Payroll Register – Employee KGO
Account
                      Control ID        Description                                                 DR            CR

Gross Wages – Labor                            1/2 Month’s Salary KGO                           $2,643.50
Liability – P/R Taxes       Fed                Federal Withholding                                                   $318.72
Liability – P/R Taxes       SS                  Social Security Withheld                                              157.21
Liability – P/R Taxes       Med               Medicare Withheld                                                         36.77
Liability – P/R Taxes       CT                  Connecticut Taxes W/H                                               114.81
Liability – P/R Benefits   HI                   Health Ins. Employee Share                                          76.93
Liability – P/R Benefits   Den                Employee’s Dental Plan                                                 19.41
Liability – P/R Benefits   Other             Other Benefits Purchased                                               11.53
Liability – P/R Legal       CS                  Child Support                                                               179.00
Payroll Checking                                   Direct Deposit ACH 42007419L                               1,729.12
Labor – Taxes                                         SS Match                                                       157.21
Labor – Taxes                                         Medicare Match                                              36.77
Labor – Taxes                                         FUTA                                                              15.21
Labor – Taxes                                         SUTA                                                              22.42
Liability – P/R Taxes         SS Match      SS Match                                                                       157.21
Liability – P/R Taxes         Medi Match  Medicare Match                                                               36.77
Liability – P/R Taxes         FUTA            FUTA                                                                               15.21
Liability – P/R Taxes         SUTA            SUTA                                                                  –            22.42
.                                                                                                                                $2,875.11  $2,875.11

Notice in the register that the dollar value for the credit is a deduction to derive the net check and is assigned to the payroll benefits liability account.  This payroll liability account is customarily a sub-account of accrued payroll under current liabilities.  Most of you should have immediately asked if the benefit is pre-tax or post tax.   How can you tell?

The key is the dollar amount calculated for Social Security withholding.  If the Social Security dollar amount is 6.2% of the gross wage, then the benefit is post-tax.  If benefits are deducted first from the gross wages and then the Social Security is calculated, the benefit is pre-tax.  In this case it is pre-taxed as follows:

.   Gross Wages                     $2,643.50
.   Less Benefits:
.      – Health Insurance               (76.93)
.      – Dental Insurance               (19.41)
.      – Other                                 (11.53)
.   Taxable Wages                  $2,535.63
.   Social Security (6.2%)           157.21  * Matches Actual Amount

It is best to track each employee’s health insurance balance in the payroll benefits spreadsheet under the health insurance tab and the section designated for that employee.  Keep a running balance.  Mathematically the employee will always owe for health insurance due to the prepayment made by the employer for this amount paid to the provider.  This is why many employees keep a week of wages on the books.

A week of wages refers to the principle of always owing employees for their services.  This way no employee can walk away leaving an employer hanging with fronted payments for benefits.  Many small employers have a cut-off several days in advance of actual disbursement of pay.  It literally takes a couple of days to process a payroll and at least 24 hours to complete an ACH payroll transfer.  As an example, a landscaping company cuts off time sheets on Tuesday night to process payroll on Wednesday.   Checks are cut on Thursday for delivery on Friday at noon.  When employees go home Friday afternoon they will logged 24 hours of work (3 days @ 8 hrs/day) of unpaid time to cover benefits prepaid by the landscape company in case an employee quits over the weekend.  This prevents the employer from being stuck with the bill.   Many employers have at least a one week deferral to run payroll.

Accounting Entries

The accounting entries are centered on two essential elements.  The first and most important to the employee is how much is paid by the employer.  The second element addresses the tax status of the actual plan deduction for payroll tax purposes.  The next two subsections explore these elements in more detail.

Employer’s Share of the Health Insurance Benefit

By far, health insurance is the most expensive benefit an employer provides for employees.  Rates for basic coverage will run from $125 per month for a single (marital status) employee to $800 per month for a family plan.  The question is, ‘How much of this amount will the employer pay?’   The answer is really an employer preference.   For those businesses that rely heavily on well-educated or skilled staff to generate revenues it is in the employer’s best interest to provide substantial coverage to retain these employees.   For high turnover operations such as retail for food service it is best to provide the minimum amount to reduce the overall cost of providing healthcare coverage.  The most common options I’ve witnessed are:

A) A Flat Percentage of Single Employee Rates – Many employers will pay 50% of the single rate for an employee and require the employee to pay the balance no matter the plan selected.  So if an employee selects the family plan and it costs $642 per month and employer pays 50% of the single rate of $135/month.   The employer contributes $67.50 of the $642 plan selected by the employee.

B) Flat Dollar Amount – Some employers will pay a flat dollar amount for the benefit.  For example, ‘up to $200 per month no matter the plan selected’; means the single employee is completely covered and those employees selecting the family plan pay any balance in excess of $200.

C) Combination of Flat Dollar Amount and a Percentage of Balance – In this case an employer generally wants to provide for the staff; this is more common in professional environments.  An employer pays a flat amount up to a certain set sum plus a percentage of any amounts in excess.  Common scenarios are up to $200 plus 25% of difference.  Using the values from ‘A’ above for the family plan, the employer pays as follows:

.                                        Employee                    Employer
.      Family Plan                 $642.00
.      Flat Amount                  200.00                      $200.00
.      Balance                          442.00
.      25% Difference            (110.50)                       110.50
.      Totals                           $331.50                      $310.50

When the bill from the insurance company is received each month the payroll clerk sits down and calculates these values for each employee in the employee benefits spreadsheet under the health insurance tab.  The goal is to break out the total amount due for these two dollar values – employer and employee’s share.  The entry to prepaid expenses is via the purchases journal with three line items:

  1. A debit value to prepaid expenses – benefits representing the employer’s share of the next month’s premium.
  2. A debit value to prepaid expenses – benefits representing the employee’s share of the next month’s premium.
  3. A credit for the total to accounts payable with a control ID for the provider of insurance.

Notice that prepaid has two lines of entry related to that particular month for health insurance.  At the beginning of the month (usually the following calendar month) the premium for the employer’s share is transferred to cost of sales, labor – benefits or to labor-benefits in the expenses section.  If you are using more sophistication, break out the labor benefits between staff and management.  Staff benefits are posted to cost of sales and management benefits in the management group under expenses.  This means that when you post the original bill to prepaid expenses, the employer’s share may have two lines instead of one.  If using class accounting, there will be one line of value per class plus one line for management costs.  It is not necessary to break out the employee’s share as the dollar value never makes it over to the income statement accounts.  The employee’s dollar value is transferred to current liabilities, accrued payroll at the beginning of the month when the premium is applicable.  Remember, the detail is tracked in the Excel spreadsheet.

As explained above, each employee reimburses the employer for the employee’s share of the fronted value during the month of the premium.  At the end of each month, the only amount the employee owes back is the fronted amount the employer paid for the next month’s premium which is a prepaid asset in current assets.

Tax Consequences of Health Insurance Premiums

The employer’s share paid is 100% tax deductible for the employer.  For the employee, the tax consequences are different.  In the past many employers purchased unqualified plans thus the plan’s cost was deducted from the employee’s net pay after taxes were calculated.  With the mandate in place, employer’s now purchase qualified plans which means the employee pays their share of the premium from gross wages before calculating taxes.  This is important to understand as the difference greatly affects the paycheck for an employee.

Using employe KGO from above, let’s compare the difference in the two outcomes.

.                                                        Pre-Tax              Post-Tax
Gross Wages                                  $2,643.50          $2,643.50
Less Benefits:
.   – Health Insurance                           (76.93)                  -0-
.   – Dental                                            (19.41)                  -0-
.   – Other (Vision, Cancer)                   (11.53)                 -0-
Taxable Wages                                  2,535.63           2,643.50
Less Taxes:
.    – Income Taxes                               (318.72)           (325.51)
.    – Social Security                             (157.21)           (163.90)
.    – Medicare                                        (36.77)             (38.33)
.    – Ct. Income Tax                             (114.81)           (118.16)
Net Before Personal Deductions        1,908.12           1,997.60
Personal Deductions:
.    – Health Insurance                              -0-                  (76.93)
.    – Dental                                               -0-                  (19.41)
.    – Other                                                 -0-                  (11.53)
.    – Child Support                                (179.00)           (179.00)
Net Paycheck                                     $1,729.12        $1,710.73

The difference between the two net paychecks is $18.39.  Annually this equals $441.36.  The employee is saving $18.39 as follows:

Income Taxes:
.   – Federal                 $6.79
.   – State                       3.35
.   – Social Security       6.69
.   – Medicare                1.56
.   Total                      $18.39

Social Security and Medicare represent FICA.

This savings is directly due to using a qualified plan.  Notice the premiums are no different between a pre and post tax status.

The employer saves money too.  By having a qualified plan, the employer saves on having to match the difference for FICA taxes between the methods.  In this case, $8.25.   Don’t forget, the employer also saves money with FUTA, SUTA and worker’s compensation insurance.  See Employee Benefits – Lesson 88 for more information.

Insights

As stated earlier, health insurance is the most important benefit an employer offers to their employees.  For those organizations with highly educated and/or skilled staff, health insurance is a must.  In general, employers that wish to retain qualified staff and recruit the best staff, offering a qualified plan along with a significant portion of the premium paid by the employer serves this purpose well.

For those employers with a high turnover rate with staff, it is better to have a less expensive plan with a higher percentage paid by employees.  This will reduce the overall cost of labor for the employer.

As will be explained in Lesson 91, offer health savings, reimbursement and flexible spending accounts to augment health insurance premiums.

Summary

The employee health insurance mandate (Obamacare) requires those employers with at least 50 full-time equivalent employees to offer a qualified health insurance plan to at least 95 percent of the employees.  The plan must be affordable, i.e. less than 9.66% of gross wages of the lowest paid employee working full-time.  Once the plan is purchased, premiums are recorded as prepaid expenses and transferred to the income statement for the appropriate month.   The employee’s share of the cost is transferred to the current liabilities section of accrued payroll.

Take advantage of the Code and ensure the plan meets the requirements as a pre-tax benefit.  This saves both the employee and employer money with each payroll run.  ACT ON KNOWLEDGE.

If you have any comments or questions, e-mail me at dave (insert the usual ‘at’ symbol) businessecon.org.  I would love to hear from you. If interested in my services as an accountant/consultant; click on My Services in the footer of this article.

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