What Is the Affordable Care Act (ACA)?

The Affordable Care Act (ACA) is the most common name and abbreviation HR professionals use for The Patient Protection and Affordable Care Act. Passed by the 111th Congress and signed into law by President Barack Obama in March 2010, the ACA is also known by the popular term “Obamacare.”

What Does the Affordable Care Act Do?

The Affordable Care Act’s primary goal when it comes to healthcare is to extend healthcare coverage to more Americans. The ACA reshaped benefits administration through new regulations, fines, and penalties.

For Employees

Affordable Care Act (also called Obamacare) rules that affect employees include:

• An individual mandate requiring most Americans to prove they have medical insurance
• Tax credits that partially (or totally, in some cases) subsidize premiums for those with household incomes falling between 100% and 400% of the federal poverty level
• Expand the Medicaid program so that states can choose to cover all adults with incomes that fall below 138% of the federal poverty level
• Permission for employees to keep children on their insurance plans until the age of 26

While the ACA originally included tax penalties for those who didn’t have medical insurance, those penalties were repealed in 2017.

For Employers

Under the ACA, employers must adhere to the following:

• New standards for determining who counts as a full-time employee in these mandates
• A requirement for employers of 50 people or more to offer health insurance

If employers do not follow these rules, they may incur hefty fees to be paid to the IRS.

For Insurance Companies

The ACA significantly affects how insurance companies operate in the following ways:

• The creation of health insurance marketplaces
• New standards for health plans to qualify as ACA-compliant coverage, with no annual dollar or lifetime limits on essential health benefits
• New laws against denying coverage due to pre-existing conditions and canceling policies because of illness
• New regulations that prevent insurers from charging higher insurance rates based on gender or gender identity
• Rules that demand insurance companies spend at least 80% of employee premiums on healthcare coverage instead of overhead or profit

While there are ongoing legal challenges to these mandates, no widespread changes have been made regarding Affordable Care Act insurance rules.

How Does the Affordable Care Act Impact Business Owners and HR Professionals?

ACA compliance issues complicate the process of administering medical benefits. HR professionals need to explain how the ACA affects their employees’ benefit choices during open enrollment so that employees can make the best choice for their health and their financial situation.

Under the ACA’s employer mandate, certain applicable large employers (ALEs) with 50 or more full-time employees (or full-time equivalent employees when you take employment status into account) are required to offer affordable healthcare coverage through a shared responsibility model.

Employers that do not follow the mandate may be required to make employer-shared responsibility payments to the IRS.

As an HR professional, you should be aware that non-ALEs (small businesses with fewer than 50 full-time employees) still have requirements under the ACA. For example, you may be required to report certain employee information to the IRS, even if you choose not to offer health insurance coverage.

If you offer health insurance coverage to even one full-time employee, you must offer it to all employees within 90 days of their hire date.

If they need coverage sooner, they can enroll in a marketplace plan, as changing jobs is considered to be a qualifying life event that allows them to enroll outside of the Affordable Care Act open enrollment period.

You must also ensure employees receive an Affordable Care Act Summary of Benefits and Coverage. This explains critical information about their healthcare plans and options.

The ACA’s health insurance marketplace provision has led to the creation of the Small Business Health Options Program, where small businesses that want to provide health and dental coverage can enroll through private insurance companies or through a broker. These plans allow businesses to qualify for credits to lower premium costs.

What Is an After-Tax Deduction?

An after-tax deduction, also known as a post-tax deduction, is an amount of money that is subtracted from a taxpayer’s earnings after taxes (federal, state, and local income, Social Security, and Medicare) are withheld. After-tax deductions can vary by state but may include:

• Roth 401(k) contributions
• Employer-sponsored pension plans
• 529 college savings plans
• Union dues
• Disability and certain life insurance policies
• Charitable contributions

Calculating After-Tax Deductions: An Example

Here’s a simplified example for calculating an after-tax deduction:

Caroline’s gross wages are $1,000. Her FICA taxes are 7.65%, her additional taxes total $75, and her Roth 401(k) after-tax deduction is 4%.

Here’s Caroline’s take-home pay once FICA, which includes Social Security, Medicare taxes, and other income taxes, has been withheld:

1. Multiply the gross pay by the FICA percentage: $1,000.00 X 0.0765 = $76.50
2. Multiply the gross pay by the deduction percentage: $1,000.00 X 0.04 = $40.00
3. Subtract the FICA amount from the gross pay: $1,000.00 - $76.50 = $923.50
4. Subtract the additional taxes from the new total: $923.50 - $75.00 = $848.50

We’ll pause here to point out that $848.50 would be what Caroline gets paid if not for her Roth 401(k) after-tax deduction, which hasn’t come out yet. That is what comes next:

1. Subtract the deduction amount from the new total: $848.50 - $40.00 = $808.50

Caroline’s take-home pay equals $808.50.

What Is the Difference Between Pre-Tax and After-Tax Deductions?

The main difference between pre-tax deductions and after-tax deductions is when the deductions are withheld from a paycheck. Pre-tax deductions are subtracted from the employee’s gross pay before taxes are withheld. After-tax deductions are subtracted from the employee’s net pay after taxes are withheld.

The primary advantage of pre-tax deductions is that they reduce the reportable W-2 income, effectively lowering the taxes due. The primary disadvantages are that the take-home pay is lower, and future benefit payments will be taxed upon withdrawal. Examples of pre-tax deductions include traditional 401(k)s, HSAs, FSAs, and health insurance.

So what are after-tax deductions' primary advantages? One is that future benefits (such as Roth IRA withdrawals) will not be taxed when done according to the rules. Another benefit is that take home pay may be a little higher. The primary disadvantage of post-tax deductions is that the tax liability is also higher.

Can Employees Opt Out of After-Tax Deductions?

Most after-tax deductions are voluntary, which means employees can opt out of them. The only exception to this general rule is wage garnishments. This is because wage garnishment orders are the only after-tax deductions handed down by a court. Because it is a legal issue, neither employees nor employers can choose not to participate.

What Are Examples of Post-Tax Deductions?

Here are some examples of after-tax deductions:

• Disability insurance
• Roth 401(k)
• Union dues
• Some healthcare benefits
• Transportation programs
• Schedule A deductions, which include:
  • Medical and dental expenses
  • Taxes you paid
  • Interest you paid
  • Gifts to charity
  • Casualty and theft losses

It’s important for HR professionals and business leaders to understand how these after-tax payroll deductions work so they can craft solid benefits packages that help them attract and retain top talent.

Do After-Tax Deductions Show on W-2s?

Most of the time, only pre-tax deductions are shown on a W-2, but there are some circumstances when after-tax deductions are listed there as well. For example, voluntary after-tax contributions to a non-Roth pension plan can be listed in Box 14.