Much has been written about the Affordable Care Act, commonly known as ObamaCare, and its wide-ranging affects on large businesses across the country.
Lost in all the debate and political rhetoric has been the fact that small businesses – those with less than 50 – will be affected as well.
It’s true that small business owners are not subject to the per employee penalty for not providing health insurance, but the creation of government-mandated Health Insurance Marketplaces has the potential to create issues for any small business that offers health insurance to its workforce. And according to the Robert Wood Johnson Foundation, approximately 37.5 percent of small employers offered some form of health insurance for their employees.
Dennis Alessi of Mandelbaum Salsbur offers this primer for companies under 50 employees.
As of Oct. 1, individuals can purchase health insurance through Marketplaces. Even employees at small businesses, which already have employer-sponsored group insurance plans, will be able to purchase insurance through these Marketplaces in certain situations. And in some cases, the Marketplace may provide an employee a better deal because of the tax credits employees may receive on their personal income tax to defray premium costs.
Consequently, small employers may find a significant segment of their workforce, particularly lower-paid employees who are eligible for the maximum tax credit, opting out of the company-sponsored group plan in favor of the Marketplace. Even a few employee defections from the company’s group plan may adversely impact a small business’ group plan insurance. With a smaller number of workers remaining in the group plan, the plan’s experience ratings and premiums may increase. For the business owner, the continued financial viability of the group plan may become at risk.
Small businesses which provide employee health insurance can choose one of three options under the Affordable Care Act (ACA). They can:
- Continue to offer their current group plans;
- Terminate those plans and purchase insurance at the Health Insurance Marketplaces mandated under the ACA and available in every state; or
- Eliminate their employer-sponsored health insurance, let employees purchase it individually at the Marketplace, and give employees a stipend of a fixed amount toward their premiums.
The decision is not easy for small business owners, particularly for those with workforces of relatively low wage earners. With purchases of insurance under the ACA starting Oct. 1 for coverage beginning Jan. 1, 2014, this is a pressing issue that small employers must address now.
Determining Potential Group Plan Defections
The first step in the decision-making process is assessing the risk of defections from a company-sponsored plan, and the number of potential defectors.
The number of employees eligible for premium tax credits is a key indicator. If the employer’s group plan is deemed “affordable” and meets a “minimum value” standard, employees are not entitled to any premium tax credits to purchase health insurance individually at the Marketplace. An employer’s plan is “affordable” under the ACA if the employee’s share of the annual premium for coverage (not including coverage costs for other family members) is more than 9.5 percent of annual household income. “Minimum value” standard is a benchmarked based on the group plan’s scope of coverage; its levels of benefits; and the employee vs. employer’s costs.
Although projections on the percentage of company-sponsored plans that will not meet the minimum value standard are hard to come by, it appears reasonable to assume that many small employer group plans will not meet the minimum value standard.
Small employers should evaluate their current plans in light of these two standards. If they fail either or both, then, because of the potential for employee defections, employers need to seriously question the viability of continuing their current group plans after health insurance becomes available at the Marketplaces Oct. 1.
In evaluating the potential for defections, business owners should consider a number of factors, aside from the tax credit component, including: (1) the income of their employees; (2) the amount employees currently contribute to their premiums; (3) how many employees currently participate in the employer's plan; and (4) the cost of premiums for the lowest level (Bronze) plans at the Marketplace.
Considering Alternatives to Current Group Plan
Even when their plans are affordable and meet minimum value, small business owners should evaluate alternatives to continuing their group plan. These options are either to terminate the group plan and purchase insurance at the Marketplace; or eliminate the group plan, let employees purchase insurance individually at the Marketplace, and then give a stipend toward the employees' premiums.
A business owner needs to first calculate the bottom-line, current cost for health insurance. This cost includes the tax ramifications, in that the employer’s premium costs are taken as a business deduction.
The business owner can compare the benefits and costs of its current group plan with what is available at the Marketplace. (If the employer makes a preliminary decision to purchase at the Marketplace, it can then require that employees commit to whether they will participate in the plan, before making a final decision.)
Under the ACA, the Marketplace’s Small Employer Health Options Program (SHOP) is particularly tailored as a simplified process for small employers to compare plan benefits and costs. The Marketplace categorizes participating insurance plans into four classes -- Bronze, Silver, Gold, and Platinum -- depending on the scopes of services provided and levels of benefit payments. For purposes of comparison, small business owners most likely will want to compare their current group plan against the Marketplace Bronze plans. Once the employer has found the Marketplace plan most comparable to its current group plan, the employer’s current bottom-line insurance cost (including tax ramifications) should be compared to the cost for purchasing a plan at the Marketplace.
When comparing costs, it is vital for business owners to determine whether their companies qualify for a small business health care tax credit worth up to 50 percent of the employer’s contributions toward the employee’s premiums for a Marketplace plan. In general, to qualify for this tax credit the small business must purchase insurance through SHOP; have fewer than 25 full-time employees, or the equivalent (part-time employees who total 25 full-timers); pay employees salaries averaging less than $50,000; and pay at least 50 percent of the employee-only premiums for the plan purchased through SHOP.
The remainder of the premiums paid by the employer, which are not covered by the tax credit, can still be deducted as the employer’s business expense. (Employers who do not qualify for any tax credit can still deduct the entire premium cost for a Marketplace plan as a business expense.)
In sum, once an employer has compared its current group plan with what is available at the Marketplace, the decision on health care plans is based on cost. The determining factor is the tax considerations -- whether the employer qualifies for the tax credit under SHOP, and whether its employees qualify for a personal tax credit, and in what amount, if they individually purchase at the Marketplace.
The Final Step
Armed with this information, the business owner can determine whether workers, because of the employee premium tax credit, would be better off financially -- and obtain a better quality of insurance -- if the group health insurance plan is terminated, allowing employees to purchase individually at the Marketplace, along with a stipend of a fixed amount as its contribution to the premiums. This may be the best option for many small employers, particularly those with workforces primarily comprised of particularly low-paid employees, each with a number of dependents.
There are many tax advantages to this option, which may make it the best of all. Employees who spend more than 9.5 percent of annual household income on their individual premiums (excluding dependents' premiums) will be entitled to the tax credit at the Marketplace. With the premiums reduced because of this tax credit, the employer can then give its employees a fairly modest stipend to further defray their costs
Under current Internal Revenue Regulations, the employer can take the stipend as a business expense on the company's tax returns. And, the stipend is not considered income to the employees, provided certain very simply requirements are met. So the stipend does not affect the employees’ eligibility for the premium tax credit.
The only IRS requirements for this option are that, if the employer pays the stipend directly to the employees, who need to provide documentation to the employer that it was used to purchase health insurance at the Marketplace. The employer can also pay the stipend directly to the insurance carrier as proof for the deduction. (Obviously this is the recommended approach.) At this time we have no reason to believe that these IRS regulations will not apply to health insurance purchased at the Marketplace.
Like so much else with the ACA, it remains to be determined whether the Marketplace SHOP will be a boon to small employers in trying to provide their employees with affordable, quality health care, either through direct employer purchase or thought individual employee purchases with the employer's financial support .
Dennis Alessi is Chairman of the Employment Law Department at the law firm Mandelbaum Salsburg (www.msgld.com), and can be reached at 973-376-4600, ext. 151, or at firstname.lastname@example.org.