Things are changing dramatically in the way you and your business purchase health insurance. Open enrollment for federal subsidies started on October 1 and the first plans of the Patient Protection and Affordable Care Act became effective January 1, 2014. There are many elements to the law that small business owners should know and understand, including obligations to notify employees about their health care options.
The best way to introduce this new law and the dramatic effect it will have on the way small businesses and their employees purchase health insurance is with a brief history lesson. It used to be very common years ago, believe it or not, for an employer to pay at least all of the single cost of health insurance. Fast forward to today. Now less than half of all small employers with fifty or less employees offer group health insurance. For those employers that still do offer group insurance, it is very common for their employees to pay a significant portion of the single cost to join. This has put a lot of pressure on the employers to choose one insurance company and often one plan that meets all the employees’ diverse needs and budgets. With the Affordable Care Act, this will be changing because with both the group and individual options, employees will be able to select their own plans.
Small Business Requirements Under the Affordable Care Act
Under the Affordable Care Act (ACA), small businesses with fewer than 50 full time equivalent employees, will NOT be required to provide health insurance to their employees. However, they will have the option of purchasing private insurance through the new Small Business Health Options Program (SHOP) Marketplace in their state. Small business can continue their current coverage or seek other options in the traditional health insurance market. Small businesses were able to begin looking at plans in the SHOP on October 1, 2013, with coverage beginning in March 2014. Tax incentives are available for some small business that opt to offer health insurance to their employees.
The Affordable Care Act establishes marketplaces where individuals, families and small business owners in a state will access health insurance in 2014. Each State has its own Small Business Health Options Program exchange with a different set of plan options and prices.
The Affordable Care Act employer mandate / employer penalty, originally set to begin in 2014, will be delayed until 2015 / 2016. The Affordable Care Act “employer mandate” is a requirement that all businesses with over 50 full-time equivalent (FTE) employees provide health insurance for their full-time employees, or pay a per month “Employer Shared Responsibility Payment” on their federal tax return.
Employer mandate update: Small businesses with 50-99 full-time equivalent employees will need to start insuring workers by 2016. Those with a 100 or more will need to start providing health benefits in 2015. Health care tax credits have been retroactively available to small businesses with 25 or less full-time equivalent employees since 2010.
The employer mandate is officially part of the Employer Shared Responsibility provision. Under the Affordable Care Act, the federal government, state governments, insurers, employers and individuals are given shared responsibility to reform and improve the availability, quality and affordability of health insurance coverage in the United States.
Option 1: Purchase Group Insurance
The first option is for a small business to purchase group insurance through either a private health insurance exchange or the new government-run exchange called the Small Business Health Options Program or “SHOP” Marketplace. In this approach, a company still selects the plans to be offered and the amount they are going to contribute, but the employees are able to select among the different plans, and often among multiple carriers, which option they want. The employees’ portion of the premiums is then deducted from their pay before payroll taxes. Unlike in the past, no medical questions are asked and there is no pre-existing condition waiting period. The employer is required to pay at least half the single cost of the group plan and seventy percent of all eligible employees need to participate in order for the small business to buy insurance through the SHOP Marketplace.
As an example, let’s say the employer sets their contribution at $175 a month and chooses a group plan that costs $300 a month for coverage of a single employee. The employees who sign up for the plan would each have $125 deducted pre-tax out of their pay checks. The individual employees who do not join will have a personal income tax penalty of $95 or 1% of their pay.
Employers who offer a group plan may qualify for a group tax credit worth up to 50% of their contribution toward employees’ premium costs if their average wage is below $50,000 (excluding the salary of owners) and they have less than 25 employees. It’s important to note, the smaller the business, the bigger the credit—the tax credit is highest for companies with fewer than 10 employees who are paid an average of $25,000 or less.
Option 2: Defined Contribution Approach
This second option for small employers is to offer no group insurance plan and instead let employees purchase health insurance on their own. There is no requirement under the new law that companies with less than 50 fulltime employees need to offer group insurance and there is no tax penalty for not offering group insurance. One advantage of going to a “Defined Contribution” individual approach is the flexibility. The employers are no longer in charge of selecting the health insurance plans for their employees or paying the carriers each month, and employees have the opportunity to select the carrier and health plan that works the best for their circumstances using the new government-run Health Insurance Marketplace or a private exchange. There are 4 categories of Marketplace insurance to choose from including bronze, silver, gold and platinum. These insurance plan categories offer the same set of essential health benefits but affect how much the individual pays for premium and total out-of-pocket costs.
As with the group insurance option, under the defined contribution approach, no medical questions are asked and there is no pre-existing condition waiting period. Employers can still choose to help cover their employees’ insurance costs by giving an additional health insurance contribution in addition to their normal paycheck, but employers no longer have to collect the premiums from their employees and the health insurance is paid for with after tax dollars.
In addition, with the individual option employees who make less than approximately $46,000 and families of four who make less than $90,000 will qualify for Advance Payment Subsidies by the federal government. For example, for a 40-year old with an annual income of $30,000, the yearly premium of a “Silver” level plan is estimated to cost $4,500 in 2014. However, since the new law says they will have to pay no more than 8.36% of their income for health insurance or $2,509 for the “Silver” benefit level, they will get an advance payment of $1,991 to the carrier of their choice purchased through the Individual Health Exchange. They are also allowed to use the federal government subsidy to “Buy Down” to the lowest cost plan level, called the “Bronze” benefit level, which after their Advance Payment tax credit of $1,991 will cost them $1,609 a year.
Costs to the Employer
The cost of health insurance to your business will depend on the choices you make such as:
The level of coverage (bronze, silver, gold or platinum) you decide to offer employees. The number of options vary by state. Any amount you may want to contribute to family or dependent care. This is not required. Once you make these decisions, you can obtain a price from the SHOP or your broker. As a business owner, you select the level or tier of coverage you want. Within that level, your employees can choose the plan that best meets their needs. Remember to factor tax credits into your cost analysis (if you qualify).
Costs to your Employees
Your employees can pay part of their health insurance costs. Their share depends on the level of coverage you choose and the plan they select. As part of the Affordable Care Act, all health plans are classified into one of four categories: bronze, silver, gold and platinum. The benefits offered by the plans remain the same across the different tiers, but the premium price, deductibles, and out-of-pocket expenses vary among the metal levels. These rankings help to compare different health plans. Some states offer all 4 levels of plans while other states offer two or three levels of plans. Check the SHOP website for your state to see all of the plan options.
Again, as the metal category increases in value, so does the percent of medical expenses that a health plan will cover. This means the gold- and platinum-level plans will cover the highest percentage of health care expenses, and bronze the least.
As the employer, you can set the category in which your employees must choose plans as well as how much you will contribute to the premium payment as either a fixed amount (for example, $400 per month) or as a percentage of total cost to the employees (for example, 70% of premium).
Key Distinctions and Next Steps
There are a few other aspects of the law that are important to note. One is that under the new Affordable Care Act, older people’s rates can be no more than three times the rate charged to the youngest person. This means rates will be coming down for older people. Second, effective January 1, 2014, all medical plans are guaranteed issue, which means no medical questions will be asked and there will be no pre-existing conditions waiting periods or exclusions by law. Third, there is no participation requirement by the employer and an employer can choose to contribute to their employees’ health care costs at varying compensation levels.
The government has made it a requirement Under the Fair Labor Standards Act that all businesses notify their employees in writing of the existence of these new Health Exchanges and that many people may qualify for a subsidy. These letters were supposed to go out by October 1, 2013, but an extension has been granted to March 31, 2014, which coincides with the close of the first Open Enrollment for the subsidies.
Determining the best health care option for your small business is not an easy task but there are a lot of resources out there to help.
