Small businesses which provide employee health insurance face a three-choice conundrum in deciding what to do under the Affordable Care Act (ACA). They can:
- Remain with 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.
Which option to choose is particularly difficult for small business owner, particularly those with workforces of relatively low wage earners.
Small Employer Health Insurance Levels
The Robert Wood Johnson Foundation reported that as of 2011 approximately 37.5 percent of small employers nationwide, defined as having 50 or fewer full-time employees, offered some form of health insurance for their employees. Because under the ACA these employers are not subject to the per employee penalty for not providing health insurance, many may erroneously believe that they are immune from the ACA’s effects. Nothing could be further from reality.
With purchases of insurance under the ACA having begun Oct. 1 for coverage beginning Jan. 1, 2014, this is a pressing issue that small employers must address now.
Possible Employee Defections From Employer Plans
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. In fact, from the employees’ perspective, the Marketplace may provide a better deal because of the mandatory coverage and benefits which insurance plans must provide in the Marketplace, and the tax credits employees may receive on their personal income tax to defray premium costs.
Considering these factors, small employers may find a significant segment of their workforce, particularly the lower-paid employees who will be eligible for the maximum tax credit, will opt out of the company-sponsored group plan to purchase insurance through the Marketplace.
For a small business owner, even a few employee defections from the company’s group plan may adversely impact them in a significant way. With a smaller pool of participants 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.
Assessing the Risk of Defections
Employees are not entitled to any premium tax credits to purchase health insurance individually at the Marketplace if their employer’s group plan is deemed “affordable” and meets a “minimum value” standard. The employer’s plan is considered affordable 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.
The Kaiser Family Foundation’s study of 2,000 businesses found that businesses with less than 200 employees pay approximately 84 percent of an employee’s premiums and about 35 percent of dependents’ premiums. This writer’s experience with small businesses (those with less than 50 full-time employees) is that these employers generally pay 80 percent of employee premiums and no dependent premiums at all.
Take for example a single employee making $30,000 a year. If she pays more than $2,850 in annual premiums for her employer-sponsored coverage (i.e. $237.56/month), then the employer’s plan is not “affordable.” Similarly, if a household with a total income of $50,000 pays more than $4,750 a year (i.e. $396/month) for family coverage, that too would be deemed not affordable. The employee would be entitled to a premium tax credit for purchasing at the Marketplace and may defect from the employer’s group plan, depending on what the premiums are at the Marketplace.
Even when the employer’s plan is affordable, the employee is still entitled to the tax credit to purchase insurance at the Marketplace if the employer’s plan fails to meet the “minimum value” standard. This standard rates the quality of the group plan based on the plan’s scope of coverage; its levels of benefits; and the employee vs. employer’s costs.
Projections on the percentage of company-sponsored plans that will not meet the minimum value standard are hard to come by. However, one of the underlying premises of the Affordable Care Act is that many current employer plans provide scant coverage, and then only for acute (i.e. hospital) care of major illnesses. This premise is why the ACA mandates coverage and benefit levels, and other mandatory provisions, for those insurance plans that participate in the Marketplaces. 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, 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; (4) how many of them may be entitled to the premium tax credit, and to what extent; and (5) what are the premiums for the lowest level (Bronze) plans at the Marketplace. Even with this number of variables, the company's accountant should be able to calculate these fairly easily because the formulae for determining an employee's entitlement to a tax credit, and the amount of it, is very simple and should be available at the Marketplace website.
Determining Which of Three Courses To Take
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.
Then, the employer should initially assume that employees and their dependents currently participating in the group plan will continue to participate if the employer purchases group insurance at the Marketplace. With this assumption, the employer 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.)
It’s All About the Taxes
In sum, once an employer has made a comparison of its current group plan with what is available at the Marketplace, the issue of determining how to proceed is one of 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
The final step is to determine whether workers, because of the employee premium tax credit, would be better off financially, and obtain a better quality of insurance, if the employer simply eliminates the group health insurance plan, allowing employees to purchase individually at the Marketplace, and provides 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. If the employer eliminates its group plan, then all its employees who would have to spend more than 9.5 percent of annual household income on their individual premiums (excluding dependents' premiums) should 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, then they have 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 .
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About the Author: 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 email@example.com.
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