Small Business Health Insurance: An Employer’s Guide

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New provisions of the Affordable Care Act (ACA) set to go into effect in 2014 will have a significant impact on small business owners. The government defines a “small business” as one that employs fewer than 50 individuals. For purposes of this discussion we will focus on businesses with 25 or fewer employees.

 

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Until now, small business owners who provided health insurance to their employees faced significant obstacles. Insurance companies treated businesses as typical group plans; consequently, significant expenses incurred by any beneficiary in the group caused the premium to spike for all participants. Insurers were also able to drop employer plans if the arrangement was no longer profitable. Many business owners chose to opt out of providing insurance altogether; according to a 2010 Kaiser Family Foundation study, only 57% of employers with fewer than 50 workers offered health insurance.

according to a 2010 Kaiser Family Foundation study, only 57% of employers with fewer than 50 workers offered health insurance

The ACA has established that businesses with more than 50 workers must begin offering health insurance in 2014. To offset the increased expenses for these companies, employers are offered numerous tax credits and financial incentives, and insurers’ actions are more restricted. Even though there is no legal requirement for them to insure employees, small business owners with 25 or fewer employees could still benefit from these new regulations.

Tax Credits

Many changes in the new healthcare law are designed to encourage small business owners to provide health insurance, particularly those who employ workers for a low or moderate wage. New tax credits can offset the burden of the company’s premiums for qualifying businesses. Federal tax credits have been standardized, and there may be additional credits available from individual states. Currently, businesses receive a federal tax credit if:

  • No more than 25 employees are on payroll
  • Average salary paid is no more than $50,000
  • At least half of the insurance costs are subsidized by the business

Beginning with the 2010 tax year, employers who fit these guidelines receive a credit of up to 35% of employer costs. This percentage is calculated based on the number of full-time workers and the average salary paid. For example, a company with 10 full-time employees or less and an average salary of $25,000 or less can receive the 35% maximum credit. The tax credit is offered on a sliding scale for companies with up to 25 employees and an average annual salary of $50,000 or less. Non-profit entities may receive a tax credit of up to 25%.

Starting in 2014, this credit increases to 50% for qualifying businesses and 35% for non-profits. Employers who purchase group health insurance in the Marketplace and meet the same conditions are eligible. This tax credit can be taken for two successive years and can significantly reduce the cost burden of providing health insurance to employees. The ACA’s strict guidelines for the Marketplace prevent insurers from charging smaller groups higher premiums or dropping a company because the arrangement is no longer profitable.

Determine if you are eligible with this 3 step form, published by the IRS.

The ACA’s strict guidelines for the Marketplace prevent insurers from charging smaller groups higher premiums or dropping a company because the arrangement is no longer profitable

Small Business Health Options Program (SHOP)

In order to receive tax credit in 2014, business owners must purchase group insurance through the Marketplace; open enrollment begins in the fall of 2013. The Small Business Health Options Program (SHOP) is designed to assist employers in choosing a policy that best fits the needs of the business and its workers.

Aside from the substantial tax credit, participating in SHOPs offers other benefits that small business owners may find attractive. The administrative hassle that accompanies traditional insurance programs is often enough to discourage small business owners from offering this benefit. The additional costs to a smaller organization can amount to as much as an 18% increase over what larger companies spend administering health insurance. Through the SHOP, insurance paperwork promises to be reduced and simplified.

The expense of administering multiple traditional plans has been a deterrent for these employers, and employees weren’t usually offered a choice of plans in a small company. SHOP users benefit from the ability to either choose which plan to offer, or allow employees to select from multiple choices. Offering multiple plans can enhance a company’s benefit package and therefore its attractiveness to new employees.

Offering multiple plans can enhance a company’s benefit package and therefore its attractiveness to new employees

Business owners can use the tools provided in SHOP to calculate the costs of subsidizing various plans and choose how much to contribute to employee plans. Premium payment can be structured as conveniently as one lump sum per month. Companies with up to 100 employees may use SHOP policies until 2016, when the Marketplace will expand this option to bigger entities.

Other Incentives

New provisions in the ACA stipulate that insurance companies spend at least 80% of income from premium payments on actual medical care, and no more than 20% on administrative costs. Insurance companies who do not meet this standard pay a penalty in the form of a rebate to policyholders. The use of this rebate, called a Medical Loss Ratio Rebate, is at the discretion of the company owner; employers may allocate rebate funds directly back to employees or apply them to overall company healthcare costs.

Another Kaiser Family Foundation report estimated that 25% of small businesses will receive rebates from their insurers. This provision of the ACA, which goes into effect in 2011, requires insurers to mail rebates in August of each year. The average rebate for a small business in 2013 is expected to be roughly $75 per enrollee, and publicly-traded insurance companies are most likely to be penalized.

Contribution amounts to Flexible Spending Accounts (FSAs) have been capped at $2,500 per individual. However, this limitation does not apply to employer contributions toward FSA accounts. Small businesses may make contributions, sometimes called flex credits, into FSAs or HSAs without penalty. In fact, these contributions are tax deductible for employers. Small business owners may choose to award flex credits toward premium costs as either reward incentives or bonuses.

Another incentive provided by the ACA is the Workplace Wellness Program. Recognizing that preventive care is one of the best ways to reduce healthcare spending, the ACA has provided grant funding for small businesses who wish to establish a wellness program. Businesses with fewer than 100 workers are eligible for these grants as of March 2010. Employers may use grant funding to reimburse gym membership fees, incentivize employees to attend wellness seminars, or reward them for attending annual check-ups.

Recognizing that preventive care is one of the best ways to reduce healthcare spending, the ACA has provided grant funding for small businesses who wish to establish a wellness program

Aside from grant funding to employers, insurers may also use this provision to encourage preventive care. Health plans may offer up to a 30% discount on wellness program costs, an increase of 10% over previous years. Tobacco-cessation programs can receive up to 50%. The ACA has also provided for consumer protection for employees who have medical conditions that prevent participation in any of these company incentives.

How Do I Choose the Best Option for My Business?

If you are a small business owner, it behooves you to consider the tax breaks you may be eligible for when you provide health insurance under ACA provisions. And even though you may be exempt from the federal requirement to provide an insurance option to your workers, it could benefit your bottom line and make your company a more attractive place to work.

First, check your individual state requirements, because they do vary. Then perform due diligence. When the Marketplace goes live on Oct. 1, 2013, one of its features will allow web users to compare plans side-by-side. Using a SHOP on the Marketplace offers business owners the same feature, so you can compare potential costs and calculate whether this is good choice for your company.

If you are a small business owner, it behooves you to consider the tax breaks you may be eligible for when you provide health insurance under ACA provisions. And even though you may be exempt from the federal requirement to provide an insurance option to your workers, it could benefit your bottom line and make your company a more attractive place to workplace

Consider the health implications of not only your employees, but also their families. Do you have potential insureds with chronic illness? Do you anticipate a number of new babies born to families of your employees? Insurance companies can no longer turn you down because of your company size, offer you a different product than they offer any other customers, or charge you higher premiums than larger groups. However, additional expenses that can drive up group premiums should be taken into account.

Finally, balance the cost outlay for employer-sponsored health insurance against the tax breaks provided to small businesses by the ACA. It may prove to be a better deal than you expected. The tax benefits and rewards incentives do much to offset cost for small businesses, and many of the obstacles you may have once faced have been eliminated or reduced.

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