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Last week, we addressed five compliance issues arising from the Affordable Care Act (the “ACA”) that small business owners should be familiar with this fall.  Each of the issues were somewhat tactical in nature.  They are the types of matters that an owner can comfortably assign to a good HR professional for resolution.

On the other hand, the five ACA related issued described below are much more strategic. They are not simply “check the box” compliance issues. They require at least some consideration by the business’s entire leadership team.

Therefore, without further ado we will move on to…

5.  The Rise (or Fall) of Self-Funded Group Health Coverage

Because of the ACA’s modified community rating rules, many small groups that had enjoyed lower rates due to their younger or healthier workforce face enormous rate increases.

Modified community rating requires insurers in the small group market to charge the same premium to everyone with adjustments being allowed only for family size, geography, smoking and age.  What’s more, the allowable adjustments for age have been reduced by 40% in most cases.  Self-funded group health plans are not subject to ACA’s rating rules and therefore are attractive to more small employers.

Historically, self-funding has been too risky for small employers.  In the past, groups that had bad experiences with self-funded plans might find themselves unable to get out of them.  Prior to the passage of the ACA, carriers could refuse to offer fully insurance plans to certain groups.  Therefore, a self-funded group that experienced high claims could find themselves locked out of the fully-insured market by carriers refusing to quote them.  ACA has eliminated this problem going forward so groups have less concern about trying out self-funding to see if it works for them.  If it doesn’t, they can just return to fully insured world next year.

In response to this new ACA inspired increase in demand, the insurance industry is making self-funding based plans available to smaller and smaller groups.  This article from Inc. online provides a fuller explanation of why self-funding has become more appealing for smaller employers in an ACA world.

4.  SHOP Exchanges and Premium Tax Credits

One of the promises of the ACA was that small employers would have access to a broader array of coverage choices to offer their employees.  So far, this promise remains unfulfilled.

The plan was that through their state’s small group health insurance exchange (the “SHOP”), small employers could provide their employees with a defined contribution towards health insurance expenses and the employees could then choose the coverage option among several that best suited their family’s needs.

The SHOP would then aggregate billing for the employer for the choices made by its employees.

So far, neither of these capabilities are fully available in any states relying on federally facilitated SHOPs.   For 2015, some states with federal exchanges are able to offer multiple plans from the same carrier within the same metal tier but otherwise, there is no employee choice.

Six state run SHOP exchanges have been authorized to offer expanded employee choice in 2015.

SHOP exchanges across the country generally offer fewer plan options than are available to small group’s outside the SHOP.  This begs the question, with less choice and no employee choice advantages, why SHOP in the first place?

The simple answer is that beginning in 2015, tax credits available to small employers for health insurance premiums will only be available for coverage purchased through the SHOP.

For employers who qualify, the credits can be substantial.  They can amount to up to 50% of the health insurance premium paid.  Employers with less than 25 employees who also average salary or wages less than $50,000 per employee per year can qualify for some amount of premium tax credit.  The credit percentage will be lower than 50% for employers with more than 10 employees or whose average annual employee pay is more than $25,000.

More information on health insurance premium tax credits can be found online within the IRS’s website.

3.  The End of Individual Insurance Reimbursement Arrangements

In September of 2013, the IRS issued Notice 2013-54.  In it, the IRS ruled that any employer sponsored arrangement that reimburses employees for the purchase of individual health insurance violates the ACA.

Historically, employers have been able to reimburse employees on a tax-exempt basis for individual insurance premiums.  The tax code clearly authorizes the reimbursements (and in fact this section of the code remains unchanged by the ACA).  However, even before passage of the ACA there were concerns about whether such arrangements constituted group health plans under ERISA, thereby triggering other federal requirements such as COBRA and HIPAA.

In Notice 2013-54, the IRS essentially ruled that such arrangements are group health plans.  As such, they are subject to ACA’s prohibition against annual or lifetime benefit limits under group health plans.  Furthermore, they ruled that limiting reimbursements to the amount of an employee’s individual insurance premium worked as an annual limit on benefits and therefore violated the ACA.

Over the winter, various commentators and vendors attempted to parse the language of Notice 2013-54 to find a viable method of retaining employer reimbursements of individual insurance premiums.  In response, in May of 2014, the IRS reiterated their position with even clearer language and clarified that such arrangements would be subject to ACA’s $100 per day per covered employee statutory penalty.

For those running the math in your head, that’s $36,500 per employee per year.

Unfortunately, too many small employers retain these reimbursement arrangements into 2014.  They are either unaware of the IRS’s guidance or have been convinced by a service provider that the provider’s “special” way of arranging these reimbursements avoids the IRS’s prohibition.

At this point, we can only advise those employers to run, not walk, away from those arrangements and those advisers as they are playing Russian Roulette with the future of their business.

2.  The Individual Mandate, Subsidies and Related Employer Concerns

Employers that historically have not offered coverage to their employees and those that do not subsidize coverage for the dependents of their employees must consider how the new individual mandate might affect their ability to retain their best employees.

Beginning in 2014, individuals who do not purchase coverage for themselves and their dependents will be subject to tax penalties unless they access a waiver from coverage.  Although the amount of the penalties is small (as little as $95 per person in 2014) they will escalate over time (at least $325 per person and as much as 2% of household income in 2015).

The amounts of the penalties will never exceed the cost of actually purchasing coverage so individuals that don’t see value in coverage most likely won’t be motivated to purchase it on their own.  However, they will view employment opportunities without family insurance coverage as less valuable than competing job offers with coverage because of the tax.

Conversely, the rules governing individual subsidies create a perverse incentive for small employers and their employees.  Subsidies are only available to individuals who are not offered employer sponsored coverage that is affordable for the employee.  The affordability for the non-employee eligible individual is irrelevant.

Therefore, consider a single mom who  is eligible for group coverage through her employment that could cover herself and her child.   Let’s assume the common situation where her employer subsidizes employee only coverage so that it is deemed affordable for her but provides no contribution towards her child’s coverage.  Under the ACA, her child will not be eligible for subsidized coverage regardless of this mom’s income.  She might be better off moving to a job that doesn’t offer coverage at all so that she get subsidized coverage for herself and her child.

This scenario requires small employers to really understand the value their employees place on coverage (on in the example above, non-coverage).

1.  The Employer Mandate and the 50-99 Full Time Equivalent Transitional Relief

Since the passage of the ACA, every business owner has probably invested at least minimal effort in determining whether or not they are subject to the law’s employer mandate.

For some groups, working through the process of counting full-time employees and FTEs, applying control group rules and identifying the appropriate measurement periods has been confusing.

The process has only been made even more complicated by the recent delays and changes in the application of the employer mandate.

First the mandate was delayed from January 2014 until the first day of the employer’s plan year in 2014.  Then it was delayed until the first day in 2015.  Then it was delayed until the first day of the employer’s plan year in 2015.  Then it was delayed until 2016 for employers with 50-99 full-time equivalents.

Assuming there are no more delays in the effective date of the mandate, employers that historically have not provided coverage to their employees must determine the best course for the future.

Should they begin to offer coverage and absorb the additional expense or should they pay the tax?

Perhaps there is yet another alternative such as reducing the workforce or modifying the workforce’s part-time/full-time status or splitting the company up into smaller unaffiliated organizations.

Finding the best solution will only come after careful consideration of the the company’s goals and strategy.

But ultimately, these decisions must also factor in complex ACA concepts.  What  are the rules governing the two different employer mandate penalties?  What is the cheapest coverage that can be provided to escape one or both of the penalties?

For employers subject to the employer mandate in 2015, it is getting a little late in the game to address these issues but there is a large number of employers who are now on the clock for 2016.

Good luck!

That’s All Folks!

We hope that the series of articles over the last two weeks designed for small business owners has given you at least one piece of information that will either help you avoid trouble or save money in the near future.

If you have questions about any of the items posted above, please contact one of Admin America’s compliance experts via e-mail or toll free at 1-800-366-2961.

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