Affordable Care Act 101: A Small Business Guide to the New Healthcare Law

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Things are about to change dramatically in the way you and the businesses in your town purchase health insurance. Open enrollment for federal subsidies started on October 1 and the first plans of the Patient Protection and Affordable Care Act will be 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. When I first got started, I worked for Blue Cross and Blue Shield in the early eighties. It was very common back then 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.

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.  

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, starting January 1, 2014, all medical plans will be 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. If you need a copy of a letter that will meet an employer's obligation to notify its employees, Maury, Donnelly and Parr, a partner of National Trust Insurance, can provide one to Main Street members at no cost. 

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. Here are a few you should check out:

1.    The Small Business Administration offers Affordable Care Act 101 Webinars for Small Business every Thursday at 2pm ET during the month of October;
2.    The U.S. Department of Health and Human Services website has a State-by-State Guide to the Affordable Care Act;
3.    HealthCare.gov provides Q&A, videos, and a basic guides on what the Affordable Care Act means for small businesses; and
4.    The IRS website offers information on the Affordable Care Act Tax Provisions for Small Employers.

Please feel free to contact Robert Dooley, directly for more information or to answer your questions at rdooley@mdpins.com or 1-800-638-9202.

Please note, Maury, Donnelly and Parr developed their own Private Exchange that can be found at http://mdp-exchange.com. Starting October 1, 2013, they will be able to assist people in calculating the level of their subsidies and applying for the Advance payment coverage.