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Beware misinformation about the new federal health care law – get the facts from SBAM

April 16, 2010

As a service to Michigan small business owners, SBAM, with the assistance of our national affiliate the National Small Business Association (NSBA) has compiled answers to the following list of Frequently Asked Questions about the new federal health care law.

A key finding from SBAM’s and NSBA’s research: despite what you may have heard, health insurance is going to be more expensive, not cheaper, under the new law.

Please use the social networking tools at the bottom of this article to forward this information to your small business colleagues. And we want to know what you think of the new law and how it might affect your small business. Engage in our online Forum!


1. As a small business owner, will I be required to provide health insurance to my employees and their dependents?

    a. There is no “employer mandate” to provide health insurance. However, the new law does have a so-called “free-rider” provision that only applies to small businesses with more than 50 employees and begins in 2014. Here is how it works with a couple of examples:
         i. Employers with more than 50 employees who DO NOT OFFER insurance to their employees, but at least one employee receives a federal premium subsidy through the new exchange, will be required to pay a penalty of up to $2,000 per employee for each employee over 30 employees.  
              1. For example, Acme Inc. does not offer health coverage to its 57 full-time employees. Five of its employees qualify as low-income and thus receive premium subsidies through the new Exchange. Acme will be required to pay a $54,000 penalty (57 employees minus 30 employees = 27 employees, multiplied by $2,000 = $54,000).
         ii. Employers with more than 50 employees who DO OFFER insurance to their employees, but have at least one employee receive a federal premium subsidy through the new exchange will be required to pay the lesser of $3,000 for each employee receiving a premium subsidy OR $2,000 for each full-time employee.
         1. Using the same example as above except Acme Inc. does offer health coverage to its 57 full-time employees. Five of its employees qualify as low-income and thus receive premium subsidies through the new Exchange. Acme will be required to pay $15,000 (The lesser of 1.) $3,000 X 5 employees = $15,000, and 2.) 57 employees X $2,000 = $114,000)

2.    How are full-time employees defined and do part-time or seasonal employees count toward the free-rider provision?

    a. Full-time employees are defined as those working at least 30 hours a week. Additional guidance is expected on how to address employees that are not paid on an hourly basis. Employers can carry over 50 employees (including part-time, seasonal and full-time) and not be counted as such as long as they don’t work longer than 120 days out of the calendar year. Seasonal workers are counted as full-time employees if they work more than 120 calendars days in the year. Part-time employees are counted as “full-time equivalent” employees by dividing the aggregate number of hours of service of employees who are not full-time employees for the month by 120.
         i. For example, Acme has 48 full-time employees and three part-time employees that work 10 hours a week. The three part-time employees’ aggregate number of hours for the month is 120 hours, which is considered to be one full-time equivalent. Thus, Acme does not exceed the 50 employee threshold to be subject to the free-rider provision (48 FTEs plus one full-time equivalent = 49)

3.    How does an employee qualify for premium subsidies in the Exchange?

    a. Premium and cost-sharing subsidies are available only through the Exchange starting in 2014 and are determined by income level and family composition. See the Kaiser Family Foundation’s premium subsidy calculator to determine if you are eligible for premium or cost-sharing subsidies.
    b. Generally speaking, premium subsidies will be available for individuals and families with incomes between 133-400 percent of the federal poverty line ($29,327 to $88,200 for a family of four in 2009) to help them purchase insurance through the Exchange. These subsidies will be offered on a sliding scale basis and will limit the cost of the premium to between 2 percent of income for those up to 133 percent of the poverty level and 9.5 percent of income for those between 300-400 percent of the poverty level.
    c. Employees who are offered coverage by an employer are not eligible for premium credits unless the employer plan does not have an actuarial value of at least 60 percent (i.e. the essential benefits package) or if the employee’s share of the premium exceeds 9.5% of income. See questions 11 and 12 for explanations on the essential benefits plan and its actuarial value.

4. What is the “free-choice voucher” and how is it different than the free-rider provision?

    a. The free-choice voucher provision requires employers that offer coverage to their employees to provide a free choice voucher to employees with income less than 400 percent of the federal poverty line whose share of the premium exceeds 8 percent but is less than 9.8 percent of their income and who choose to enroll in the Exchange. The voucher must be equal in value to what the employer would have contributed otherwise to the employee. Unlike the free-rider provision that requires employers to pay a penalty if employees get premium subsidies in the Exchange, employers providing free-choice vouchers will not be subject to penalties.

5. Does an employee have to take an employer’s insurance if offered?

    a. No, there is nothing that requires an employee to take what their employer offers. An employee could easily get insurance through a spouse, as a dependent until the age of 26, or through the new Exchange. Employers with over 200 employees are required to automatically enroll their employees in their health insurance coverage, but the employee may opt out. The onus to carry insurance coverage is on the employee who will be subject to penalties if they cannot show proof of insurance or documentation to be exempt.

6. When are the tax credits available for small businesses that provide insurance to their employees? How do employers get those tax credits? Will the self-employed be eligible?

    a. Tax credits are available to small businesses in two phases. To be eligible for both phases of the tax credits, employers must have 25 or fewer full-time equivalent employees with average wages of $50,000 or less and provide at least 50 percent of the total premium costs. In the first phase of the tax credit – tax years 2010-2013 – employers meeting the criteria can receive a tax credit worth up to 35 percent of the employer’s contribution toward the employee’s health insurance. The second phase begins in 2014 when the Exchange is created. The credits are available for two years once the employer purchases a group policy through the exchange (note: phase II credits are available strictly through the Exchange). Employers meeting the criteria can receive a tax credit worth up to 50 percent of the employer’s contribution toward the employee’s health insurance during this time. The full tax credit for both phases is available only to employers with 10 or less employees who have average salaries of $25,000 or less. The credit phases out for businesses between 10-25 full-time equivalent employees with average wages between $25,000 — $50,000. Tax exempt employers meeting the aforementioned criteria get a 25 percent credit for tax years 2010-2013 and a 35 percent credit for the two years in the Exchange.
    b. For-profit employers can capture the tax credits by deducting it against their federal income tax liability. The credit is not refundable, but it can be carried back one year and forward 20 years. Tax-exempt employers can deduct it against their payroll taxes.
    c. The self-employed are not eligible because the credit is only available to those businesses with employees. The only health insurance premium self-employed individuals will qualify for are federal premium subsidies, assuming they meet the low-income criteria through the Exchange.

7. What is a full-time equivalent employee for purposes of this tax credit? How do I calculate my average wages? Do seasonal employees count towards the calculation of full-time equivalents? Are there any exceptions?

    a. A full-time equivalent is determined by dividing the total hours for which the employer pays wages to employees during the year (but not more than 2,080 hours for any employee) by 2,080. See the IRS Web site’s FAQs with regard to additional information on determining full-time equivalents for the small business tax credit.
    b. Average annual wages are determined by dividing the aggregate amount of wages that were paid by the employer to employees during the taxable year by the number of full-time equivalent employees. For purposes of calculating average wages, only use employee’s wages up to 2,080 hours of work. The result is then rounded down to the nearest $1,000.
    c. Seasonal workers are not used in the calculation of full-time equivalent employees for purposes of the tax credit if the worker works for the employer on less than 120 calendar days during the taxable year. If the employee works more than 120 days, they will be counted towards full-time equivalents.
    d. Certain employees are not considered as such if they are a 2 percent shareholder or a 5 percent owner. Leased employees are counted.

8. How can I find out what my tax credit will be for my business?

    a. The calculation of a tax credit is fairly simple for employers with less than 10 full-time equivalent employees and average wages less than $25,000 per full-time equivalent, but businesses with more than 10 employees and average wages more than $25,000 can make the calculation tricky. The IRS provides a simple checklist to determine if you are eligible for the tax credit. Also, click here to view the Council of Smaller Enterprises (COSE) small business tax credit calculator. Meanwhile, the IRS explains the tax credits further here. In addition, the IRS and Small Business Administration provide more examples here and here.

9. How do employers, their employees and dependents access the new Exchange?

    a. The new health insurance Exchange in your state is not required to be up and running until 2014. At that time, employers with up to 100 employees can take their entire group into the Exchange for coverage (states can choose to limit the size of eligible employers to 50 employees up to 2016). Specifics on how to access and engage the Exchange will be made public by DHHS and your state in the coming years.

10. Will the cost of my health insurance premiums go up post reform?

    a. While cost-containment was the original impetus for reform (and which SBAM and NSBA relentlessly fought for), the final product placed access to coverage paramount. The non-partisan Congressional Budget Office (CBO) analyzed the Senate health care bill last fall, prior to minor changes made by the final bill and the reconciliation bill, and suggested that average premiums in the small-group market will be anywhere from 1 percent lower to 2 percent higher in 2016 than what they would have been otherwise absent reform. For the non-group market – those buying as individuals – average premiums per person will be about 10 to 13 percent higher in 2016 than what they would have been under current law. It should be noted, CBO’s conclusion suggest the premium changes are on top of the currently unsustainable health insurance inflation trends. Much of this increase is due to the expanded requirements for essential benefits packages and the actuarial value of those plans post-reform.  What is not taken into account are myriad taxes on other service providers, such as health insurers and medical device makers, which could basically be passed on to the consumer in the form of higher premiums.

11. What is the minimum coverage that everyone is mandated to carry? Are there different levels of coverage? Is there a “bare-bones” option?

    a. By 2014, all health insurance plans offered in the Exchange or out must abide by a new essential benefit package standard. Grandfathered plans will be exempt (see more below). The essential benefit package will provide a comprehensive set of benefits, including Ambulatory patient services (i.e. outpatient services), emergency services, hospitalization, maternity and newborn care, mental health and substance use disorder services (including behavioral health treatment), prescription drugs, rehabilitative and habilitative services and devices, laboratory services, preventive and wellness services and chronic disease management, pediatric services (including oral and vision care). In addition, an essential benefit package must cover 60 percent of the actuarial value of the covered benefits and limit annual cost-sharing to the current law HSA limits ($5,950/individual and $11,900/family).
    b. There are four levels of coverage: Bronze, Silver, Gold, and Platinum. Each level requires the plan pay for a specified percentage of costs: Bronze (60% actuarial value), Silver (70%), Gold (80%), Platinum (90%). Secretary of Health and Human Services may issue regulations under which employer contributions to a health savings account may be taken into account in determining the level of coverage for a plan of the employer.
    c. There is no bare-bones policy under the new law effective 2014. Unless you have a grandfathered plan, all other individuals must carry a health insurance policy that meets the requirements of essential minimum benefits package. However, individuals under 30 years and not using the tax credit to obtain coverage can enroll in a catastrophic plan to satisfy the individual responsibility requirement. The catastrophic plan is not minimum essential coverage and thus cannot be offered by an employer to meet health coverage requirements. A catastrophic plan must cover essential health benefits and at least 3 primary care visits, but must require cost-sharing up to the Health Savings Account out-of-pocket limits. Also, if an insurer offers a qualified health plan, it must offer a child-only plan (under 21) at the same level of coverage in the individual market.

12. What is meant by an actuarial value of a health insurance policy?

    a. The actuarial value of a health insurance plan has several variables, but is generally a percentage of the total covered expenses that the plan would, on average, cover. For example, the “Bronze” package, or minimum coverage defined by the new health reform law in 2014, has a 60 percent actuarial value, which means the consumer would pay on average 40 percent of the cost of health care expenses through features like deductibles and co-payments. As previously mentioned, traditionally there have been several factors that determine an actuarial value of a health insurance policy, including the plan type (HMO, PPO, POS, CDHP), benefits, exclusions, deductible level, co-payment/coinsurance, provider networks, out of pocket maximums and employer health savings account contributions. The general rule is higher premiums mean higher actuarial value; you pay more for more coverage. For purposes of the new health reform law, actuarial values were used to set benchmarks levels of coverage to qualify for minimum coverage and premium subsidies.

13. How will my out-of-pocket costs change under the new law?

    a. All plans in all markets will prohibit out-of-pocket limits that are greater than the limits for Health Savings Accounts (2010: $5,950 self, $11,900 family).
    b. In the small group market, it prohibits deductibles that are greater than $2,000 for individuals and $4,000 for families and it indexes the limits and deductible amounts by the percentage increase in average per capita premiums. It also limits cost-sharing for such coverage (deductibles, coinsurance, copayments, or similar charges – does not include premiums.)

14. Will there be any changes to flexible spending accounts (FSA) or health savings accounts (HSA)?

    a. In 2011, individuals will no longer be allowed to use FSA HSA or health reimbursement account funds to purchase over-the-counter drugs not prescribed by a physician. In addition, the penalty for distributions from a HSA or Archer MSA that are not used for qualified medical expenses is doubled to 20 percent. By 2013, FSA contributions by employees will be capped at $2,500 per year. Pre-reform, there was no federal limits on FSAs.

15. Will I really be able to keep my current insurance policy?

    a. The notion that you can keep the coverage you have if you like it is slightly misleading. The law does allow for plans to be grandfathered (i.e., you can keep the coverage you have with respect to the new essential benefit package and certain insurance market reforms). In other words, grandfathered plans will not have to abide by the new list of mandated benefits and certain insurance market regulations. However, the law requires even grandfathered plans to make certain changes, including changes immediately to extend dependent coverage to adult children up to the age of 26, prohibit rescissions of coverage, and eliminate waiting periods for coverage greater than 90 days. Six months after enactment grandfathered plans are required to eliminate preexisting condition exclusions for children. By 2014, grandfathered plans will also have to eliminate lifetime and annual limits on coverage.
    b. The law allows individuals and groups to keep the grandfathered status when you only add or delete new employees and new dependents.

For more information contact SBAM’s health insurance expert Scott Lyon.

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