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Small employers (under 50 employees) offering bare-bones healthcare plans face costly choice

August 5, 2015

By Michael J. Burns, courtesy of SBAM Approved Partner ASE

Most media coverage of the Affordable Care Act (ACA) generally focuses on compliance issues for large employers (i.e., those with 100 or more full-time equivalent employees or FTEs; beginning next year, also those with 50 or more FTEs). The ACA’s pay-or-play penalties force those employers to choose whether to even offer health insurance or to just pay the penalty tax. Employers who are below but near the 50-FTE threshold must think twice about growing their populations above that mark.

But left out of the media coverage are the multitude of small employers (i.e., under 50 FTEs) that still want to offer some kind of health plan or subsidization of the cost thereof. With healthcare premiums of some of those group plans still rising at rates from the high single digits to well above 20%, these employers face a tough choice:

  • Drop your existing plan, send your employees out onto the exchanges to buy individual plans, then hold your breath that you don’t start losing your best people to employers with better plans; or,
  • Accept the premium increase to bring your plan up to minimum levels required by the ACA. That means your plan must cover a list of 10 “Essential Health Benefits” (“EHBs”) mandated by the ACA.

Until recently, those employers had a third option, which was to provide their employees with a Health Reimbursement Account (HRA), i.e., a tax-favored account that the employer could fund and they could use to purchase, or at least subsidize the purchase of, a health insurance plan through an ACA exchange. But that option is no longer available to those small employers due to a recent IRS decision to use its taxing power to go after some those firms’ health insurance plans.

The IRS rule states that if an employer—regardless of its small size—offers any reimbursement to employees that can be used for healthcare insurance premiums (e.g., an HRA), that reimbursement would be an employer-payment plan. An employer payment plan in turn is now considered a group health plan by the IRS; therefore, it must meet the conditions of the ACA.

This puts a Hobson’s choice directly in front of a very small ASE member firm that recently told us its story. This firm, which covers fewer than 10 employees in its healthcare plan, was recently told by its insurance company that because of ACA requirements its current plan was no longer available to them because it was not EHB-compliant. A new plan, EHB-compliant and more expensive, would not be affordable for them. But, because of the new IRS rules, they would not be able to make a tax-favored payment to their employees before sending them out onto the exchange to buy their own plans.

The ASE member above is caught between a rock and a hard place. It can no longer afford to offer an ACA-compliant health insurance plan with exorbitant annual premium increases and it also cannot offer an HRA that its employees can use to pay for the insurance they want.

This employer has three alternatives, none of them attractive:

  • Drop all insurance and risk losing employees to employers who offer health insurance benefits
  • Upgrade their insurance plan to one that meets EHB requirements and risk breaking their benefits budget
  • Raise employee pay levels so that they are “made whole” for the cost of plans they may or may not purchase on the exchange. But this approach forfeits tax benefits as well as creates a difficult value proposition to communicate when discussing salary.

In one of those ironies that can only arise in a huge, and hugely complex, program like the ACA, there are plans that larger employers can buy that are less generous—and probably less costly per capita—than the plan that this under-50 employer would have to buy in order to meet ACA requirements.

Help may be on the way. The Small Business Healthcare Relief Act of 2015 (S.1697/H.R. 2911) was introduced in both the U.S. House and Senate earlier this year to correct this situation. This legislation would allow small employers to continue to support employee health care coverage by permitting them to provide a Health Reimbursement Arrangement (HRA) that permits the businesses to offer pre-tax dollars to help pay the premiums and/or other out-of-pocket costs associated with medical care and services. Employer groups such as the Small Business Association of Michigan and the National Federation of Independent Business, as well as the American Society of Employers, supports this solution for small employers that are being forced by the IRS’s interpretation of the ACA to drop all healthcare coverage options for the small employer.

Need help? Contact your insurance agent or ask SBAM for help!

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