SHOP versus individual marketplace? That is the question. Whether ’tis nobler (and more cost-effective) to offer coverage to your employees or simply direct them to the individual exchange?
Thanks to the Affordable Care Act, small business owners have options to help their employees obtain health insurance, although they are not required to offer coverage if they have fewer than 50 full-time equivalent (FTE) employees.
A major ACA innovation for small employers is the Small-Business Health Options Program (“SHOP” for short). SHOP exchanges – where small businesses can purchase coverage for their employees – are available in every state, either through the state-run exchange or through the federally-run exchange (FFM, or federally-facilitated marketplace) at Healthcare.gov
To determine if your state has its own SHOP, visit HealthCare.gov and you will be directed to the appropriate site after selecting the state where you live. In most states, the individual exchange and the SHOP exchange are run by the same entity (either the state or HHS) – but in Arkansas, New Mexico, Mississippi, and Utah, the state runs the SHOP exchange while Healthcare.gov is used for individual enrollments.
Up to 50 employees – in most states
In most states, the SHOP marketplace is available to employers with up to 50 employees. That cap was scheduled to increase to 100 in 2016, but the PACE Act, signed into law in October 2015, maintained the definition of small group as 50 or fewer employees, and SHOP coverage through Healthcare.gov is still only available to businesses with up to 50 employees.
But states still have the freedom to define “small group” as up to 100 employees, and some states have done so. SHOP exchanges in Colorado, New York, and Washington all offer coverage to businesses with up to 100 employees.
Three ways to keep employees covered
Small employers are not required to offer health insurance for their employees as long as they have fewer than 50 FTE employees. But thanks to the ACA, employees now have guaranteed-issue coverage available, either via an employer-sponsored plan, or in the individual market. Here’s how to go about making sure your employees are covered:
- Regardless of whether your state’s exchange is run by HHS or by your state, you can access the SHOP exchange by starting at the SHOP Marketplace on Healthcare.gov, and selecting your state. If you purchase coverage for your employees, you may be able to take advantage of the Small-Business Health Care Tax Credit for Small Employers. There is no deadline to apply for health plans through SHOP; Enrollment is open all year (as opposed to people buying individual coverage, who must enroll during the annual Open Enrollment Period unless they have a qualifying event), although once your business is enrolled, you can only make changes to your coverage during your annual open enrollment period, which will coincide with your plan’s renewal date (ie, if you enroll with a June 1 effective date, you’ll be able to make changes as of June in each subsequent year). Note that with the exception of enrollments completed between November 15 and December 15, there are employee participation requirements for SHOP. And some state-run exchanges have contribution requirements for employers who wish to purchase coverage through the SHOP exchange (here’s an example of eligibility requirements from Massachusetts Health Connector). You can enroll through SHOP on your own, or with the help of a broker – the price is the same either way.
- Send your employees to the individual marketplace, where they may be eligible for premium tax credits and cost-sharing reductions. But it’s important for employers to be aware that they are not allowed to reimburse employees for individual plan premiums, and that there are significant financial penalties that apply if employers do contribute to or reimburse for individual market premiums (employer can still contribute to their employees’ HSAs, if the employees select HSA-qualified HDHPs). But again, coverage is only available in the individual market during open enrollment, or during a special enrollment period triggered by a qualifying event. Open enrollment and special enrollment periods apply both on and off-exchange. For the remainder of 2016, a qualifying event is necessary in order to purchase coverage in the individual market. Employees can enroll themselves in a plan through the exchange, or they can use a broker or navigator for assistance – their premiums will be the same regardless of whether they seek help with the process.
- Or, you can contact a broker, private exchange, or specific insurance company and sign up for a small group plan outside of the SHOP marketplace, albeit without access to the ACA’s small business tax credits, and without the “employee choice” offered in the SHOP marketplaces (see details below). Initially, SHOP enrollment was possible directly through carriers, because the SHOP websites weren’t fully functional (note that this is still the case in Vermont).
Open enrollment in the individual market for 2016 has ended, although small group enrollment continues year-round. But now’s a good time for small businesses to begin making plans for their 2017 coverage (if you’re planning to direct employees to obtain their own health insurance through the exchange in 2017, note that the open enrollment period is tentatively scheduled for November 1, 2016 through January 31, 2017). And while each small business will have to make its own determination in terms of whether to offer employer-sponsored coverage, here are some important considerations to ponder.
Pros of offering employer-sponsored coverage
Attracting and retaining employees and being competitive in the local labor market are critical to business success. When a business loses an employee, it costs money. Such costs include hiring and training new employees and productivity losses resulting from open positions and the time it takes new employees to get up to speed.
A 2012 Center for American Progress report combined data from 30 case studies dealing with the costs of employee turnover. According to the report,
“Implementing workplace policies that benefit workers and help boost employee retention is not simply a ‘nice’ thing for businesses to do for their employees. Maintaining a stable workforce by reducing employee turnover through better benefits and flexible workplace policies also makes good business sense, as it can result in significant cost savings to employers.”
The report calculates that excluding executives and physicians, the median cost of employee turnover is 21 percent of an employee’s annual salary.
Let’s say your long-time prized manager making $40,000 a year leaves because her new position offers health insurance (and you don’t). Replacing her will cost you approximately $4,800 through lost productivity, training, and hiring costs. What if her replacement doesn’t work out and you have to hire someone else? That’s $9,600 for one employee.
What if you lose two more employees the same year? The costs add up. Include this consideration when deciding whether to offer your employees health insurance.
SHOP gives employees options
One of the selling points of the SHOP marketplace is that it allows employees to select from a variety of health plans, rather than just one plan selected by the employer. Some large employers have long operated in this fashion, giving employees several plan choices from which to pick (the Federal Employees Health Benefits Program is a good example). But for small businesses, it was often impossible to offer employees multiple plan selections.
The SHOP marketplace has changed that. Employers who use SHOP can specify a metal level (ie, bronze, silver, gold, platinum, referring to the actuarial values of the plans) and a contribution amount, rather than picking a specific plan. Employees can then select any available plan with that metal level from the options available through SHOP. Employers also have an option to select a particular insurance carrier and allow their employees to select any plan from that insurer – again, with a pre-determined contribution amount or percentage that the employer will pay for coverage (the employee pays any premium amounts above that level if a more expensive plan is selected). This “employee choice” feature was expected to be implemented in 2015, but states that use Healthcare.gov were given transitional relief and were able to postpone employee choice until 2016 if they felt that would be in the best interest of the state’s insurance market.
In 2015, most of the state-run exchanges and 14 FFM states offered employee choice in the SHOP market. Starting in 2016, employee choice is available in every state (in Vermont, where SHOP enrollments are still being done directly through the two participating SHOP carriers, employee choice is limited to the options available from a single carrier). SHOP enrollment has been relatively low in 2014 and 2015, although it might increase in 2016 now that employee choice is available nationwide.
Larger risk pools spread costs more evenly
According to Grant Lahmann of Small Business Majority, “High employee turnover directly impacts a small employer’s bottom line. There’s a reason larger employers offer insurance, and it’s not out of a sense of moral obligation. Small employers have typically paid 18 percent more on average for the same insurance product available to their larger competitors.”
According to Lahmann, small businesses have historically been treated as an individual small group from a medical underwriting perspective, thus minimizing their buying power and the size of their risk pool, compared to large businesses. As a result, they haven’t been able to afford insurance. As of 2013, most states allowed health insurance carriers to use rating bands (which often ranged as high as a 60% increase over the base premiums) to adjust premiums for small groups based on the group’s overall medical history. That made health insurance much less affordable for groups with members who had experienced significant health problems.
But the ACA changed that. Just as medical underwriting is no longer allowed in the individual market, it’s also no longer allowed in the small group market. Instead, each health insurance carrier has to use a single unified risk pool for all of its small group plans (including plans sold on and off the SHOP marketplace). Groups can no longer be charged higher premiums based on the group’s medical history or claims experience history – instead, rates are based on the overall claims experience of the carrier’s entire small group book of business (states are allowed to take this one step further, and use a single combined risk pool for individual and small group markets, but only Vermont and Massachusetts have opted to do so thus far).
Two different studies – one by the RAND Corporation, the other by the Urban Institute – suggest that ACA market reforms and the new ACA marketplaces will reduce small employers’ premium contributions and increase insurance-offer rates among small firms. With the “risk pooling effect” of the SHOP Marketplace, smaller employers now have an unprecedented benefit, driving insurer competition and pooling together with other small businesses to spread the risk like a larger company.
Premium aggregation and tax credits
Premium aggregation is a feature that allows small employers to offer multiple plan choices while still receiving just one monthly invoice from the SHOP marketplace. The SHOP Marketplace manages payments to each insurer, taking any additional paperwork or time costs out of the equation.
Another very specific advantage of purchasing coverage inside SHOP is the small-business tax credit. Although small business plans are available outside of the SHOP marketplace (except in Vermont and DC, where there’s no off-exchange market), the Small Business Healthcare Tax Credit is only available through SHOP. If your business has fewer than 25 full-time equivalent employees and they have an average salary of less than $50,000/year, you could be eligible for tax credits that pay up to 50 percent of premiums for up to two consecutive years.
To determine whether you qualify for the small-business tax credit – and how much you might save with it – see Small Business Majority’s tax credit calculator.
Attractive to employers ‘on the cusp’
If you’re an employer on the cusp of having 50 full-time employees (FTEs) you have a solid incentive to enroll in coverage through the SHOP marketplace as soon as possible. That’s because once you participate in SHOP the first time, you don’t have to re-qualify in subsequent years unless you move to another state or stop offering coverage to all full-time employees. This is a significant advantage for small businesses. Why?
Here’s an example: Let’s say your business is at 45 FTE for 2016. You can get a SHOP plan this year and still be able to provide those SHOP plans in 2017 even if your business grows and surpasses 50 FTEs (and at that point will also be subject to the employer shared responsibility requirement, which means you’d be required to offer coverage). This will allow your employees continued access to the employee choice component going forward.
These unprecedented advantages truly make the Affordable Care Act a game changer when it comes to making small businesses more competitive with their large-business counterparts. It’s therefore important for small-business owners to familiarize themselves with their new options and make the best choices based on their individual circumstances.