The nation's smallest businesses are exempt from ACA's employer mandate. So why do many small-business owners offer small-group coverage?

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Small businesses don't have to provide health benefits, but many do. Here's why they do – and what you need to know if you're interested.

Owners of America’s small businesses have plenty on their plates to worry about – marketing costs, tax compliance, and their competition, just to name a few – and yet millions of these entrepreneurs also the devote time, energy and money necessary to provide health benefits for their employees.

If you’re thinking it’s because small-business owners have no choice, you’d be wrong: they actually aren’t required by federal law to do so. The nation’s smallest businesses – with fewer than 50 full-time equivalent (FTE) employees – are exempt from the law’s employer mandate (not required to offer coverage, and not subject to a penalty if their employees buy subsidized coverage in the exchange).

So why do these small-business owners go to the trouble of setting up small-group coverage?

4 reasons to look at small-group coverage

1. Attracting a talented workforce

Offering health benefits has been one of the ways historically that businesses of all sizes have attracted and retained talented workforces.

Employees are drawn to businesses that offer health benefits. Being able to simply enroll in an employer’s health plan is easier for most people than having to shop for coverage on their own. And the employer contributions to the premiums are an added benefit that employees wouldn’t have if they worked for an employer that didn’t offer health benefits.

In fact, a 2015 survey by the Employee Benefit Research Institute revealed that workers “overwhelming consider health insurance to be the most important workplace benefit.

The same survey also noted that 60 percent of workers reported they would work longer in order to keep receiving employer-sponsored benefits – and also revealed that most employees would actually stay with an employer longer to hold on to health benefits.

It almost goes without saying, then, that if you can afford to offer coverage, it will help your small business stand out from other businesses that are competing for your employees.

2. Tax incentives

At the same time, dedicating funds to employee coverage could be less expensive than simply using the same money to provide higher wages.

Health insurance is a form of compensation, but payroll and income taxes are not assessed – on you or your employees – on money that employers use to purchase health insurance (and in most cases, taxes are also not assessed on the portion of premiums that employees pay).

In contrast, if you were to not offer coverage and instead give your employees a raise equal to the amount you were paying in health insurance, payroll taxes and income tax withholdings would apply. This makes group health insurance an attractive way to optimize compensation while minimizing the tax hit for both employers and employees.

3. Costs that are split with your employees

Employers certainly don’t have to bear the whole burden of paying for the coverage. Most health plans require employers to pay at least 50 percent of each enrolled employee’s premiums, although employees can be asked to pay up to the full cost of adding family members to the plan.

For perspective, a 2016 Kaiser Family Foundation survey found that across firms of all sizes, employers pay roughly 71 percent of total family premiums for their employees, leaving the employees to pay just 29 percent of the cost. But compared with large businesses, small businesses (which the Kaiser survey defines as having up to 199 employees) are more than twice as likely to require employees to pay the full premiums associated with adding a spouse and/or kids to the plan.

4. Healthier, happier employees

Subsidizing health coverage is a logical step toward improving the health of employees, who may be more likely to embrace preventive screenings and care. It also stands to reason that healthier – and insured – employees are less likely to be burdened by financial stress.

Those positive effects, in turn, are likely to boost attendance and productivity and – hello! – profits for your small business.

How to decide whether to provide benefits

Deciding whether or not to provide small-group coverage for your employees is not a “no-brainer.” Here are some factors to look at as you make your decision:

1. Look at the costs now.

The first step is getting a realistic picture of how much it would cost, by obtaining a variety of premium quotes for your group. The SHOP exchange in your state will be able to help with this, and a local broker will be able to show you even more options, including plans that aren’t available through the exchange. The broker will be able to help you work out how much you’d have to pay and how much your employees would pay under various contribution splits. From there, ask yourself whether you can afford the coverage.

2. But also consider future coverage costs.

You’ll also want to consider whether continuing to offer coverage is likely to be a viable option for your business in the long run. Will you still be able to afford to offer coverage as premiums rise with time? (Keep in mind that there are cost-saving measures available, including switching plans, increasing out-of-pocket costs, or requiring employees to pay a larger share of their premiums).

3. Check up on your competition.

Do other similarly sized employers in your industry tend to offer coverage? If they do, you may need to offer coverage in order to remain competitive.

4. Get feedback from your employees.

HR leaders at large organizations routinely survey their employees to determine their level of satisfaction with their overall benefits package. Seeking feedback from your employees is a good place to start, and can give you an idea of their willingness to join an employer-sponsored plan, the type of coverage they’d like to see, and the amount they’d be willing to pay for it.

5. Consider the ‘family glitch’

Some employers pay the entire premium for their employees’ coverage, but that’s the exception rather than the rule. Employer-sponsored health insurance premiums are typically funded via a combination of employer contributions and employee contributions, with the latter being deducted from each employee’s paycheck.

If you’re a small-business owner and you’re setting up a group plan for your employees, you’ll want to understand the ramifications of who pays what. This includes an understanding of how the family glitch works. Here’s the basic info you need to know:

  • As a small-business owner, you’re not required to offer coverage to anyone.
  • No employers – large or small – are required to pay for coverage for employees’ spouses and/or kids.
  • However, if you offer coverage to your employees and their families, and pay for all or most of your employees’ premium – but require them to payroll deduct the full premium to add their families to the plan – you may inadvertently be consigning them to the family glitch. That’s because the determination of whether an employer plan is affordable is based only on the employee’s premium, but that affordability designation carries over to any family members who are eligible for the plan. The cost to add family members to the plan is not taken into consideration. And yet, if your employees’ family members have an option to get coverage through your plan – even if they have to pay the full cost for it themselves – they will be ineligible for premium subsidies in the exchange if your employees’ coverage is considered affordable.

If your employees’ families end up impacted by the family glitch, they may not have an affordable coverage option at all. That’s not to say that small businesses should overextend themselves by paying for employees’ family premiums, but employers should be aware of the family glitch and understand how it works.

A few more small-group pluses

1. Buying options.

You can buy a small-group plan can directly from an insurance company, via a broker or private exchange, or from the SHOP exchange in your state.(You may qualify for the Small Business Health Care Tax Credit, which is currently only available via SHOP exchanges, although there may be more flexibility in future years.)

Use our tool to get a small-group coverage quote.

2. Plans are ACA-compliant.

Regardless of where you get the plan, all new small-group plans effective since January 2014 are compliant with the ACA. (In most states, small-group rules apply to groups with up to 50 employees, but in four states – California, Colorado, New York, and Vermont – they apply to groups with up to 100 employees).

3. Medical history isn’t a factor.

Insurers cannot use the group’s medical history to set premiums for ACA-compliant small-group plans, and premiums for older employees cannot be more than three times those for younger employees.

4. Clearly defined benefits.

ACA-compliant small-group plans have to fit into one of the four metal levels and cover the ACA’s essential health benefits.

This could change if the House version of the AHCA were to be enacted, as states would have the option to adjust the definition of essential health benefits. For now, however, all new small-group plans in the country are required to cover the ACA’s essential health benefits, but with state variation in terms of exactly what has to be covered for each category.

What if you decide to not offer benefits?

ACA introduced viable alternatives

Prior to 2014, individual health insurance (the kind people buy on their own) was medically underwritten in most states, so pre-existing conditions were an obstacle when people had to obtain coverage on their own. And the tax code didn’t give people a way to deduct individual insurance premiums unless they were self-employed or spent more than 10 percent (previously 7.5 percent) of their income on health insurance and medical care.

In those days, there were some clear advantages to a small-group health insurance plan: the premiums were paid pre-tax, and coverage was guaranteed-issue, regardless of the group’s medical history (states could allow premiums to be based on a group’s medical history, but under HIPAA, small groups could not be declined altogether as long as the group met minimum participation and contribution requirements, and individual employees could not be singled out for higher premiums due to pre-existing conditions).

But under the ACA, the playing field has been leveled to some degree. Coverage in the individual market is now guaranteed-issue and premiums no longer depend on applicants’ medical history. (Note that coverage in the individual market is only available during open enrollment or a special enrollment period triggered by a qualifying event – as is the case for employees seeking coverage under an employer-sponsored plan).

In addition, premium tax credits (subsidies) in the exchange provide a tax advantage for low-income and middle-income people who purchase their own coverage; this makes the tax system a little more equitable in terms of how individual and group health insurance premiums are treated.

Plans are guaranteed issue – for now.

Republicans in the House of Representatives passed their American Health Care Act (AHCA) on May 4, and the Senate is now drafting its own version of the bill. Under the House version of the bill, states would be allowed to waive some of the ACA’s consumer protection rules.

Notably, they could allow insurers to charge higher premiums based on medical history when people apply for coverage in the individual market after having a gap in coverage during the previous year. This provision may not be included in the Senate’s version of the bill, but it’s something for employers to consider.

If the ACA’s protections for people with pre-existing conditions are weakened in the individual market, small businesses might find that a group plan once again does a better job of ensuring affordable coverage for all employees, regardless of their medical history and prior insurance coverage. The CBO agrees this is the likely outcome if the House version of the AHCA is enacted.

Reimbursing employees for coverage is an option

Under 2013 ACA implementation guidelines established by HHS, the IRS, and the DOL, employers of any size were banned from reimbursing employees for the cost of individual market coverage. The penalty for non-compliance, which was delayed until July 2015, was $100 per day, per employee – a significant deterrent, for sure.

But in late 2016, Congress passed the 21st Century Cures Act with strong bipartisan support. Among many other things, the legislation allows businesses with fewer than 50 full-time equivalent employees to establish Qualified Small Employer Health Reimbursement Arrangements (QSEHRA).

For a small employer that doesn’t offer group health insurance benefits, these arrangements allow the employer to reimburse employees, tax-free, for some or all of the premiums they pay for coverage purchased in the individual market, on or off-exchange. (Note that if the coverage is purchased on-exchange, the QSEHRA doesn’t necessarily make the employee ineligible for an exchange premium subsidy, but the QSEHRA is taken into consideration for determining affordability, and the amount of the exchange subsidy is reduced by the amount that the employee receives via the QSEHRA.)

The maximum amount that an employer can reimburse via a QSEHRA is $4,950 for a single employee’s coverage, and $10,000 for family coverage (indexed in future years). The limits are also prorated across the year, so an employee who is hired mid-year would only be eligible for a portion of the maximum annual reimbursement.

If you want to create a particularly competitive benefits package as a means of attracting and retaining a top-notch workforce, a small-group plan will likely be a better option than a QSEHRA, as there’s currently no upper limit on how much an employer can contribute – tax-free – towards their employees’ group health insurance premiums. (This could change in 2020 if the Cadillac tax is implemented as currently scheduled; the AHCA would delay the Cadillac tax until 2026.)

With average group premiums reaching more than $6,400 in 2016 for a single individual, and more than $18,000 for a family, employers who wish to cover the full cost of a robust health insurance plan for their employees will generally need to establish a group health insurance plan, as the QSEHRA limits aren’t enough to fully cover the cost of a robust plan in most areas.

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