Editor's note: On Feb. 10, the IRS delayed the penalty for employers with 50 to 99 full-time equivalent employees. Click here for details.
New health care regulations in the United States have small business leaders bracing for increased costs and eager to save where they can.
Although it was delayed a year, the employer mandate in the Patient Protection and Affordable Care Act (PPACA), P.L. 111-148, takes effect Jan. 1, 2015. Businesses with 50 or more full-time-equivalent employees (FTEs) will be forced to pay a penalty if they do not provide minimum essential health insurance coverage for employees.
Small businesses that already provide employees with health insurance—which have faced rising costs for years—may face additional premium increases as an indirect result of the new legislation, experts say.
Small businesses with 25 or fewer employees and average annual wages of less than $50,000 should determine if they are eligible to claim the credit of up to 50% of nonelective contributions they make on behalf of their employees for insurance premiums.
And experts advise employers to start considering all their options now instead of waiting until the end of the year.
In this environment, experts said during a recent AICPA webcast devoted to health care reform, numerous insurance options are emerging for small businesses as insurers develop new products that could provide better coverage and minimize cost increases
One of the first questions businesses with 50 or more FTEs may want to consider is whether to provide health insurance to their employees or pay a penalty of $2,000 per year per employee (the first 30 employees are exempt). Brian Marks, an executive director at Virginia-based consultancy Digital Benefit Advisors, said that if direct costs were the only consideration, most 100-employee companies he knows would save money by paying the penalty.
But there are a lot of other factors to consider.
“Strategically how important is it to offer those benefits?” Marks asked on the AICPA webcast. “What do your employees need? And yet, can you sustain your current cost trend? Historically it has been pretty important to offer health coverage. Is it still?”
Marks said he doesn’t foresee a lot of employers deciding to pay the penalty, but he said companies will have to analyze the possibility. The drawbacks of paying the penalty rather than providing insurance include:
- Damaging morale. Declining to make this investment in employees could lead to resentment in the workplace. Associated consequences could include reduced productivity and retention problems.
- Recruiting difficulties. Deciding not to provide coverage may hurt a company’s chances to attract potential employees who view employer-provided health insurance as an important benefit.
- Reputational risks. Potential customers may take a negative view of companies that do not provide health insurance to employees. This could particularly be a concern if a company’s competitors or peers provide coverage, so it may be important for management to consider whether competitors choose to pay the penalty or provide health insurance.
“A lot of employers don’t want to be the first one that drops coverage,” said Laura Westfall, a lawyer and associate with King & Spalding in New York who specializes in employee benefits. “And that is because of the … effect that will have on public opinion, in part.”
Hiring part-time workers (less than 30 hours a week) may help businesses avoid the employer mandate by keeping their FTE staff under 50. But employers should tread carefully here, especially if they are considering reducing hours of current workers, Westfall said.
“Aside from the expectation that employees may have for a certain number of hours per week, there is the potential for retaliation claims,” Westfall said, “especially from a group of employees who as of January 1, 2015, would be required to be offered coverage because they consistently work [at least] 30 hours a week now.”
An employer should consult with legal counsel before changing hiring practices, Westfall said. She said there is a big difference in risk between cutting current employees’ hours and merely limiting future hires to part-time hours.
Job sharing, joint ventures, partnerships, and outsourcing opportunities also may be ways to keep employees below the 30-hour threshold, Marks said.
If a small business does decide to offer coverage, there are many ways to reduce costs. Cost-saving strategies also should be evaluated for their impact on employee morale, engagement, productivity, retention, recruiting, and even reputational risk, experts said.
Cost-saving strategies include:
1. Considering a self-insurance plan. Virtually all large employers in the United States use self-insurance plans, according to Mark Dietrich, CPA/ABV, an author and health care valuation expert. Large employers insure their employees on their own, but they work through insurance companies to access providers and “stop-loss” insurance.
The plan essentially creates a budget for the employer and its employee base, which is paid to the insurer. If the company’s health costs are below budget, it receives a premium credit the next year. If costs are over budget, the company is responsible for those costs. The stop-loss protection may pay in cases where a particular employee incurs very high medical costs, and it is necessary because self-insurance plans are not eligible for coverage under state guarantee programs.
Insurers are creating self-insurance plans for smaller employers as a result of PPACA, Dietrich said. Self-insured plans are exempt from an excise tax on high-cost plans, exempt from community ratings or premiums, and generally are exempt from mandates for essential health benefits.
“Plan sponsors may have greater control in designing plan benefits and provider networks, and designing the employee cost sharing,” Westfall said.
Companies with low-risk (generally younger, healthier) employees may especially benefit from self-insurance plans, Marks said.
2. Considering a defined contribution plan. In this model, much like a 401(k) retirement savings program, the employer pays a predetermined amount to an employee’s health plan. The employer makes at least five or six plans available to employees on a private exchange and instructs employees to choose the plan that works best for them.
Employees must pay the difference if they choose a plan that costs more money than the employer provides.
“These [plans] typically work well with the right decision support to help employees make the right decision,” Marks said. “… They really do create a marketplace experience for the employees.”
Another popular defined-contribution option is high-deductible plans, which typically are offered by insurers at lower premiums. These plans often are paired with employee accounts such as a health reimbursement arrangement (HRA) or health savings account (HSA) that helps employees use pretax money to pay medical expenses.
In some cases, the company will contribute a portion of its premium savings to the HRA or HSA for employees to spend on medical care. About two-thirds (66%) of large employers offered some type of account-based health insurance plan in 2013, and that number was expected to increase to 79% in 2014, according to a Towers Watson/National Business Group on Health survey of 583 employers.
3. Reviewing contracts with vendors. Companies may find several ways to save through different contract terms, Westfall said.
Comparing the actuarial value of current plans to the available options may lead to a revelation that the company needs to change plans. Employers may also save money by using one vendor instead of many, and they may be able to implement contracts with performance-based targets to keep the vendors on track, according to Westfall.
4. Evaluating coverage of dependents and spouses. PPACA requires employers to offer coverage to employees and their dependents, but spouses are not considered dependents under the act, Westfall said.
And the affordability requirement is calculated using employee-only coverage, so raising the premium costs for dependents and spouses—while being mindful of out-of-pocket cost limits—is one option for companies, Westfall said.
Offering coverage only for dependents and not for spouses is another option. And some companies are charging a premium for spouses who could receive health insurance through their own employer but elect not to take that coverage.
Still another option is to change the benefit structure to incrementally increasing “employee plus one, employee plus two, employee plus three” coverage based on the number of dependents covered. “Employee plus children” and “employee plus family” alternatives currently offered by some companies do not take into account the total number of dependents.
5. Assessing the whole benefits package. There may be opportunities to require employees to pay for some portion of the dental, vision, or life insurance benefits they receive to help offset higher health care costs, according to Westfall.
If employees are not using some of these other benefits, it may make sense to drop them and divert the savings to health insurance, Westfall said.
6. Considering wellness strategies. Outcome-based wellness programs can offer discounts to employees based on their health. For instance, Westfall said, an employer could provide a discounted rate to employees who have an annual cholesterol test and achieve cholesterol levels below 200.
Employers that use these strategies are required to provide reasonable alternatives for achieving the discount to employees for whom it is unreasonably difficult or medically inadvisable to satisfy the requirements, Westfall said.
7. Communicating better. A wellness program won’t help much if employees don’t know it exists or how to access it. And to make the best health care choices—which can save the company money—employees need to be fully informed of their options.
Westfall advises making full use of all available avenues—including webpages, email, social media, and in-person classes and seminars—to keep employees fully informed.
“Make information about the cost of health services readily available to employees so they are able to make decisions, to really understand the cost of what they are paying for, and what is available at different cost points,” Westfall said. “And take advantage of technology generally.”
The best combination of strategies and options will vary widely between companies, Marks said, because situations and demographics are so different from company to company. And the rules and the market will continue to evolve as new rules come into place and new products are created.
Each decision should be made with careful consideration of the overall value proposition of decisions—and their effects on employees, Marks said.
“They [employees] are why we have employee benefits,” Marks said. “Keep your eye on that. Don’t rush, but definitely, definitely analyze, definitely consider all the potential decisions and make sure you look under every stone to get to the solutions that leave you best positioned.”
—Ken Tysiac (firstname.lastname@example.org) is a JofA senior editor.