The Affordable Care Act (ACA) has brought about many changes that strongly favor the individual health insurance market. This, in turn, has made employer-funded individual health insurance an optimal health insurance solution for many small employers. This article overviews the four key ACA changes that have caused many small employers to drop their group plan in favor of reimbursing employees’ individual health insurance premiums.
1. Guaranteed-Issue Individual Health Insurance
The ACA’s Pre-existing Condition Exclusion (“Guaranteed-Issue”) provision prohibits health insurers from denying coverage to individuals due to a pre-existing condition. This provision, known as “guaranteed issue,” simply means health insurers and employers cannot limit, exclude, or deny coverage to employees based because of a health condition that was present before the effective date of coverage.
2. The Employer Shared Responsibility Provision Only Applies to Large Employers
The Employer Shared Responsibility provision, also called ESR or the employer mandate, is the requirement for larger employers to either offer health insurance to employees, or pay a fee if/when an employee buys subsidized health insurance through the Marketplace.
Small employers are not subject to the employer shared responsibility, and are therefore, not required to provide health insurance to their employees. The penalty does not apply to companies with fewer than 50 full-time equivalent employees.
3. Premium Tax Credits for Individual Health Insurance
The federal government is providing discounts on individual health insurance to individuals and families who qualify. These discounts are called “premium tax credits,” or “premium subsidies” and are available for policies purchased through the Health Insurance Marketplaces run by each state.
Eligibility for these premium tax credits is based on the following factors:
Income requirements: families who earn up to 400% of the FPL (Federal Poverty Line) may be eligible for premium tax credits
Household size: income requirements are also dependent on how many family members are living in a household; for example, an individual earning up to $46,680 in 2014 would be eligible for a premium tax credit, while a family of four earning up to $95,400 in 2014 would be eligible for a premium tax credit
Access to affordable health insurance: individuals who have access to healthcare through their employer or a government program, such as CHIP, Medicaid, Tricare, etc. would not be eligible for a premium tax credit
For more details on premium tax credits, see this guide.
4. Individual Shared Responsibility
If an individual fails to purchase health insurance that qualifies as minimum essential coverage, and does not qualify for an exemption, they will pay the individual shared responsibility payment. The fee is calculated in one of two ways, and the individual is required to pay whichever amount is higher:
One percent of yearly household income: the maximum penalty is the national average premium cost for a bronze plan.
$95 per adult and $47.50 per child under 18: the maximum family penalty is $285.
The penalty will increase each year:
In 2015, the penalty will be 2% of annual income or $325 per adult.
In 2016, the penalty will be 2.5% of annual income or $695 per adult.
Why These Four ACA Changes Favor Employer-Funded Individual
1. Individual health insurance policies are guaranteed issue, and eliminate the non-economic factors from an employer’s decision making process. This will ensure that every employee has access to affordable health insurance, independent from employment.
2. Most employees will pay less for health insurance on the individual Marketplace due to premium tax credits.
3. For small employers with under 50 FTE employees, there is no employer shared responsibility and no penalties. This is the reason many small employers are dropping group health insurance to help pay for employees’ individual health insurance premiums.
What do you think about the way the ACA has made individual health insurance more appealing?