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Small Business Employee Benefits and HR Blog

A Small Business Solution to the Health Insurance Tax

Most small business owners are facing health insurance rate hikes at renewal time this year. One of the reasons is Affordable Care Act's health insurance tax (HIT), which is levied on insurance companies and passed down to businesses in the form of premium increases.

The Health Insurance Tax (and New Rate Hikes)

A small business solution to the HIT and rates hikes

The HIT is just one of the new ACA taxes and fees impacting premium rates. And the cost is not insignificant. 

According to the CMS, 11 million employees of small businesses will see ACA-related premium increases - 65% of the estimated 17 million employees covered under a fully-insured small group health plan.

And, these estimates by CMS do not even include non-ACA factors that have already caused health insurance costs to be on the rise over the last decade, such as changes in product design, provider networks, and the overall rise in the cost of health care.

As the chart below shows, from 1999 to 2013, without accounting for the annual benefit reductions, the cost to cover a single employee rose from $2,196 per year in 1999 to $5,884 per year in 2013. Family coverage increased from $5,791 per year in 1999 to $16,351 per year in 2013.

Increase_Cost_of_Group_Health_Insurance

Chart Source: The Inevitable End of Small Business Health Insurance Whitepaper

It's these past and future annual increases, as well as the new advantages to the individual market (guaranteed-issue, premium tax credits, etc.), that have experts predicting 90% of employers will abandon traditional group health insurance by 2020.

Small businesses have been especially impacted by the rate increases, and are the first to transition away from traditional group health insurance. In fact, fewer than half of all small businesses offer group health insurance today -- largely because of cost.

But, that doesn't mean small businesses will stop offering health benefits altogether. So, what is the solution?

The Solution to the Health Insurance Tax for Small Businesses

The solution to the HIT for small businesses is not to offer a traditional small group health insurance plan. Instead, offer an employer-funded contribution to employees' individual health insurance expense.

With this strategy, the small business contributes a fixed monthly amount toward an allowance that employees can use on individual health insurance premiums. The allowance can be pre-tax or post-tax, depending on how the arrangement is set up.

This strategy is called "pure" defined contribution health benefits or a personal health insurance reimbursement program. It puts an end to the continual contribution increases and creates predictable, controllable health benefit costs for the business and employees.

How is the HIT impacting your business or clients? What do you think the solution is?

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