ObamaCare. Love it or hate it, one thing is true... the landscape of employer-sponsored health insurance is changing. Many of the Affordable Care Act ("ObamaCare") provisions strongly favor the individual health insurance market, making defined contribution health plans the ideal health insurance solution for most (if not all) US employers.
How? Why? To understand, there are four key ObamaCare changes happening January 1, 2014 that make the shift from defined benefits (group health insurance) to pure defined contribution simply... irresistible.
#1) Guaranteed-Issue Individual Health Plans
Beginning January 1, 2014, insurance carriers must accept all applicants for individual health plans regardless of health status.
This portion of the ACA evens the playing field between group health plans and individual health plans. Why is this important? It minimizes the moral obligation of employers to offer group health insurance to employees with pre-existing conditions. As a result, the decision to offer health benefits will become purely an economic business decision.
#2) Employer Mandate (Only For Employers with 50+ FTE)
Beginning January 1, 2014, employers with more than 50 full-time-equivalent (FTE) employees must sponsor an “affordable” and “qualified” group health plan, or else the employer may have to pay a tax penalty capped at $2,000 per full time employee.
The penalty does not apply to companies with less than 50 FTEs.
#3) Individual Premium Tax Subsidies
Beginning January 1, 2014, if the employer does not offer an “affordable,” “qualified” group health plan, employees may qualify for federal insurance subsidies (based on income) through their state’s Health Insurance Marketplace.
Individuals with household incomes below 400% of the federal poverty line (approximately 68% of the U.S. population) will receive subsidies that cap their out-of-pocket health insurance expenses as a percentage of income, on a sliding scale (between 2-9.5%). As a result, most employees will be able to obtain identical health coverage on the individual market through their state exchange, at a substantially lower cost than group health insurance.
#4) Individual Mandate
Beginning January 1, 2014, “qualified” individuals must purchase health insurance, or else pay a tax penalty.
The annual fee for not being covered under health insurance will phase in over the first three years, from the greater of $95 or 1% of household income in 2014 (for a single), to the greater of $695 or 2.5% of household income in 2016 (for a single).
Why These Four ObamaCare Changes Favor Defined Contribution
So, how do these four health care reform changes shift the small business health insurance industry from group health insurance to defined contribution? To summarize:
Individual policies will become guaranteed issue, and eliminate the non-economic (i.e. moral) factors from an employer’s decision-making process. In other words, employers feel assured that sick employees will be able to get affordable individual health insurance coverage through the Marketplaces.
Most employees will pay less for health insurance on the individual market due to federal subsidies. Click here for a tax subsidy calculator.
For small businesses with under 50 FTE employees, there is no employer mandate and no penalties. For many businesses with 50+ FTE employees, the total cost of paying the employer penalty plus providing a defined contribution health benefit will be less expensive than group health insurance. Additionally, the only way for employers to give employees access to the individual premium tax subsidies is by not offering group health insurance.
What do you think about ACA and defined contribution? Let us know in the comments below.