The biggest kept secret of the Affordable Care Act (ACA) is the individual premium tax subsidies that will be available to the majority of employees through the new state marketplaces starting January 1, 2014. Because of the new individual tax subsidies, the best decision for most companies and employees in 2014 will be to eliminate their company-sponsored group health insurance in favor of a defined contribution health plan solution.
Why? Here are five strategic issues HR professionals need to know about the individual premium tax subsidies and defined contribution health plans. (If you're unfamiliar with defined contribution health plans, see this overview.)
#1) Group health insurance costs too much
As most HR professionals are intimately familiar with, group health insurance costs have been rising significantly over the last decade. Since 1999 to 2012, the average cost of group health insurance for single coverage has increased from $2,200/year in 1999 to $5,600/year in 2012. Family coverage on average has increased from $5,790/year in 1999 to $15,700/year in 2012. The premium cost increases have been especially hard on small and medium-size businesses and employees. These cost increases are not sustainable to many companies.
#2) Individual premium tax subsidies in 2014
While the ACA does little to address the increasing cost of group health insurance premiums, the individual premium tax subsidies make individual health insurance policies affordable to employees. To summarize, the individual premium tax subsidies will cap the amount of employees' health insurance at 2% to 9.5% of household income, depending on the employee's income.
Employees are eligible if their household income is up to 400% of the federal poverty line (FPL). That translates to approximately $45,900 for an individual and $94,200 for a family of four in 2013. To be eligible for the premium tax subsides, employees cannot be offered affordable, qualified group health insurance coverage through an employer.
However, with defined contribution companies allow employees to take advantage of the premium tax subsidies, while contributing tax-free to their premium through a stand-alone Health Reimbursement Arrangement (HRA). More on this in #4...
#3) All employees will be approved for coverage
Starting in 2014, employees will be able to purchase a guaranteed-issue individual health insurance policy from their state marketplace. In other words, they cannot be denied coverage because of a pre-existing health condition.
This eliminates the non-economic (i.e. moral) factors from a company’s decision-making process. Companies will be assured that all employees will be able to be approved for coverage. This is a major change to the health insurance industry, and makes a defined contribution model an easy transition for the company and employees.
#4) "Pure" defined contribution model lets you get out of the health insurance business, and focus on your business
With a “pure” defined contribution health plan:
Your company gives each employee a fixed dollar allowance (a "defined contribution") that the employees choose how to spend.
Employees purchase their own individual policy directly from a health insurance company of their choice, through an insurance broker, or through their state health insurance marketplace.
Employees use their defined contribution allowance to reimburse themselves tax-free for their individual health insurance costs or other medical expenses such as doctor visits and prescription drugs, up to the amount of their allowance.
#5) No penalties for small businesses not offering traditional coverage
For small businesses with fewer than 50 FTE employees, there is no employer mandate,
and thus, no tax penalties for not offering traditional coverage. Small businesses can utilize a defined contribution health plan with the individual premium tax subsidies.
And, for many companies with 50+ FTE employees (who are subject to the employer mandate and penalties for not offering traditional coverage), the total cost of paying the applicable employer tax penalty plus providing a defined contribution health benefit will be less expensive than group health insurance. Most importantly, the only way for employers to give employees access to the individual premium tax subsidies is by not offering group health insurance.