This article was last updated in January 2017. It may contain outdated information.
If you're a small employer, you've probably asked - what is the impact of the Affordable Care Act on our company?
Much of the public discussion about the Affordable Care Act (aka ACA or "ObamaCare") has been around the increasing cost and complexity of the law.
However, what everyone isn't talking about (but should be) is that the ACA creates an opportunity for employers to get out of the health insurance business and still offer employees a valuable health benefit through defined contributions.
To understand how the ACA impacts small employers and why these changes create a new opportunity, let's look at the four key ACA changes and how these changes create an opportunity for a more sustainable health benefits model.
The 4 big ACA changes impacting small employers
There are four ACA changes that directly impact small employers. While there are additional ACA requirements, these four changes are impacting how small employers offer health benefits.
1. Guaranteed-issue individual health plans
As of January 1, 2014, insurance carriers must accept all applicants for individual health plans regardless of health status.
This provision of the ACA evens the playing field between group health plans and individual health plans. This is important because it minimizes the employer's moral obligation to offer group health insurance to employees with pre-existing health conditions. As a result, the decision to offer health benefits is becoming purely an economic business decision (ex: How can we get the most value of our health benefits dollars? How can we offer good coverage at the best price?).
2. Employer shared responsibility fee (only for employers with 50+ FTEs)
Beginning January 1, 2015, employers with 100+ 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. By January 1, 2016, employers with 50+ FTE employees must comply.
The employer shared responsibility fee (aka "employer mandate") does not apply to small employers with fewer than 50 FTEs.
3. Individual premium tax credits
As of January 1, 2014, if the employer does not offer an “affordable,” “qualified” group health plan, employees may qualify for federal insurance tax credits (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 tax credits that cap what they pay for health insurance as a percentage of income, on a sliding scale (between 2-9.5%). As a result, most employees will be able to obtain the same or better health coverage on the individual market, at a substantially lower cost than group health insurance.
4. Individual mandate
As of January 1, 2014, most individuals must purchase health insurance or else pay a tax penalty.
The annual fee for not being covered under health insurance phases 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). There are some exceptions, however, most will need to enroll in coverage by March 31, 2014 to avoid the penalty.
The cost of small employer group plans keeps rising
Before 2014, increasing healthcare costs were already making traditional group health insurance cost-prohibitive for many small employers. From 2009 to 2013, small employers reported their health insurance costs nearly doubling, with 91% of small employers reporting increases in their health plan at their most recent health insurance renewal.
To add fuel to the fire, experts say the ACA's new taxes and fees are expected to cause premium rate hikes for small employers -- on top of other annual increases.
Opportunity for better small employer health benefits
These four ACA changes, and the unsustainable cost of health insurance, is quickly shifting the small business health insurance industry from group health insurance (a defined benefit) to defined contribution (health insurance allowances for individual health insurance). That's because:
Individual policies are now guaranteed issue which eliminates the non-economic (i.e. moral) factors from an employer’s decision-making process. Employers now feel assured that sick employees will be able to get affordable individual health insurance coverage through the Marketplaces.
For small businesses with fewer than 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 and their families access to the individual premium tax credits is by not offering group health insurance.
With a "pure" defined contribution approach, the employer offers health insurance allowances that employees can spend on purchasing individual health insurance. This type of approach empowers small employers to get out of the business of offering health insurance while still providing a valued health benefit to employees.