For entrepreneurs, the great divide in the Patient Protection and Affordable Care Act (Affordable Care Act or Obamacare) is between employers with more than 50 employees and those with fewer. In 2015 employers with more than 50 full-time employees must offer affordable health insurance to those employees or pay a tax. Small employers, who make up 96 percent of all firms in the United States, are not subject to this mandate/penalty scheme. Obamacare’s approach to this group of employers is more carrot than stick. These are complicated carrots, however. Let’s figure out how it applies to you.
Are you a small employer? This is not so obvious. You must consider all employees who work at least 30 hours per week, and part-timers (known full-time equivalents, or “FTE”s). A business with three full-time employees and 100 part-timers could easily find itself subject to the large employer mandate with respect to the three full-timers. Here’s the equation:
- Count the number of employees who work more than 30 hours a week.
- Calculate the FTEs by adding up the weekly hours for all part-timers in the previous month and dividing that number by 120.
- Add the number of full-timers and FTEs. Is the sum more or less than 50?
Other counting rules deal with fluctuations in workforce size and require that all members of a controlled group of corporations be counted together. However, if your business falls under the threshold, the Small Business Health Option Program, or SHOP, may be particularly important to you.
Small Business Health Option Program (SHOP)
Entrepreneurs with 50 or fewer employees have access to SHOP marketplaces, intended to strengthen purchasing power by pooling risk. The District of Columbia and seventeen states, including California and New York, have established state-run marketplaces.
- In California, this is called “Covered California.”
- In New York, the exchange goes by a number of names including “New York State of Health” and “Small Business Marketplace”.
The particulars of eligibility and pricing depend on state law and market conditions. All these plans, however, allow employees to select among three levels of coverage (Gold, Silver and Bronze) but consolidate billing for the employer.
Small employers in the remaining 33 states, including Texas, have access to a federal marketplace, which is less attractive. They cannot offer differentiated coverage or enroll online. These employers will have to work directly with an agent, broker, or insurer in a process called “direct enrollment.” Whether it’s worth doing may depend on the premium and other incentives.
Will My Premiums Go Up or Down?
That’s what everyone wants to know. The federal law allows small group premiums to vary only upon four factors: age, family composition, geographic rating area, and tobacco usage. States with their own exchanges may limit this further. California, for example, prohibits consideration of tobacco usage. It may also make a difference whether your state previously required community rating. In community rating states, like New York, premiums are less likely to rise. Generic speculation is not particularly useful in this situation. It may take at least a year of experience to have a satisfactory answer to this question.
So What Are My Options?
Employers with between 50 and 25 employees have four choices, each with advantages and disadvantages:
- Do not offer health insurance to your employees, but encourage them to participate in the individual marketplace.
- If you have a health insurance plan that existed on March 23, 2010 and has not been substantially changed in terms of benefits or cost (a “grandfathered plan”) you may continue to offer that plan, but it must now be amended to meet certain coverage requirements of the new law.
- Buy a new plan that complies with the requirements of the Affordable Care Act outside of your SHOP exchange.
- Get a new plan through the SHOP exchange, either the federal or state one, depending on your location.
Small employers who have access only to the federal marketplace may be particularly torn between the third and fourth options.
I Have 10 Employees. What About Me?
Very small employers have an additional wrinkle to consider. In 2014, the Affordable Care Act provides a 50% tax credit (available for two consecutive tax years before it reverts to a 35% level) to employers with fewer than 25 employees, who
- pay average annual wages below $50,000,
- contribute 50% or more toward employees’ self-only health insurance premium, and
- purchase a SHOP plan.
Other details may vary with state law for those states that have their own exchanges. In addition to the tax credit, these employers may also be eligible to deduct costs not offset by the credit. Your choices are essentially the same as those listed above, but with a thumb on the scale to shift the balance toward a SHOP plan.
The short-term disruptions of Obamacare obvious – the long term benefits, more clouded. It’s time to calculate your choices.