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According to The Traveler’s First Annual Business Risk Index, the number one worry for small businesses is the skyrocketing cost of medical insurance.  You’re not crazy to be stressed.  Estimates are that medical insurance costs have risen by a whopping 80 percent in the last 11 years.

Add to that the Affordable Care Act deadlines and some new wrinkles in the federal SHOP program.  Oh, and the IRS has now decided that paying employees to buy individual health insurance does not satisfy the requirements of the ACA.  What is the little guy supposed to do?

Medical Insurance Costs Only Go Up

Employer healthcare costs are expected to rise nearly 9% in 2014.  The good news is that the rate of increase seems to be slowing, but many employers find it hard to be happy about numbers that are still unsustainable.

Some have responded by shifting more costs to employees, at the risk of making their businesses less desirable places to work.  Others have reduced staffing levels or turned to independent contractors to drop below the numerical threshold that brings them within the ACA mandate. Some others report that they have fundamentally restructured business operations, turning centralized operations into franchises.  Still others have tried to push employees into the exchanges. Clearly this is a situation that requires a strategy.

ACA Requirements and Deadlines

By way of review —

  • businesses with 100 or more full-time employees must begin insuring them by 2015;
  • small businesses with 50 to 99 full-timers must begin insuring them by 2016;
  • smaller businesses with 50 or fewer full-time employees either have access to the Small Business Health Option Program (SHOP) in the states where it has been implemented, or will have access in through the federal marketplace in 2015;
  • very small businesses with fewer than 25 full-time employees can get a small-business healthcare tax credit when buying coverage through SHOP.

New Changes to the SHOP Exchanges

Some states, like California and New York have already rolled out state exchanges.  The majority have not, however.  Small employers in those states must look to the federal SHOP exchanges, which are scheduled to go live on November 15.

Department of Health and Human Services officials have just announced that, if state insurance commissioners believe it will prompt insurers to raise rates for 2015, they may opt out of a SHOP feature  that would allow employees a choice of multiple plans on the insurance marketplaces.  This is puzzling, since many have believed that the “employer choice” feature was essential to the goal of reining in medical insurance cost by promoting competition.

No More Dumping Employees into the Exchanges

Some employers have concluded that, rather than offering employer-based coverage, it makes sense to pay workers a tax-free stipend so that they can purchase individual coverage.  The IRS has recently clarified that this approach, known as an employer payment plan, does not meet the requirements of the ACA.  Specifically, employer payment plans fail because they do not prohibit annual limits for essential health benefits or require certain preventive care without cost sharing.  That option is now off the table.

What should a small business do about rapidly rising medical insurance costs?  With the possible exception of the SHOP exchanges, especially for very small employers who may qualify for a tax credit, none of the options are particularly attractive.  The likely solution for many entrepreneurs will probably be a combination of several approaches, including some cost shifting and some very careful shopping in the insurance marketplace.

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