On February 18, the IRS announced that it would delay the imposition of an excise tax penalty on small employers who maintain standalone health reimbursement arrangements. The delay recognizes that the Small Business Health Options Program, or SHOP, has not yet lived up to the expectations that it would provide small employers with affordable employee health insurance options.
The relief is temporary, though. On July 1, 2015, small employers who offer standalone HRAs will once again face penalties of up to $100 per day per covered employee. The creative challenge of providing employee health coverage at an affordable cost remains an issue for small businesses.
ACA Impact on Small Employers
The Affordable Care Act applies to an expanding group of employers each year, so a review of some basic information is probably not misplaced. The legal landscape changes as well, but mostly with regard to deadlines and penalties, rather than basic elements.
As of January 1, 2015, employers who have 50 or more full time employees must either provide minimum essential coverage to most of those employees or pay a penalty, called the Employer Shared Responsibility Payment. Certain employers who had fewer than 100 employees in 2014 are eligible for transitional relief from the penalty, but not the coverage requirement.
Employers with fewer than 50 employees are not required to offer healthcare coverage. Many small businesses with employee populations that dip over and under the 50 person threshold or with few full time employees but many part timers are not sure what to do. Many others, safely under the threshold, want to offer coverage anyway, either seeing a competitive advantage or wanting to act altruistically.
Those small employers, who voluntarily offer employee health insurance, even though not required to, must ensure that their plans meet the requirements of ACA. Offering nothing is fine, but offering non-compliant coverage is not.
As complicated as the basic situation is, it becomes even more layered by the methodology of counting employees and the rules that determine whether coverage meets the minimum essential coverage and minimum value requirements.
Full time employee equivalents
Many small employers have a fluctuating number of employees and both full and part time staff. The headcount is done on the basis of the previous year and on a monthly basis. Those part timers also count in determining whether the business reaches the 50 employee threshold.
Counting employees is a three step process:
Step one: Count the number of full time employees who worked at least 30 hours per week for each month in the previous calendar year. Add those monthly totals together.
Step two: Determine the number full time equivalent employees in the part time workforce by adding the number of hours worked in the month and dividing by 120. Add those monthly totals together.
Step three: Add the monthly totals from steps one and two and divide by 12.
There are additional rules for seasonable and variable hour employees. If, when all the math is done, the final number is less than 50, the business need not offer healthcare coverage.
Minimum essential coverage
Not all healthcare coverage satisfies the requirements of the ACA. Minimum essential coverage includes any health insurance plan sold on the Health Insurance Marketplace, certain grandfathered plans, at least for a limited period of time, Medicare, Medicaid, Tricare military plans, CHIP and a variety of other governmental plans.
It is actually easier to describe what does not comply. These plans include coverage for vision or dental care only, workers’ compensation, coverage for a specific disease or condition, plans that offer only discounts on medical services and standalone health reimbursement arrangements that cover two or more people. Although likely the product of good intentions, these options can spell trouble for the small employer.
Minimum value requirements
In addition, ACA compliant plans must also meet a minimum value standard. Employers may be subject to penalties if the plan’s share of the total allowed costs of benefits provided under the plan is less than 60 percent of those costs. Many of the limited benefit plans once offered to part time employees have vanished because of this or the minimum coverage requirement.
Health reimbursement arrangements
HRAs are employer funded plans that provide tax free income to employees and a tax deduction to employers. They qualify as group health plans under the Employee Retirement Income Security Act. HRAs are designed to reimburse employees for out of pocket medical expenses and individual health insurance premiums. Any funds in the account not used by the employee during the year revert to the employer.
Approximately 14 percent of small businesses have used HRAs to help their employees purchase health insurance on their own, through the individual marketplace, according to the National Federation of Independent Business Research Foundation. To many, it seemed like a good way to help employees get legally required coverage without burdening a small business with the administrative and other costs associated with a health insurance plan not required by law, in any event.
The IRS, somewhat belatedly, took that option off the table in Notice 2013-54. It determined that, regardless of how generous their benefits, HRAs fail to meet the ACA’s minimum essential coverage requirement because they do not prohibit annual limits for essential health benefits or require certain preventive care without cost sharing. They can be used effectively in connection with an ACA compliant employee health insurance plan, but not as a substitute for one.
In Notice 2013-54, the IRS also announced that it would impose an excise tax on employers who offered standalone HRAs beginning in 2015. That sparked considerable reaction in the small business community, and penalty has now been delayed until July 1.
As another alternative to providing no coverage, small businesses were to have access to the new health care marketplaces through SHOP exchanges. The goal of these exchanges was to offer small employers a better choice of high quality coverage at a lower cost through pooled risk. SHOP enrollment has, however, been well below the 2 million people projected for 2014 by the Congressional Budget Office.
Why the SHOP exchanges haven’t worked well is a matter of debate. Few states set up SHOP exchanges. Online enrollment was delayed on both the federal and some state exchanges. Some suggest that the tax credit offered was too small and too administratively complex to motivate many employers, and the premiums for SHOP exchange plans have not necessarily been lower than premiums on non-SHOP plans.
The General Accounting Office, while conceding a slow start, still holds out hope that the SHOP exchanges will provide a viable alternative to businesses with 50 or fewer employees. Whether six months will be enough to improve SHOP offerings remains to be seen.
Although the IRS has delayed imposition of the HRA excise penalty tax for six months, many small employers would not be surprised to see additional delays. Nonetheless, the writing appears to be on the wall for standalone HRAs.
Other options for small employers
Some small employers have been hanging onto SHOP plans, hoping that costs will decline as the marketplace stabilizes. Others have gone with non-SHOP alternatives.
Still others have reconsidered an earlier ambition to offer health insurance or have dropped health insurance coverage for employees entirely.
Some small employers have increased employee compensation by an amount intended to allow the employee to purchase coverage in the individual marketplace, essentially adding to compensation what would have been contributed to an HRA. This is not an entirely satisfactory solution, given the taxable nature of the additional compensation to the employee.
Another option may be a self-insured healthcare reimbursement plan that complies with the ACA by covering basic preventative services without cost sharing and an annual limit. It is not clear whether this would necessarily be cost effective, but it is a product being developed by several benefit consulting firms.
Health care providers have begun to explore less expensive ways of delivering patient services, including video office visits. While these alternatives may bring employee costs down and ultimately affect the cost of coverage, they may not reduce employer costs in the short term.
The Affordable Care Act is a work in progress, as is the task of complying with it. Small employers, who fall below the 50 employee threshold, need not offer health care coverage, although many see it as a good way to do business.
How to offer coverage in a cost effective way that meets the requirements of the law is a complex puzzle. Although standalone HRAs, designed to help employees purchase insurance in the individual market once appeared to be an option, it is clear now that they are not, or will not be for much longer.
The SHOP exchanges have yet to fulfill their promise, although increasing stability in the market may remedy that problem. They still seem like the next best hope.
Other than the SHOP exchanges, employers who want to offer legally compliant healthcare coverage may have to turn to increasingly creative benefit structures or hope for improvements in the healthcare industry, which bring the cost of patient care down.