Affordable Care Act: Health Insurance Exchanges and Other Issues for Small Employers

by Wilson Elser
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The Affordable Care Act (ACA) has a variety of implications for small employers and their employees. Under the Qualified Health Plan and Health Insurance Exchange provisions of the ACA, the term “small employer” is defined as one that employed an average of at least one but not more than 100 employees on business days during the preceding calendar year and employs at least one employee on the first day of the plan year. Prior to 2016, states have the option of defining a “small employer” as either one with 100 or fewer employees or one with 50 or fewer employees.

It is important to note that employers with 50 or more full-time employees are considered “Applicable Large Employers” for purposes of the Shared Responsibility excise tax provisions of the ACA. As a result, an Applicable Large Employer for purposes of the Shared Responsibility provisions of the ACA may be a “small employer” under the Qualified Health Plan provisions of the ACA. In addition, the small business tax credit provisions of the ACA apply only to small employers with 25 or fewer employees.

Grandfathered Plans
The ACA permits small businesses to retain insurance plans that were in place as of March 23, 2010. These so-called “grandfathered” plans are not required to comply with certain aspects of the ACA. For example, these plans do not need to cover preventive services without cost sharing or provide Essential Health Benefits. These plans can maintain their status even where certain events occur, including enrollment of new employees and a change in insurance carriers (provided that benefits and costs are largely the same).

Certain events will eliminate a plan as a grandfathered plan, such as to (1) increasing copayments, deductibles, out of pocket expenses or co-insurance rates; (2) decreasing annual limit amounts; or (3) instituting annual limits or eliminating coverage for treating or diagnosing a specific condition.

Small Business Health Options Program
The ACA requires each state to maintain a State Health Insurance Exchange, or insurance marketplace, where individuals and small employers can purchase private insurance effective January 1, 2014.

These exchanges can be operated by the state, the federal government or both and must offer “qualified health plans” to their customers. Each such exchange must operate a Small Business Health Options Program, or SHOP, to enable qualified employers to offer insurance programs to their employees. A qualified employer is a small employer that elects to make all full-time employees eligible for one or more qualified health plans and either has its principal place of business in the Exchange service area or offers coverage to each eligible employee through the SHOP serving that employee’s primary worksite.

A qualified employer deciding to offer coverage to its employees completes a single application. A single application is also submitted for the employees seeking insurance. The SHOP then determines eligibility for coverage based on the criteria set forth by the Department of Health and Human Services (HHS). If the employer and the employees are eligible for coverage, the SHOP then assists with the enrollment of the employees in qualified health plans. Open enrollment periods will be established by the SHOP and must be followed by the employees seeking coverage. Under the HHS rule, the SHOP must permit small employers to choose all qualified health plans that it wants to offer to its employees at a single level of coverage. However, under a new proposed amendment to that rule, SHOPs would not have to offer this employee choice option for plan years starting on or after January 1, 2014, and before January 1, 2015. As a result, the premium aggregation requirements applicable to SHOPs where employers have employees enrolled in multiple qualified health plans is optional for plan years beginning before January 1, 2015.

Small Business Tax Credits
While the ACA does not require employers to contribute toward the cost of employee health coverage, the law does provide an incentive to certain small employers to pay a portion of this cost.

  • A tax credit may be available to small employers with 25 or fewer employees with average income of $50,000 or less that pay at least half of the premiums for employee health insurance coverage under a qualifying arrangement. 
  • Credits are also available to small tax-exempt employers such as charities. However, only businesses with 10 or fewer employees and average salaries of $25,000 or less are eligible for the full credit. 
  • Once the business reaches 25 employees or $50,000 in average salaries, the credit is completely phased out. For tax years 2010–2013, the maximum credit is 35 percent for small business employers and 25 percent for small tax-exempt employers. 
  • Enhanced credits become available January 1, 2014; in general, 50 percent and 35 percent, respectively. However, the small employer tax credit is available only for qualified health plan coverage through an exchange, and an employer may receive the credit only for a maximum period of two (2) consecutive years. Business expense deductions for the cost of the premium are still available. The credit can be applied to other tax years. Tax-exempt small businesses may be eligible for refund if no tax was owed.

Wellness Programs
The ACA provides rewards to employers who establish wellness programs as defined by the law. Beginning January 1, 2014, the maximum reward for maintaining such programs will be 30 percent of the cost of health coverage, and a maximum of 50 percent of the cost of coverage may be granted for programs targeted at reducing or preventing tobacco use. These incentives do not apply to grandfathered plans.

Notice of Coverage
The ACA mandates that employers notify their employees of the existence of the State Health Insurance Exchange and certain information relative to the Exchange. The effective date of this requirement has been delayed until the Department of Labor issues sample notices and/or further guidance relative to this matter.

W-2 Reporting
The ACA generally requires employers to report the cost of health coverage on the W-2 forms. Employers filing fewer than 250 W-2 forms do not have to comply with this requirement until the IRS issues further guidance. Such guidance shall give employers at least six months’ advance notice before any new mandates will be imposed.

Scope of Compliance
The information set forth above provides a general overview of the factors that a small employer needs to consider in determining the impact of the ACA on its business. Federal regulations include additional provisions and transition rules that may impact a particular business. Application of these rules must be performed on an employer-by-employer basis based upon each employer’s discrete circumstances.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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