While the politics of Obamacare continue to rage onward, small business owners have been left back at the ranch looking for a clear and better path to navigate through the law. At the end of the day regardless of the politics and whining on both sides of the aisle, advisors need to be able to tell their small business owners what to do.
The initial problems of Obamacare have been very well publicized perhaps to a fault – (1) Website Development (2) False Promises - You can Keep your Coverage if You Want (3) Better Coverage- Reduced Physician Networks and higher deductibles (4) The initial failure of insured(s) under Age 30 to enroll in coverage. I am certain that there are probably ten other things to add to the list.
My purpose in this article is not to continue with the complaining about the law but rather focus on possible solutions for small business owners now that it is the law. The President has three years left in his second term and it is a reasonable assumption that Obamacare will remain unscathed during those three years. After that, it is anybody’s guess! The Employer Mandate is effective in 2015.
A major thrust of DOL Notice 2013-03 issued in September 2013 was limiting the ability of business owners and plan participants from enjoying the tax benefits of premium reimbursements under a health reimbursement account for employees who purchase individual coverage on the healthcare exchange with or without tax subsidies. Under the DOL Notice, excepted benefits include accident-only coverage, disability income, certain limited-scope dental and vision benefits, certain long-term care benefits, and certain health FSAs.
One of the consequences of the DOL Notice was that it ended up severely limiting the quantity and quality of coverage as well as the cost to low and moderate-income employees. If you sample the Kaiser Permanente’s Obamacare calculator under different income scenarios, you quickly see how important these tax subsidies might be to low-moderate income employees.
The IRS, Employee Benefits Security Administration, and Health and Human Services Department, issued proposed regulations on December 24, 2013, that provided amendments to the Excepted Benefits under Obamacare Coverage – Reg. 143172-13.
This article focuses on the use of one of the Excepted Benefits, Employee Assistance Plans, in conjunction with individual coverage purchased on the healthcare exchange using the benefits of tax subsidies as a more cost efficient method for small employers and their employees to purchase health insurance.
The Best Defense is a Good Offense
Many small business owners that offer group health insurance to employees have had to face premium increases of 20-40 percent in the aftermath of the rollout of Obamacare. According to the Small Business Administration, small businesses provide 82 percent of employment in the United States. Thirty five percent of small businesses with fewer than fifty employees provide health coverage to employees.
According to the Kaiser Family Foundation, thirty nine percent of small businesses with less than 200 employees did not offer health insurance as of 2012. Fifty percent of small businesses with fewer than ten employees did not offer health insurance as of 2012.
In 2012, the average cost to insure an employee under group health insurance was $5,615. The average cost of family coverage under group health insurance was $15,745. Until the advent of Obamacare, individual health insurance only made up six percent of the health insurance marketplace.
According to Ehealth.com, the average annual cost for an individual with a deductible of $3,100 was $2,200. The average cost for family coverage was $4945 with an average deductible of $4,100.
Most small business owners do not offer health insurance solely because of cost (61%) according to the Kaiser Family Foundation but at least one half of small employers according to the same survey feel a moral obligation to offer coverage. At least one-third of the small businesses feel that health insurance is an important benefit to attract and retain talented employees.
The question becomes how to offer health insurance coverage in a manner that both employers and employees can afford? The combination of individual coverage with or without the benefit of tax subsidies complimented with the integration of Excepted Benefits under Obamacare provides a path for the “Camel to pass through the Eye of a Needle”. The strategy limits the financial exposure of the small business while simultaneously supplementing the individual coverage of the employee, which on its own might be inadequate in terms of coverage and cost.
The use of individual health insurance coverage provides coverage, which is lower cost than the cost of group health coverage. Employers have financial exposure that is finite and discretionary based on the business’s budget. The Employer is finally able to get off the “Merry Go-Round” of annual premium rate increases.
The chart below for a married 45-year-old worker with three children in New York City (Spanish Harlem) might provide a good example of the benefit of tax subsidies at different income levels. The cost of Silver level coverage before subsidies is $12,492 for family coverage. The cost of Bronze level coverage is $10,502. Household income is adjusted gross income (AGI).
Household Income Tax Subsidies Annual Net Cost for Bronze Coverage
$ 40,000 $11,006 $ 0
$ 50,000 $ 9,770 $ 732
$ 60,000 $ 8,341 $2,161
$ 70,000 $ 6,777 $3,725
$ 80,000 $ 5,120 $5,382
$ 90,000 $ 3,942 $6,560
$100,000 $ 2,042 $8,460
Employee Assistance Plans
Employee assistance programs (EAPs) are typically programs offered by employers that can provide a wide-ranging set of benefits to address circumstances that might otherwise adversely affect employees' work and health. Benefits may include short-term substance use disorder or mental health counseling or referral services, as well as financial counseling and legal services. They are typically available free of charge to employees and are often provided through third-party vendors. To the extent an EAP provides benefits for medical care, it would generally be considered group health plan coverage, which would generally be subject to the HIPAA and Affordable Care Act market reform requirements, unless the EAP meets the criteria for being excepted benefits. Nevertheless, no universal definition exists for EAPs.
Numerous stakeholders have asked the federal government to treat EAPS as excepted benefits that are generally very limited and intended to provide benefits in addition to those provided under group health plans sponsored by employers. Additionally, consumer groups have been concerned that treating EAPs as minimum essential coverage could limit the ability of employees from qualifying for tax subsidies under IRC Sec. 36B.
The Departments issued guidance on September 13, 2013, which stated the Departments' (Department of Labor and IRS) intent to amend the excepted benefits regulations with respect to EAP. The guidance also provided transition relief, stating, “until rulemaking is finalized, through at least 2014, the Departments will consider an employee assistance program or EAP to constitute excepted benefits only if the employee assistance program or EAP does not provide significant benefits in the nature of medical care or treatment.
For this purpose, employers may use “a reasonable, good faith” interpretation of whether an employee assistance program or EAP provides significant benefits in the nature of medical care or treatment.”
These proposed regulations set forth requirements for an EAP to qualify as excepted benefits beginning in 2015. Under these proposed regulations, benefits provided under EAPs are excepted if four criteria are met. First, the program cannot provide significant benefits in the nature of medical care. Currently, the proposed regulations do not define “significant.”
The second requirement for an EAP is that EAP benefits cannot be coordinated with benefits under another group health plan. The proposed regulations outline three conditions in order to meet the standard. First, participants in the separate group health plan must not be required to exhaust benefits under the EAP (making the EAP a “gatekeeper”) before an individual is eligible for benefits under the other group health plan. Second, participant eligibility for benefits under the EAP must not be dependent on participation in another group health plan. Third, benefits under the EAP must not be financed by another group health plan.
The last requirement necessary for an EAP to qualify as excepted benefits is that no employee premiums or contributions can be required to participate in the EAP, i.e. no cost sharing under the EAP.
The intent of the proposed regulations is ensure that employers are able to continue offering EAPs as supplemental benefits to other coverage, and to ensure that in circumstances in which an EAP with limited benefits is the only coverage, or the only affordable coverage provided to an employee, that the coverage does not unreasonably disqualify an employee from otherwise being eligible for the premium tax credit for enrolling in coverage through an Exchange.
Absent further clarification of “significant benefits” in the future, the use of an EAP to augment employee-owned individual coverage on a limited basis provides a cost efficient employee benefit solution for small business owners and their employees. As an unfunded (non-insured) solution provided by the employer, the EAP can determine a level of annual benefit to augment or share in the cost of co-payments, deductibles, and the additional cost of out-of-network care. Chances are that the cost of this solution will be 40-70 percent lower than the existing cost of group health coverage.
The EAP program can be administered by a third party administration (TPA) firm. Explanation of Benefit (EOB) statements may be sent directly to the TPA firm by the medical provider to cover the costs or co-payments that fall within the deductible limits of the Bronze level coverage as well as provide for coverage that is outside of the individual bronze level coverage for vision, and dental coverage.
In my view, the proposed regulations are designed to coincide with the Employer Mandate in 2015. Nevertheless, the proposed regulations reflect the legislative intent and thinking of the federal government including the Department of Labor and IRS. Frankly, I would not wait eleven months to implement an EAP integration with other Excepted Benefits to reduce the cost of healthcare for employers and employees. The cost savings between now and then could be significant. The future is now!
On a happier note, remember to count your blessings today!