The sports term “Small Ball” usually refers to the productive but unglamorous approach of winning games. In most sports, as spectators we live to see the “big play”, i.e. the long touchdown pass; the grand slam or the slam dunk. We get less excited about singles and sacrifice bunts in order to move the runners around the bases in order to score runs and win games. Nevertheless, this type of strategy may not be as attractive to watch but results in a greater of games won which is after all, the point of playing the game.
For all of the “belly aching” about Obamacare also known as the Affordable Care Act, is it within the realm of possibility that anything good can come out of this legislation for any constituency let alone small business owners? After all, the Republicans in the House of Representatives are up to their 49th attempt to repeal or defund the healthcare law. I am still waiting for the part when an alternative plan is proposed and passed. As the cliché goes, “When life gives you nothing but lemons, you need to learn how to make lemonade!”
This article is a variation on a theme that I have presented in several articles that in spite of the half-truths and sometimes whole-truths about Obamacare, it may not be nearly as bad for small business owners as previously thought. When you consider that the majority of small businesses in this country have fewer than fifty employees (a threshold number of employees for the Employer Mandate) and many of those businesses have less than ten employees, the combination of individual coverage with some employer participation through a Health Savings Account (HSA) might produce a winning combination. I have previously used this approach using a Medical Expense Reimbursement Plan (MERP).
Like Small Ball, it is not glamorous but provides coverage for employees at a low cost with or without tax subsidies depending on household income. The employer is able to make a limited defined contribution to the cost of healthcare without being exposed to escalating group health insurance premiums. Healthcare is something that we all need. The question is how to pay for healthcare in a manner that allows an employer to offer a benefit that can be used to attract and retain good employees while minimizing any financial pain in the process. At the same time, an employer exploit the opportunity to allow an employee to maximize any government subsidies available.
The Tools of Small Ball 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. 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 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 (in 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
Health Savings Accounts
A health savings account (HSA) is a tax-exempt trust or custodial account that an employee can set up with a qualified HSA trustee to pay or reimburse certain medical expenses incurred by the employeeu must be an eligible individual to qualify for an HSA. The HSA is owned at the employee level.
The creation of a HSA does not require prior approval from the IRS to establish an HSA. The HSA can be established through a trustee that is different from the employee’s health plan provider.
The benefits of an HSA are valuable. The employee can claim a tax deduction for contributions the employee or someone other than your employer, make to the HSA. The employee may take deduction even if they do not itemize deductions on Schedule A. Employer contributions are non-taxable. Investment earnings within the HSA are tax-free and distributions for qualified medical expenses are tax-free.
The individual contribution limit is $3,300 while the family limit is $6,550. Individuals that are age 55 or older may contribute an additional $1,000
The eligibility requirements of an HSA are reasonably straight-forward.
The employee must be covered under a high deductible health plan (HDHP).
The employee must have health coverage that is at least Bronze level coverage. The employee cannot be enrolled in Medicare.
The employee cannot be claimed as a dependent on someone else's 2013 tax return.
The employee with individual coverage must have eligible high deductible coverage. The minimum deductible on an individual policy is $1,250 and $2,500 for a policy with family coverage. The coverage must provide for maximum out of-pocket expenses for individual coverage is $6,350 and $12,700 for family coverage.
Under the last-month rule, an employee is an eligible individual adopts an HSA on the first day of the last month of your tax year (December 1 for most taxpayers), then the individual is considered an eligible individual for the entire year. The individual is treated as having the same high deductible health plan coverage for the entire year as the individual had on the first day of the last month.
An employee must reduce the amount the employee contributes to his HSA by the amount of any contributions made by the employer that are excludable from your income. This includes amounts contributed to your account by the employer through a cafeteria plan such as a premium only plan (POP) to pay health insurance premiums.
Small Ball Obamacare Strategy using HSAs
A business owner in the South Bronx previously provided group coverage for his existing 7 employees of his Bodega (read neighborhood convenience store). The monthly premium under the existing group was $10,500 per month or $1,050 per employee or $126,000 per year. Family rates were as high as $2,100 per month. The existing plan had deductibles up to $2,000/$3,500 Out-of-Pocket. The average age of employees is 35 with a $40,000 average salary.
The premium for an individual with a family of four including two children is outlined below. The average salary is 170 percent of the federal poverty level. The unsubsidized premium for Bronze level coverage $10,500 or $875 per month. The amount of the subsidy is $10,526 which is more than 100 percent of the premium. The employee's cost for coverage after subsidies is zero.
The business owner provides a provides a contribution to each employee’s HSA equal to the maximum amount of for an individual of $3,300 and $6,550 The bottom line is that the employee has a stronger benefit at a lower personal cost as does the business owner. The employer’s out of pocket cost assuming a family level contribution to the employee’s HSA is $44,450 which is about $80,000 per year less than the group health insurance premium.
The combination of subsidized individual coverage and an HSA accomplishes two important goals. First, it reduces and freezes the employer’s contribution and financial exposure in providing healthcare for employees. Second, it provides coverage for employees who must meet the requirements of the individual mandate but were previously unable to afford the employee cost for individual coverage. Lastly, the employer contribution the HSA reimburses employees for a significant portion of out-of-pocket expenses.
In could very well turn out in a number of small businesses that the cost of health coverage could be zero after considering the benefit of tax subsidies. If the tax subsidies are available, why not use them? The HSA provides a finite level of contribution for business owners, i.e. a defined contribution. The recent regulations regarding excepted benefits provides clearance for this approach. While the Republicans and Democrats continue to slug it out, small business owners would be well advised to follow this approach. There is nothing wrong with the Small Ball approach of singles and doubles to score runs and win games.
On a happier note, remember to count your blessings today!