Written By: Dennis J. Alessi, Esq.
West Orange, New Jersey
The Affordable Care Act (“ACA”) goes into effect on January 1, 2014. As most employers now know, the ACA’s mandate – that they must provide health insurance for their employees which meets certain minimum standards or pay a per employee penalty – only applies to employers with more than fifty (50) full-time employees (i.e. employees working more than thirty (30) hours per week.) However, smaller employers are not immune to the effects of the ACA, particularly those which do provide health insurance for their employees.
Essentially every employer, even if it has only one employee, is subject to the Fair Labor Standards Act (“FLSA”), which addresses issues such as hours of work, minimum wage, and overtime pay. The ACA includes certain amendments to the FLSA which are applicable to all these employers. These FLSA amendments relate to what are known as Health Insurance Marketplaces, or Exchanges, under the ACA.
One of the ACA’s cornerstones is the Health Insurance Marketplace (previously denominated as Health Insurance Exchange), which will be a site where small employers, with up to one hundred (100) employees, and individuals can essentially “shop” for different private health insurance plans with different types of coverage and premium costs. (The ACA establishes the scope of coverage and other essential terms which these private plans must meet to be eligible to participate in the Marketplace.)
Under the FLSA, almost all employers will have to provide a notice to their employees in October 2013 that as of January 1, 2014 they can purchase health insurance through a Marketplace. (The Federal Department of Labor will provide a model notice.) For small employers who do not offer health insurance for their employees, the providing of this notice ends any direct impact on their business by the ACA.
It is a very different situation for small employers that do provide health insurance. Most small employers pay only a portion of the premium (generally 70% to 80%) for the employee’s personal coverage, and the employee pays the entire premium for dependent coverage. With employees paying such a large percentage of the premiums, the small employer’s group health plan may not meet the “minimum value standard” established by the ACA (i.e. this is a standard which rates the employer’s group plan based on the services the plan covers, the amount of benefits provided for these services, and the premium cost sharing between the employer and employee.)
If the employer’s group plan does not meet this minimum value standard, then its employees may be eligible for a tax credit on their personal income tax to individually purchase health insurance at a Health Insurance Marketplace. Even when the employer’s plan does meet this minimum value standard, employees may still be entitled to a tax credit for the Marketplace if their premium costs for the employer’s group plan are above a certain percentage of their household income for the year.
Considering these factors, small employers may find that a significant segment of their workforce, particularly the lower paid employees, may opt-out of the employer’s group plan and purchase health insurance individually at a Marketplace. This may occur because of the possibly lower premiums offered by insurance carriers in the Marketplace, these tax credits, and the small percentage of the premiums paid by the employers for their group plans, particularly for family coverage.
With a smaller pool of participants remaining in the group plan, there may be an adverse effect on the premiums the employer and the remaining participants will have to pay. This consequence may result in these employees also opting-out, even though they are not eligible for any tax credit.
While small employers can also purchase health insurance in the Marketplace, many will probably not qualify for the tax credit they can receive for doing so, and, in any event, the credit ends in 2016. So such purchases may not be an economically viable option for small employers.
The conventional wisdom is that large employers may opt to terminate their group plans and pay the two thousand dollar ($2,000) per employee penalty for not offering health insurance, as a cheaper alternative, particularly for employers with low per employee profit margins. The various elements of the ACA described above, particular the tax elements, may also result in small employers similarly eliminating their group health plans, because of employee defections from them. This result may also be accelerated by the fact that small employers are not faced with any penalty for doing so.
However, there are other elements of the ACA which may work against such a result. First, employees who opt for the Marketplace may lose the benefit of the portion of their premiums which the employer pays for their participation in its group plan.
Secondly, both the employer’s and the employee’s premium contributions are not considered taxable income to the employee. However, employee payments for insurance through a Marketplace are made with after-tax dollars. These factors may sufficiently off-set the possibly lower premiums offered by insurance plans on the Marketplace, and the tax credits for employee Marketplace purchases, such that even lower income employees may stay within the employer’s group plan.
Given all these variable and uncertainties, we recommend that small employers, who erroneously thought they would not be affected by the ACA, now begin to consult with their benefits consultants on what is the best approach to health insurance for them and their employees with implementation of the ACA rapidly approaching in January 2014.
For more information about Mandelbaum Salsburg, please visit www.msgld.com or the International Society of Primerus Law Firms. Dennis J. Alessi is a partner with the firm and Chair of the Health Care Law Section as well as Co-Chair of the Employment Law section of the firm.