Small business health plans for 2015

How to design a cost-effective strategy for maximum coverage under the new federal regulations

by Tony Novak, CPA, MBA, MT
May 23, 2014

Summary: New federal regulations make more difficult for small business employers to compete with the government-run insurance exchanges in 2015. Employers can respond by switching strategies to make the best use of the current market conditions rather than battle the tightening obstacles.

Last week the federal department of Health and Human Services dealt a significant blow to small businesses struggling to tread water in the changing market of small group health plans. The federal government is using a triple whammy of three separate rulings¹ to tighten the noose around the neck of small business employers that want to continue to offer health coverage. Editorial comments in social media this week indicate "the death of small group health insurance". While this may be an exaggerated viewpoint for 2015, the longer term trend is clear.

No requirement to play: there is an "easy out" for small firms

First the good news for small businesses³ who feel pressured by the new health plan rules: there is no requirement that a small business employer continue to offer employee health coverage. In most cases the employer is better off not offering group health coverage. Many employers both large and small have already recognized that no employer-sponsored health plan they can offer will match the benefits available through the individual insurance exchange. The list of American employers who have already cancelled group coverage and sent employees to the individual insurance exchange looks like a "who's who" of progressive cost-savvy management².  

What the federal government is saying is that small employers are simply better of staying out of the health insurance arena. In most cases it is no longer possible to build an argument - either from an accounting perspective or an HR perspective - that a small employer is doing any good by continuing a small group health plan.

By providing an "easy out" and then issuing a series of continually more restrictive and more expensive hurdles for employers, the federal government will eventually be effective in pushing small firms out of the health insurance market.

Low cost options restricted 

Until now, low cost health insurance - known as mini med or limited indemnity insurance has been more popular than the new Obama care polices. Why? Primarily because the cost is lower and they do not have the high deductibles associates with insurance available through a group plan or individual insurance exchange.

This new ruling issued last week says that beginning in 2015 employees who want to enroll in this preferred coverage must also prove that they have the type of "minimum essential coverage" required under Obamacare.

Employer health insurance reimbursements are now taxable

Employers who help employees pay for primary health coverage purchased through the individual exchange must now include that benefit in the employees' taxable wages. I'm skipping the mountain of technicalities in this area of evolving tax law, and stating the simple result for the vast majority of small business employers. This is not a new concept; employers have used this approach to other benefits in the past and now it simply extends to most health insurance.

There are exceptions to this general statement and employers should consider their options. The simplest approach for a small business that wants to help employees pay for health care is to first encourage lower paid employees to seek government subsidies for primary coverage. Then the employer assists with tax-free payment of supplemental coverage to cover the large gaps in coverage left open by the new Obamacare plans. This avoids the tax consequences that might otherwise further increase costs for both the employer and the employees.

Restrictions on low cost coverage

Beginning in 2015, millions of workers who use employer-paid health plans known as "mini-med" will no longer be able to enjoy that benefit until they prove that they have also enrolled in Obamacare. Mini-meds tend to be more popular than Obamacare among most healthy workers because they do not have the high deductibles and co-payments associated with the new health reform plans. They lack coverage for catastrophic expenses and are inappropriate as stand-alone coverage when an employee has significant and ongoing medical expenses.

More delays and rollbacks in small group insurance exchange

The Affordable Care Act, as passed in 2010 and modified by various actions since then, envisioned that by 2015 employees of small companies would have access to the same choice of coverage as individuals in the insurance exchange. Last week's federal regulations make it clear that will not happen in all states. The services offered and the timing of these services is now up to each state's insurance department.

Brokers now support individual coverage through portals

The small business employee benefit industry has been strongly opposed to the concept of terminating the group insurance that they depended on for their livelihood. It was not clear that their compensation could be replaced through the individual insurance exchange. Now it is clear that every benefit firm and every small employer can have its own custom-designed portal to the individual insurance exchange. Additionally, firms have proven that they can increase access to employees and improve cross-selling of supplemental benefits through this new approach. While the transition may be rocky, there is no longer any reason for benefit professionals to resist the change.

Despite the media coverage about "automated enrollment" and navigator systems available today, the fact is that employee benefit firms and insurance brokers do the bulk of work associated with small business benefit plans. Their opinions should not be taken lightly.

Changing employer focus

All of this adds up to a simple conclusion: employers should get out of the health insurance shopping role and focus instead on helping employees get the best deal in this new health care landscape. Employers who embrace a new approach to employee health coverage are enabled to change their focus from the burden of providing health insurance to reducing employee financial stress⁴, improving satisfaction with health coverage and making employer costs more predicable.

A small business owner should consider three steps now to get ready for the changes ahead:

1) Conduct a mini-audit to analyze the current situation including coverage, cost and the options available.

2) Develop a relationship with an adviser who is upt-to-date on health reform.

3) Begin communications with employees about the changes ahead in small business health plans. (If you find a good adviser in step #2 above, they will handle this).

Look before you leap

Employers should spend a bit of time analyzing their options, including getting a second opinion on the state of their current employee health plan, before making any changes. As a first step, I recommend that business owners download a copy of the "Small Business Health Plan Checklist" and schedule a free telephone review. This is likely to lead to consideration of new options that have not previously been considered.

Bumps ahead

No matter what choices we make, there will be bumps ahead in our health care transition. The best strategy is to develop a relationship with a professional adviser to help navigate through the transitions ahead.

Resources

Small business health plan checklist (Downloadable PDF)

Obamacare's impact on small businesses (PowerPoint presentation)

Footnotes:

¹ The three restrictive provisions are: 1) restriction from tax-free reimbursement of health insurance, 2) restricted enrollment in limited indemnity coverage and 3) allowing states to opt out of the some of the small business insurance exchange provisions that were originally envisioned. The text of the latest regulation issued in May 2014 can be found here in the Federal Register.

² Small businesses are defined under the law as those with less than 50 employee equivalents but the reality is that the overwhelming number of firms affected by the rulings have far fewer employees.

³ The list of well-recognized employers that terminated group health insurance plans in favor of sending employees to a privately managed individual insurance exchange includes Sears, United Parcel Service, Trader Joe’s, Home Depot and Walgreens.

⁴ Employee financial stress has increased over the period since enactment of the Affordable Care Act. This is justified both from an accounting perspective in that health care costs more and now is documented by a new report from FinancialFinesse.

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