Feds confirm that more small employers are bypassing health insurance reform laws

This post was originally published in 2013 but is now updated for 2016.

Background: The Affordable Care Act encourages small businesses to provide employer-sponsored group health insurance but does not require them to do so. The two best options for small businesses that choose to not offer group health insurance are: 1) offer supplemental insurance that is exempt from ACA rules, or 2) redesign the employee benefit plan and payroll accounting system to take the employer out of the health insurance business. So far, employers who have tried these options have not fared well because of a lack of qualified resources and guidance from independent advisers. In 2015 Freedom Benefits introduced a service designed to help small businesses with the transition to an ACA-compliant employee health benefits plan. This post relates to the options that are available under that service.

The federal government confirmed a growing trend in the small business health insurance market: a growing number of employers are essentially doing to an “end run” around health insurance reform laws by switching to online insurance like Freedom Benefits’ popular Core Health Insurance that is exempt from the law. Last week the Department of Labor, in conjunction with Health and Human Services (HHS), and the U.S. Department of Treasury published a release that said:

Fixed indemnity coverage under a group health plan meeting the conditions outlined in the Departments’ regulations(3) is an excepted benefit under PHS Act section 2791(c)(3)(B), ERISA section 733(c)(3)(B), and Code section 9832(c)(3)(B). As such, it is exempt from the health coverage requirements of title XXVII of the PHS Act, part 7 of ERISA, and chapter 100 of the Code. The Departments have noticed a significant increase in the number of health insurance policies labeled as fixed indemnity coverage.” (emphasis added).

Many employers are required to notify employees of the availability of online health insurance exchanges by March 1, 2013 and I suspect that this next action by employers may motivate even more people to seek out this type of alternate insurance on the Web.

While this limited insurance is easier to use and less expensive than the government-designed coverage created by health reform law, it may not be the best solution. This insurance leaves gaps in protection that will inevitably create problems for some covered individuals. The new health insurance law allows those with chronic expensive health problems not covered by the limited insurance to switch to the other type of comprehensive coverage at the beginning of each year.

In 2015 IRS issued statements saying that it is aware that the popular limited indemnity insurance plans do not meet the requirements for exempt supplemental insurance under the law. The Obama administration issued vague statement about its efforts to increase the use of supplemental insurance.

Some small business employers have opted to help employees with the cost of individual insurance or to help employees pay for medical expenses not covered by insurance. Both strategies are a mistake. Huge tax penalties are triggered by firms. While there may be a work-around built into the law in most cases it is not worth the risk to a small business owner in the event that a tax auditor finds fault.


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