THE IMPACT OF THE AFFORDABLE CARE ACT ON SMALL BUSINESSES
October 2, 2012
The Affordable Care Act (ACA) has a significant impact on the health plans that employers offer to their employees. Some provisions, such as the employer shared responsibility rules, only apply to “applicable large employers” by requiring these employers to offer health coverage to their full-time employees or face possible penalties. Other provisions may only apply to the small group market. This summary provides an overview of many of the significant elements of the Act that are of particular importance to small employers.
There are some items that are discussed below where, as of this time, outstanding questions still remain that need to be answered through additional guidance from the appropriate regulatory agencies.
EMPLOYER SHARED RESPONSIBILITY RULES
The ACA requires large employers to provide health insurance that qualifies as “minimum essential coverage” to all full-time employees or pay a penalty. The rules, often called the “play or pay” rules, apply only to applicable large employers which is defined as an employer who employed an average of at least 50 full-time employee equivalents (FTE) on business days during the preceding calendar year.
In calculating the total number of full-time employees, the employer must count part-time employees on a pro-rated basis. For example, an employer with 40 full-time employees and 100 part-time employees (each working 20 hours per week) would be considered a large employer for purposes of the shared responsibility rules.
Therefore, if an employer does not meet this threshold of being an applicable large employer, certain portions of the law, such as the requirement to offer coverage to all full-time employees, do not apply.
SMALL EMPLOYER INSURANCE EXCHANGE
The ACA requires states to set up two different types of insurance exchanges. One, the American Health Benefit Exchange, is designed to facilitate the sale of individual health insurance policies, while the other, the Small Business Health Option Program (SHOP), will be where carriers can offer small group health insurance to employers. States have the option to combine the participants covered by each exchange into a single risk pool, or to keep the two exchanges completely separate. If a state fails to set up a state based exchange, the federal government will operate an exchange in that state.
An exchange will perform a number of functions, but at its core, it is essentially a marketplace where insurance companies, and possibly other payers such as cooperatives, will sell health insurance policies to individuals and small employers. The general concept of combining small businesses together to purchase health insurance is not new, and has gone by many names: purchasing cooperatives, insurance alliances, and connectors to name a few.
However, beginning in 2014, the ACA also makes significant changes to the rules that the insurance companies must follow when offering health insurance plans to individuals and small groups. Many of the new rules apply to policies sold both inside and outside the exchange.
Currently, health insurance carriers typically use underwriting strategies to try to select and price individual and small group policies based on the projected risk of that particular policyholder. Many states have existing rules that restrict this selection process, but these rules vary dramatically from state to state. The ACA imposes a number of rules on organizations offering individual and small group insurance designed to eliminate risk selection as a competitive strategy and “level the playing field” for individuals and small groups purchasing health insurance.
Rules that apply to small group policies sold inside or outside an exchange
- Guarantee issue and renewability: Carriers must accept all individuals and small groups and cannot cancel coverage due to utilization.
- Modified community rating: Rates charged to different customers for the same policy can vary only by age, smoker/non-smoker and some regional adjustments. Rates cannot be based on the medical status of participants or employees.
- Risk sharing across carriers: One of the most significant reforms to the individual and small group market is the introduction of risk sharing between health insurance carriers. Carriers which end up covering a greater proportion of lower risk individuals will be required to make payments that will be shared with carriers with a higher cost pool of participants. Carriers are also prohibited from intentionally marketing to try to attract better risk groups and individuals.
Rules that only apply to policies sold through an exchange
- Defined contribution option: Carriers selling small group polices sold through an exchange must offer an option that permits an employer to select a target “coverage tier” and set employer contributions based on that tier. Employees could then choose coverage from any qualified plan in that tier. The employer would pay a single premium to the exchange, and the exchange would handle the payments to the various carriers involved.
- Small employer tax credit: Beginning in 2014, the small employer tax credit (described below) will be available only for plans sold through an exchange.
The ACA limits deductibles in the small group market to $2,000 individual / $4,000 family, (indexed in future years). Based on the statutory language, it appears that this amount may be increased by the amount of reimbursement available to an employee though a health reimbursement arrangement (HRA). For example, if the employer-sponsored coverage features a $3,000 individual deductible but $1,000 is available via a HRA, this effectively would satisfy the $2,000 deductible cost-sharing limit requirement.
Additionally, cost-sharing under a small group health plan is also limited to the maximum cost-sharing allowed in 2014 for HSA qualified high deductible health plans (currently $5,950 for individual/ $11,900 family). In subsequent years, the limitation on cost-sharing is indexed to the rate of average premium growth.
It is possible that funds available to employees through a flexible spending arrangement will also impact the maximum allowed amounts, but additional clarification from the regulatory agencies is necessary regarding this point.
SMALL EMPLOYER TAX CREDIT
Effective January 1, 2010, eligible small employers can receive a tax credit of up to 35% of the contributions they make toward the cost of health insurance offered to their employees. The credit is available to employers with 25 full-time employee equivalents (FTE) or less. There are also average wage and employer contribution requirements. Small not-for-profit employers may also be eligible for a credit even though they do not owe federal corporate taxes.
Beginning in 2014, the small employer tax credit will only be available to employers who purchase their group coverage through a SHOP exchange.
OTHER PROVISIONS IMPACTING SMALL BUSINESSES
Since the law’s inception in 2010, small group plans have also been subject to a number of provisions that have already taken effect, such as extending dependent eligibility to age 26, the prohibition of pre-existing condition limitations on children under age 19, and the inability to impose a lifetime limit or annual limit (some exceptions apply) on benefits. It is believed that many plans sold in the small group market are no longer grandfathered and are therefore subject to additional requirements including providing coverage for certain preventive care services without member cost-sharing and certain patient protections.