ACA Fact Sheet: Considerations for Small Employers

Small employers under the ACA employer shared responsibility provisions are generally those with an average of less than 50 full-time employees (including full-time equivalent employees) on business days during the prior calendar year. Small employers are not subject to ACA’s “pay or play” provisions and therefore are not required to offer ACA compliant medical plans to full-time employees in order to avoid paying potential tax penalties.

Because small employers are generally not subject to the ACA’s employer shared responsibility provisions and the associated tax penalties, many small companies do not think the ACA will impact their businesses. However, ACA regulations broadly impact companies of all sizes and affect if and how they will offer minimum essential coverage to their employees.

Employer Reimbursement of Individual Premiums are Prohibited

Many small employers were considering directing employees to an individual Marketplace plan and reimbursing a portion of the premium for that coverage as a potentially less costly solution to helping employees obtain medical coverage. However in November 2014, the federal agencies (IRS, DOL and HHS) released guidance stating that reimbursements for the purchase of individual coverage in the Marketplace would not be allowed under the ACA, regardless of whether the company processes the payments on a pre-tax or post-tax basis.

An employer arrangement that provides cash reimbursement for an individual policy would be “part of a plan, fund or other arrangement” that is considered a group health plan subject to the ACA’s market reform provisions. Because such cash payment arrangement will not comply with the ACA’s requirements for a group health plan under Internal Revenue Code (Code) Section 4980D, it will likely trigger the ACA’s general excise tax penalty of $100 per day for each employee ($36,500 per employee per year).

The Cost of Individual Marketplace Plans Varies Significantly

Many employers are under the mistaken assumption that their employees will be eligible for a subsidy based on their salary or hourly rate, and as a result it will be less expensive for them to obtain coverage through a Marketplace plan. However, eligibility for a Marketplace subsidy is a complex determination and depends on several factors, such as an employee’s total household income and whether the employee’s spouse is offered an ACA compliant medical plan through his/her employer. So it can be difficult to determine which employees would be eligible for a subsidy, even if employee earns between 100% and 400% of the federal poverty level.

Even if a worksite employee qualifies for a subsidy, the choice of medical plans and premiums will vary significantly depending on the state of residence. Many states may have a limited selection of insurance carriers, plan designs and networks, which may ultimately result in employees ending up paying more for coverage that may not best fit their needs.

Finally, most companies have Code Section 125 cafeteria plans in place that enables employees to pay benefit premiums on a pre-tax basis. Unfortunately, premiums for Marketplace medical plans (not covered by the subsidy) cannot be funded through a cafeteria plan and must be paid for by employees on an after-tax basis. Not being able to pay for medical premiums using pre-tax dollars, means more employee wages become subject to income tax, FICA, Medicare, etc., resulting in more tax liability for both the employees and the company.

Market Reforms that Impact Small Group Plans

The ACA small group market reforms that impacted premium rates became effective beginning in 2014, and many of these reforms also apply to policies issued in the individual market. For purposes of this portion of the ACA, the definition of a “small employer” is an employer who employed an average of at least 1 but not more than 100 employees on business days during the preceding calendar year. For plan years prior to January 1, 2016, a state may elect to define a “small employer” as one that employs an average of not more than 50 employees.

All individual and small group market insurers must provide a core package of medical services known as “essential health benefits,” which include minimum benefits in 10 general categories, such as maternity and newborn care, emergency services, hospitalization and prescription drugs.

There are also new premium rating rules that limit insurance carrier flexibility in setting medical plan premiums in the individual and small group markets. Rates for a particular plan may vary based on only four factors, subject to state limitations:

1. Coverage category (e.g. individual vs. family coverage);
2. Geographic rating area (as established by the state);
3. Age ratio of 3-1; mature work site employees cannot be charged more than 3x that of younger work site employees; and
4. Tobacco use (but not more than 1.5 times the rate of a non-tobacco user).

In addition, the ACA directed HHS to establish a process for the annual disclosure and review of certain rate increases by health insurers above certain defined thresholds.

HHS outlined an extended transitional policy that the states may choose to adopt which would allow individual and small group market insurers (who meet certain conditions) to offer coverage through October 2016 that will not be considered out of compliance with small market reforms. Specifically, under the transitional relief, the insurer will not be considered out of compliance with six specified reforms, including premium rating rules, guaranteed availability and renewability, coverage of essential health benefits, coverage for clinical trial participants, prohibition against preexisting condition exclusions and nondiscrimination in health care (except with respect to group coverage). States may choose to adopt the transitional policy for (1) the individual market only, (2) the small group market only or (3) for both markets.

In the longer term, reforms in the small group market may make it more costly for small employers to offer medical plans.

Restrictions on Health Care Flexible Spending Accounts (FSAs) and Health Reimbursement Accounts (HRAs)

 FSAs and HRAs are popular because these accounts enable employees to pay for eligible out-of-pocket health care expenses on a pre-tax basis. Generally, FSAs are funded by employee payroll contributions and HRAs are funded by company contributions. However, under new ACA rules, a company may only offer a FSA and/or an HRA if the company also offers an underlying ACA compliant group medical plan.

HRAs and FSAs not integrated with an ACA compliant group health plan will violate the ACA’s annual limit and preventive services mandates, unless the plan consists of “HIPAA–excepted benefits” (e.g. retiree only or limited scope dental/vision benefits). Employers that offer non-compliant HRA or health care FSA plans will be subject to the ACA’s general excise tax penalty of $100 per day per participant ($36,500 per year per participant).