(This post is part of my Small Business Startup & Survival Guide. You can catch up on the whole series here.)
Under the new health care law, sometimes called Obamacare, the “employer mandate” kicks in for businesses with 50 or more full-time equivalent employees (FTE). For purposes of the mandate, FTE includes full-time employees plus each 30 hour period worked by non-full-time workers.
With Obamacare, employers must provide health insurance to at least 95% of their full-time employees and dependents up to age 26. If employers who are required to provide health insurance and do not, they may be forced to pay a penalty of $2,000 per full-time employee, with an exclusion for the first 30 employees. Additional fees may also apply, depending on the circumstances.
The employer mandate does not apply to employers with fewer than 50 employees. According to the Treasury, approximately 96% of employers are small businesses with fewer than 50 FTE workers which means they are exempt from the employer responsibility provisions. This is good news for small businesses but that doesn’t make the health care question go away. The reality is that many small businesses still do provide health care for their employees, either out of a sense of responsibility or out of a desire to attract quality candidates (or both).
So how can small businesses make that happen? It’s not enough to simply pay for coverage. Depending on how you pay for those plans, you can find yourself in trouble (it can be tough to avoid the gotchas). Here's how you make good decisions:
- Understand the distinction between group and individual plans. The idea of a group plan can be daunting. “Group” feels like it would be a lot of people but the reality is that many plans only require two insureds to constitute a group. The cost of a group rate is often more affordable than an individual plan because it banks on the fact that coverage applies to all group members without regard to specific health conditions. This means that similarly situated persons in the census (or same demographic group) are charged the same no matter even if they have pre-existing conditions or high risks (like smokers). In contrast, individual costs may be based on specific health conditions or demographics that make health care coverage expensive.
- Sort out the alphabet soup. If it doesn’t make good fiscal sense for you to provide health insurance coverage for your employees, or if the coverage you do provide is less than ideal, consider setting up an additional health benefits plan. A Section 105 plan is named after the section of the Tax Code that allows tax-free reimbursements for expenses incurred for medical care. Section 105 plans may be called a Health Reimbursement Arrangement (HRA), a Health Reimbursement Plan (HRP), a Medical Expense Reimbursement Plan (MERP) or a Medical Reimbursement Plan (MRP). Whatever the moniker, the plan is a 100% employer-funded spending account where contributions are available to employees, tax free, as reimbursements; eligible expenses from the account are generally the same sort of out-of-pocket costs that qualify for the medical deduction. As an employer, you can also set up a flexible spending account (FSA) for your employees. The FSA is funded by pre-tax money and can be used for qualified medical expenses, including insurance copays and deductibles. In contrast, when an employer doesn’t offer a formal HRA or FSA, an employee can create a health savings account (HSA). Contributions to an HSA are made by the taxpayer, or a combination of the taxpayer and an employer. As with an HRA, the payment of qualified medical expenses from an HSA is federal income tax free. By law, you’ll need to have a high-deductible health plan in order to participate in an HSA (those limits are set each year by IRS).
- Consider hiring a health insurance broker. A broker can help you find a suitable plan - generally, at no extra cost to the company - and can also advise on other health care benefits including those alphabet soup plans. Additionally, a broker isn’t limited to finding you coverage through traditional outlets: brokers are protected when they help find coverage through the Marketplace.
- Don’t forget the marketplace. Small businesses that meet certain criteria (generally employers with fewer than 50 full-time workers) can search for coverage in the marketplace. Employers who qualify can use the Small Business Health Options Program (SHOP) to find group plans for their employees. Employers can enroll in SHOP at any time. SHOP only applies to small businesses with employees. Sole proprietors, SMLLCs and businesses with no employees can’t use SHOP: you’ll have to use the Health Insurance Marketplace for individuals. For information about SHOP, call 1-800-706-7893, Monday through Friday, 9 a.m. to 7 p.m. ET.
- Don’t overlook tax credits. Obamacare has a lot of mandates - but it also offers a few perks. One of those is an employer tax credit for employers with less than 25 FTE who are paid an average of $50,000 a year or less who provide health care coverage for their employees. To be eligible for a tax credit, an employer must contribute at least 50% of the total premium cost or 50% of a benchmark premium cost and coverage must be obtained through the SHOP Marketplace. If you weren’t aware of this opportunity before, don’t worry: tax credits are available retroactively all the way back to 2010. These tax credits can get complicated so be sure to check with your tax professional for specifics.
- Think outside of the box. When it’s clear that one method isn’t working, don’t throw in the towel, consider another option. Joy Buck Gothard did exactly that. When she found out that her previous practice of reimbursing employees for their health care insurance was prohibited under the new law, she sought out other options and eventually settled on additional compensation for her employees. Other small businesses have focused on the viability of self-insured plans. There is no one size fits all answer to health care cost concerns for small businesses. Ask questions and be open to new solutions.
- Stay educated. The laws keep changing and it’s up to you, as the employer, to stay on top of things. In addition to regular communication with your professional team, you can remain in the know by reading articles and receiving news alerts. The tax team at Forbes offers great coverage on Obamacare related tax penalties and tax breaks. The IRS offers an entire page of Obamacare resources on its website. You can also sign up for updates with deadline reminders and other important information from Healthcare.gov on their site.
