By Josie Martinez, Senior Partner and Legal Counsel
EBS Capstone, A UBA Partner Firm
Most of us are scratching our heads on a daily basis as the rules of health care reform seem to shift continually. Particularly for employers in the under 50 employee market, identifying marketplace health care coverage options has been a moving target. Currently, it seems small groups have five viable options: 1) state exchanges; 2) SHOP exchange; 3) private exchanges; 4) co-operatives and 5) going direct to carriers.
The first option seems relatively simple: direct employees to the marketplace in the state where they reside to purchase individual coverage. Keep in mind that the exchanges are state-specific, so there will be variations in benefits and network access based on that particular state’s offerings -- something to consider if a small employer has employees in different states.
The second option, the SHOP exchange, is a good coverage alternative for employers with 50 or fewer employees if certain requirements are met. In Massachusetts, for example, employers participating in SHOP must contribute at least 50 percent of the premium amount. In addition, employers with 1-5 employees must have 100 percent of the employees enrolled; and employers with 6-50 employees must have at least 75 percent of the employees enrolled. For some employers, a SHOP exchange may offer the additional advantage of certain tax credits.
Private exchanges appear to hold great promise, but many are still under development or may limit plan offerings to the options available from a single carrier. On the other hand, development in this area has been rapid -- witness the recent availability of the UBA Exchange Marketplace option for small employers, called benefitbay™. Benefitbay can be an option for employers because it provides an enrollment and administration process, and allow them to offer their workers the advantages of large group medical and ancillary insurance benefits with multiple carriers, while allowing subsidy-eligible employees to go to government exchanges. In the “defined contribution” model prevalent with private exchanges, employers benefit from fixed costs by choosing how much they will contribute to an employee’s health plan -- a strategy gaining popularity for its ability to control benefits expenses.
It is certainly worth keeping an eye on the private exchange market in order to better advise small group clients.
Finally, the last two options -- co-ops and going direct to the carriers -- are the traditional modes for purchasing employee health coverage. Still viable options, these methods of providing health insurance remain the most popular coverage choices for most small employers.
A critical issue for employers to consider when deciding what option works best for their small business is the tax status of contributions. After Dec. 31, 2013, employer contributions for individual health insurance coverage are taxable to the employee as regular compensation and subject to income tax and FICA tax. For the employer, any such contribution may be a tax deduction as a business expense, but the employer must still pay FICA taxes. From the employee’s perspective, employer contributions for health coverage are tax free only if they go towards a group plan. In addition, any payment by an employee for the purchase of individual coverage through a public or private exchange must be paid with post-tax dollars (although premium costs in excess of 10 percent of income may be deductible on the employee’s tax return). These tax consequences are key considerations for any small employer grappling with the healthcare options for its employees down the road.