Many small business owners are asking questions about navigating the coming changes in health insurance under Obamacare. That’s not surprising, given that major reform provisions begin taking effect this year and next. There is also widespread confusion among small business owners about the law’s implementation and requirements.
Here’s some guidance on the key areas small business owners should consider now, before state-run SHOPS (insurance marketplaces for small businesses) open on Oct. 1 of this year.
Question: Our business has under 10 employees who work 25 to 35 hours per week. How will the employer health insurance mandate affect us?
Answer: Short answer: It won’t. Under Obamacare, the mandate requires employers with 50 or more employees (or “full-time equivalents”—we’ll get to that next) to offer coverage or pay a $2,000 fine per employee, not counting the first 30 employees, starting in 2014. Micro-businesses like yours, with fewer than 10 employees, are well under the limit.
The mandate has gotten lots of attention, but nationwide it will apply to very few businesses. That’s because 96 percent of all businesses have fewer than 50 employees, says David Chase, an outreach director at Small Business Majority, a lobbying group that supports health-care reform. “Of the 4 percent who’ll be mandated to offer insurance, 96 percent of those companies already offer it. So it’s 4 percent of the 4 percent that will be affected by the mandate.”
Question: My company fluctuates from 37 to 53 employees, depending on how many paint jobs we are doing. Does “employing over 50” mean daily, weekly, monthly, quarterly, or yearly? If I drop lower than 50, can I drop the insurance I’m mandated to offer?
Answer: If you employ fewer than 50 “full-time equivalent” employees, you will not be mandated to offer coverage in 2014. The FTE calculation considers full-time any employee who is scheduled or has worked more than 40 hours per week, averaged over a month. So if you have two part-timers who work 20 hours a week, they would count as one FTE.
A business like yours, which employs variable-hour workers who may work 40 hours one week and not at all other weeks, must add up the total hours those employees worked in a year. Divide that number by 2,080 (which represents 40 hours/week times 52 weeks in a year) and you’ll get the number of FTEs your company employs.
A complexity: That calculation determines whether you are mandated to offer coverage, not which of your employees are eligible for coverage, says Marcus Newman, a registered health underwriter and chartered benefits consultant at brokerage GCG Financial in Chicago. “If you are mandated to offer coverage, you’ll have to cover employees working 30 or more hours per week on average, starting 90 days after they are hired,” he says.
Part-timers under 30 hours and seasonal employees who work fewer than 120 days annually do not have to be covered even if your company falls under the mandate. To avoid penalties, employers under mandate must offer insurance to eligible employees that covers at least 60 percent of the actuarial value of the cost of benefits; the employees’ share must not be more than 9.5 percent of their income.
Question: I have five employees and use a payroll company to do our payroll. My company does not provide medical at this point in time. Will the payroll company be required to cover insurance for the employees or will we?
Answer: Neither, since you’re under 50 employees and won’t be subject to the mandate, and payroll companies do not provide health insurance. “They may have an agency associated with them that provides health insurance to companies, but it’s just like any other agency,” says Jay Starkman, chief executive officer of Engage PEO, a Fort Lauderdale professional employer organization that handles administration and payroll for small businesses. Many PEOs, including Starkman’s, do offer companies health insurance as part of the package of services they sell, but the decision about whether to offer it lies with the business owner.
With some exceptions, your employees will be mandated to get insurance coverage starting in 2014; some may qualify for government subsidies to help with the cost, depending on their income levels. They will have access to insurance on the private market or through government exchanges scheduled to open Oct. 1, 2013, with coverage beginning Jan. 1, 2014. One common misconception: The government exchanges will not be providing a “government option” for insurance. They will be marketplaces where private insurers sell policies based on levels of coverage provided.
Question: I don’t currently buy health insurance for my employees. Even if I’m not required to, should I start when Obamacare kicks in?
Answer: This is something every business owner should weigh, taking into account cost, its employees, and the value that benefits lend to recruitment and retention. According to a January 2013 survey (PDF) done by the Pepperdine Private Capital Markets Project at Pepperdine University, 49 percent of small- and midsize businesses said they will keep their employee health-care coverage but make tweaks, such as shopping for cheaper rates; 39 percent said they would make no changes to their coverage; and 12 percent said they would drop coverage and either pay a penalty or switch to a defined contribution health-care plan (more on that below).
After health reform passed in Massachusetts in 2006, the number of businesses offering insurance coverage increased because potential employees—worried about penalties for being uninsured—were more inclined to take jobs with companies offering benefits, Chase says.
If you opt to buy employee health care through a SHOP exchange in 2014, and your business employs fewer than 25 FTEs with average annual wages below $50,000, you may be able to claim a tax credit for up to 50 percent of your cost.
Question: If my employees would qualify for subsidized coverage on the individual government exchanges next year, should I drop my company policy and let them get their own insurance?
Answer: Again, this is an option each small business owner will have to weigh, but it does offer some benefits on both sides, says Michael Mahoney, a senior vice president at Chicago-based GoHealth Insurance, an online insurance marketplace.
“In a lot of cases it may be more advantageous to allow people to buy their coverage individually. It will be more flexible, so the individual who is young and healthy can buy a different policy from someone older, who has children and needs more coverage,” Mahoney says. “The company can help the employees buy coverage with a defined contribution of cash or in the form of an HRA (health reimbursement account) or FSA (flexible spending account)” depending on state rules.
A defined contribution plan would ease the pain of unpredictable, annual insurance premium rate hikes, long identified as one of the biggest headaches for small businesses, while still providing a retention and recruitment incentive, says Newman. “We think it’s a significant opportunity for small businesses to finally get out of being the delivery service for health care, which is not something they should have to be doing anyway.”