In 2010, the Affordable Care Act was passed, heralding an era of change for the healthcare industry in the United States. Now, nearly six years after the passage of the ACA and three years after small business mandates began to take effect, we can take a step back and begin to analyze this complicated piece of legislation, what impact it has had on businesses of various sizes, and what the future holds. As that impact continues to grow, it’s critical that small business owners, executives, and HR managers assess their responsibilities when it comes to health insurance benefits, and make the most of the ACA’s subsidies and marketplaces to offer competitive benefits packages to attract and retain top talent into the future.
What is the ACA?
The Affordable Care Act, also known as Obamacare, or by its full name, the Patient Protection and Affordable Care Act, is a law passed in 2010 and upheld in 2012 that aims to make health care more affordable for more Americans. With an individual mandate (that every person in the U.S. must be covered by a health insurance plan or face tax penalties) as a starting point, the ACA aims to achieve its goal through many tactics: by offering insurance subsidies to households with an income that puts them within 400% of the poverty line (for example, a household of four would need to make less than four times the four-member household poverty line of $24,250, or $97,000 total, to qualify)1; by extending Medicare benefits; and by supporting innovations in healthcare delivery, including home-based and community care options, better tracking of healthcare information, and increased collaboration between healthcare providers.
For individual consumers, the ACA is best understood by the restrictions and guarantees it makes on coverage for anyone in the country. The ACA guarantees coverage to individuals 18 years or older, regardless of pre-existing conditions, and also makes available a wide range of preventative health services at no cost to individuals. More than that, it makes it impossible for insurers to price plans based on factors like pre-existing conditions, age, or even tobacco use. For those individuals at or near the poverty line, the ACA also offers a number of subsidies to make it easier to afford healthcare coverage.
The ACA remains the Obama administration’s touchstone policy achievement, but it’s not without its controversy. Supporters and detractors on either side of the political aisle debate the ACA’s methods, especially when it comes to enforcing its mandates and paying for itself. With millions of previously uninsured Americans suddenly receiving federally-subsidized health insurance coverage, a significant cost burden emerges. In fact, it’s currently estimated that the ACA will cost upwards of $1.2 trillion by 2025.
“It’s currently estimated that the ACA will cost upwards of $1.2 trillion by 2025.” 2
A significant portion of this burden is paid by taxes, by penalties paid by insurers and employers not following the mandates, and by forced reforms on the healthcare industry itself. These reforms include the way businesses are expected to provide healthcare to their employees, which face mounting responsibilities and potentially massive penalties for failing to comply with the ACA’s mandates.
What are those mandates, to be exact? That answer varies widely depending on the size of the business in question. The ACA identifies small to mid-sized businesses as falling into one of three distinct categories: those businesses with less 50 employees, those with 50-99 employees, and those with 100 or more.
Businesses with 1-49 Employees
The ACA has no mandate requiring that businesses with 49 employees or less provide health care benefits of any kind to their employees. On the surface, this makes it easy for these small businesses to understand their responsibility; at the same time, the ACA has brought with it a number of changes that may still impact the way such businesses think about benefits.
The Small Business Health Options Program (SHOP) Marketplace is a national health insurance exchange designed to give small businesses an opportunity to access more affordable benefits packages. The ACA allows for individual states to set up their own exchanges, as well, but the intended effect is the same across the board: lower premiums for small businesses who choose to offer benefits.
Under the old healthcare system in the U.S. (pre-ACA), insurance companies would routinely charge businesses of this size higher premiums by as much as 18%3, their logic being that it would cost potentially more to insure smaller groups of individuals, whose collective risk could be higher than that of a much larger group, where the risk is more spread out. Generally speaking, the ACA aims to remove this sort of logic from the marketplace, grouping every business in SHOP (or a comparable state exchange) as part of one greater risk pool and granting all businesses which purchase insurance through SHOP or similar exchanges the same kind of group purchasing power larger businesses once enjoyed exclusively. In other words, if the SHOP exchange continues to gain new businesses, many businesses may see an overall decrease in premium costs.
“If the SHOP exchange continues to gain new businesses, many businesses may see an overall decrease in premium costs.”
For businesses of less than 25 employees who choose to offer health benefits, there’s also the very real opportunity for a sizeable federal tax credit. According to the IRS, qualifying businesses must meet the following criteria:
- Have purchased coverage specifically through the national SHOP Marketplace
- Have fewer than 25 full-time equivalent employees
- Have an average annual salary of less than $50,000 per employee
- Have at least 50% of their employees’ premiums
This credit can make it much easier for small businesses of this size to offer health benefits and thereby compete with larger businesses for talent. Furthermore, the credit is refundable on yearly taxes. It can either be applied toward a business’s current year tax bill, or in the event that a business doesn’t have a tax debt for the year, can be applied to a previous year’s bill or even a future tax bill. 4
Businesses with 50 or More Employees
Once a business grows beyond its 49th employee, the ACA begins to have much more direct repercussions. Businesses with 50 or more full-time equivalent employees are mandated by the ACA to provide affordable healthcare benefits to their full-time employees.
There are a few hard numbers businesses of this size face when it comes to defining “affordable” for their employees. Specifically, these businesses must provide benefits that cover at least 60% of expenses for those insured, and they must also make sure that their employees do not have to pay more than 9.5% of their income out of pocket to pay for that coverage. This must be true for any employee receiving benefits, which means that executives and HR managers have to be thorough when crunching numbers and purchasing insurance plans to make sure that all ACA affordability requirements are met for even the lowest paid employee on the company payroll.
Should either of these requirements not be met, businesses face hefty fines equal to $2,000 per employee per year, minus the first 30 employees. For example, if a company of 50 full-time equivalent employees fails to meet requirements, they will be fined $2,000 for their 20 employees beyond the 30-employee mark, or $24,000 per year. These penalties are also set to increase with time to match the cost of rising premiums.
These responsibilities are heavy, but there is some small relief for businesses at the smaller end of this bracket: the SHOP Marketplace. Businesses with up to 99 employees are allowed to purchase health insurance in both the national and state exchanges, which give them additional options to find the right plan for their employees and their company’s goals. If purchasing a plan in the SHOP Marketplace can result in a lower premium than purchasing from a private broker or insurer directly, they are free to do so, effectively gaining the ability to offer comprehensive benefits packages at a lower cost than their larger competitors.
It should also be noted that the specific language of the ACA in referring to full-time equivalent employees might have a major impact on the actual responsibilities of employers, particularly for those that employ very large amounts of part-time employees in addition to their full-time workforce.
In the context of the ACA, full-time equivalent means 30 hours per week, but also refers to the total number of hours the whole employee base works for an employer per week. In other words, a company has 100 full-time equivalent employees if 100 employees work 30 hours per week or more, but they also are said to have 100 full-time equivalent employees if 200 employees work 15 hours. And while no business is responsible for providing healthcare benefits to part-time employees, this concept could mean that a business with much less than 100 actual full time employees may have 100 or more full-time equivalent employees, requiring them to then provide the mandated benefits to the full-time employees they do have.
Ultimately, for companies of this size, the ACA means that the health insurance equation simply cannot be ignored. Regardless of an employer’s business model, whether they employ mostly full-time, salaried workers, or part-time hourly workers, the sheer size of the workforce means that an adequate benefits plan must be in place to avoid these significant penalties.
The Future of Small Business Healthcare Benefits in the US
In the six years since the ACA was first signed into law, it has been a slow and winding road to get all businesses in the country to understand and comply with the mandates the law contains. Unfortunately for business owners, there’s still a way to go before we can understand the full impact of the law on the economy and on the health insurance market as a whole, which could mean more change in the years to come.
The lower premium cost benefit that the ACA claims to offer smaller businesses of 99 or less assumes widespread participation in the SHOP Marketplaces. In order to drive premium costs down, a critical mass of businesses will need to purchase from the exchange and widen the risk pool. It’s still unclear if businesses in the middle bracket, between 50 and 99, will stick around in the SHOP Marketplace long enough to keep those numbers up, or if they will find better prices elsewhere.
“…hiring employee #26 has an immediate impact on budgets.”
Some analysts believe that, if more insurance providers and employers don’t enter the SHOP Marketplace, premiums will actually continue to increase, and not decrease. This is further complicated by the fact that the ACA will allow states to begin accepting employers with 100 or more employees into their own state-run exchanges starting in 2017, which has potential to significantly impact the number of total policies available in the SHOP marketplace.
In the meantime, there are bills in both the House and the Senate that aim to alleviate some of the cost pressures facing employers in that middle bracket of 50-99 full-time equivalent employees by extending the penalty exemptions all the way to 99 employees. Should either of these bills pass, the only employers who will be required to provide health coverage will be those with 100 employees or more.
For those companies learning to adapt to new mandates, the question of health benefits is proving to be an expensive one. But even for those smaller businesses who don’t currently face penalties, the future and the potential of growth is murkier than ever before. For employers with less than 25 employees, the ACA tax credit for offering health coverage may mean that hiring employee #26 has an immediate impact on budgets. For those making the even bigger jump from 49 to 50 employees, it’s not simply a matter of affording that one employee’s compensation, but making sure that adequate, affordable benefits are in place for every employee.
The legacy of the ACA, and the impact of these upcoming shifts and potential amendments to the law, is yet to be seen, but one thing is clear today: the ACA has changed the way companies of any size should think of their benefits, as well as the long-term growth of their business.