Traditionally, as businesses face sharp health-care premium increases, they comparison-shop on an annual basis; for example, they may change plans to shift some of the costs onto employees in the form of higher co-pays. However, this year, new health-care legislation has complicated that decision.
Under the new laws, businesses that renew their existing plans without substantial changes will be exempt from some of the upcoming requirements that could lead to substantially higher costs. While many owners would like to keep their current plan and retain the "grandfathered" status, many are finding they just can't afford the premium increases.
Failure to retain that status, however, could lead to more headaches once 2014 rolls around. That's when up to 20 new mandates are placed on nongrandfathered plans, which could increase premiums anywhere from 20 percent to 60 percent, according to the U.S. Chamber of Commerce .
With the "pay more now or pay even more later" proposition confronting entrepreneurs, many are coming to the conclusion that they might be better off not offering health care, taking the current penalty and then joining public exchanges once they become available.
For example, a company with 50 full-time employees will face a penalty if the employer does not offer health-care benefits. The fine will be $2,000 per employee , excluding the first 30 employees that means that the company will be charged a $40,000 fine for dropped insurance coverage, likely substantially lower than the annual cost of providing health-care benefits.
Will employers change their health-care plans and only provide what is required by law in 2014? Over the past decade, the percentage of small businesses offering coverage dropped from 65 percent to 59 percent . At the same time, annual family premiums more than doubled. Benefits are a major portion of a company's overall compensation strategy--14 to 16 percent of salary spend. While limited tax credits should help offset a portion of the rising costs, the complexities and cost of health care are sure to change the way small businesses operate in years to come.
I've gathered three of the most common questions clients and prospects have asked about this topic and shared them below for your benefit.
- What minimum health plan will be required?
Employers who have more than 50 full-time employees are required by 2014 to either offer coverage to employees or pay a $2,000 penalty per employee. The law includes the minimum requirements that will have to be part of any health plan, either offered through an employer or as part of a state-based exchange, starting in 2010 and ramping up to additional requirements by 2014. Some of these "minimum essential benefits" include emergency services, hospitalization and laboratory services.
- Are insurance exchanges national or statewide, and how will health-care reform affect employers with employees nationwide?
The law established that states, not the federal government, set up health option exchanges administered by either a government agency or a nonprofit organization. The federal government will provide states with startup money for exchange establishment. The exchanges are supposed to be open for business by 2014. If a state declines to open one, the federal government has the option to step in and open an exchange. In their initial years, the exchanges will be open only to those who work for firms with 100 or fewer employees, and to individuals looking to buy insurance for themselves--either because they're self-employed, unemployed or retired but not yet eligible for Medicare.
Employers that have employees nationwide will either have to buy separate policies from separate state exchanges (similar to what has to be done today in the private market) or participate with a "Health Care Choice Compact" where they exist. A Health Care Choice Compact is a provision that was included in the law that allows two or more states to form compacts to allow for purchase of qualified health plans across state lines, beginning in 2016.
- Are employers exempt from payroll taxes for new hires in 2010 if those employees were unemployed prior to being hired?
Many owners are concerned about this. They're worried that companies will have an incentive to retain fewer employees due to the rising cost of employing workers. According to the health-care reform bill, companies with payrolls exceeding $400,000 will have to pay a penalty equal to 8 percent of total payroll.
To counter this, President Obama signed an $18 billion jobs bill in March dubbed the Hiring Incentives to Restore Employment (HIRE) Act . There are two significant provisions to the new law that have a direct impact on all businesses. The first provides for relief from the employer share of social security tax on wages paid to any newly hired employees who have been unemployed for at least 60 days prior to employment. Additionally, the new law provides for a $1,000 business tax credit against an employer's corporate income tax for each new employee who is employed for at least 52 consecutive weeks.
What should small-business employers do to prepare for health-care reform? First, they must understand how these laws affect their company and employees. Owners should take into account the cost drivers of offering health insurance, but also consider how the overall decision will affect their business goals--especially employee retention, overall morale and recruiting.
For more information about health-care reform and what it means for your business, read The Entrepreneur's Guide to Health-Care Reform .