Companies such as Wal-Mart, Target and Home Depot stopped offering health insurance plans to part-time employees since the Affordable Care Act’s major provisions took effect in 2014.1 It’s happened with smaller businesses, too. Some employers have dropped their group health insurance policies now that:
- Health insurance available through state-based and federally facilitated exchanges
- Enrollees may qualify for federal subsidies to help lower premium and out-of-pocket costs
- Health insurance companies can no longer deny people coverage or charge them more based on health history and pre-existing conditions
Can your employer do the same?
It depends. Effective 2015, companies with 50 or more full-time equivalent employees are required by law to offer workers affordable health insurance plans that provide a minimum level of coverage or pay a tax penalty known as the shared responsibility payment.2 Section 4980H of the Internal Revenue Code defines a full-time employee as an individual that averages at least 30 hours of service each week.3 These companies cannot send employees to the exchanges without financial consequences.
However, this provision does not apply to employers with fewer than 50 full-time employees—this may also be a combination of full-time and part-time employees that is equivalent to 50 full-time employees.4; These employers, especially those with workers in low-wage positions who are potentially eligible for subsidies, may stop offering group health insurance. Some might pay employees additional income to purchase health insurance elsewhere. Whether or not this is legal depends on how the extra funds are distributed.
Pre-tax and post-tax income
On November 6, 2014, the Departments of Labor, Treasury, and Health and Human Services released a series of FAQs further clarifying the legal limits on employer efforts to steer employees into individual policies. The FAQs state that employers may not provide cash reimbursement to employees, either pre-tax or post-tax, to purchase individual health insurance policies. Any such arrangement is a group health plan, and would fail to comply with the ACA market reforms, subjecting the employer to penalties and excise taxes under the Internal Revenue Code.5
Employers may provide employees with extra taxable income to buy health insurance, but they cannot require employees to use it to purchase health insurance. However, as stated by the IRS, individuals who do not obtain qualified health insurance coverage, either on or away from their state’s exchange, may owe an individual shared responsibility payment for going without health insurance, unless they qualify for an exemption.6
Why would an employer eliminate group health insurance?
Job-based health insurance can be a big part of employees satisfaction. However, options may be limited to a couple of plan choices. By eliminating group health insurance and also providing employees with additional, taxable income to purchase health insurance on their own, employers may give their employees access to more options, which allows them to find benefits that best fit the healthcare needs of them and their families. Furthermore, those with incomes between 100 and 500 percent of the federal poverty level may qualify for premium tax credits when they shop their state’s exchange.
If employees select health insurance coverage that costs less than the amount employers provide, they can use the extra money however they like. Those who select an HSA-compatible high-deductible health insurance plan may opt to place funds in a health savings account. This money can be saved and used for qualified medical expenses. Employees may also use funds in excess of their health insurance premium to secure dental and vision insurance plans or other supplemental insurance benefits.
This approach has a key drawback, however, the additional income paid to employees could push some into a higher income tax bracket, which A) may require them to pay more income tax and B) could impact their subsidy eligibility.
Additional job-based health insurance options
There are other options for employers who are required to or want to provide employees with access to qualified health insurance plans.
Some employers are setting up private exchanges that provide employees with numerous benefits options, including major medical insurance, dental and vision, among others. Plans purchased through private exchanges do not qualify for federal subsidies. The big draw is that they allow employers to offer employees a multitude of plan options and the freedom to choose what works best for them and their families. Typically, an employer will set a defined contribution amount and allow employees to spend it as they see fit within the private exchange
Small business owners with 50 or fewer employees may provide group health insurance through the federally facilitated Small Business Health Options Program marketplace or their state-based exchange SHOP marketplace. They can choose a contribution level, provide multiple health insurance plan options and potentially receive federal tax credits if they meet certain criteria.
Those with 25 or fewer employees may qualify for tax credits. Employers can visit healthcare.gov/marketplace/shop/ and select their state to learn more.
Agents and brokers
Agents and brokers continue to offer small group health insurance plans and supplemental insurance products in the private marketplace. Employers who wish to continue offering traditional group benefits may work with these licensed individuals to select health insurance coverage for their workers. For more information on group health insurance options and products such as dental insurance and critical illness coverage, visit healthedeals.com or call 88-839-7679 to speak to a licensed health insurance agent from healthedeals.com.
Although the information contained here is presented in good faith and believed to be correct as of the time presented, it is general in nature and is not intended as tax advice. As always, business owners and individuals who have questions about the Affordable Care Act and its tax implications should contact an accountant or financial adviser.