Affordable Health Care for Main Street Employers


The recent Supreme Court ruling that all Americans must have health insurance or pay a tax is beginning to send shock waves from Main Street all the way to Wall Street. Every person must have a qualified health plan or pay a tax penalty starting in 2014. But how are they going to find affordable health insurance and how are they going to pay for it? The purpose of this article is to help answer these questions and show how small employers can and will play a major role in carrying out this new mandate.

Today less than half of all small business employers provide 100 percent free group health coverage to their employees. Many small businesses have dropped group coverage because of the high cost and because it has been too difficult to get younger employees to pay their portion to participate. This has forced employees to buy health insurance on their own with after-payroll-tax income. Currently, there is no tax deduction for individual health plans unless they are purchased through an employer. This was further clarified in an opinion letter by the Internal Revenue Service. Most small business owners are unaware that even if they choose not to contribute to the cost of their employees’ health insurance, they can still set up a plan that could save both them and their employees’ significant money. These plans are called Premium Reimbursement Arrangements (PRA) or “Defined Contribution” plans.

How do these plans differ from traditional group health insurance?

First, the employer does not select the plan. In fact, each employee can have a different insurance company or a different plan within the same insurance company. All the employer does is set the amount of contribution, called “Defined Contribution,” if any. This is much like the change that took place in pension plans in the 1970s when 401K’s were introduced and employers only make a contribution to an employee’s retirement account. The only reason group insurance has lasted this long is because it offered a way to guarantee that all of a company’s employees could qualify for health coverage even if they had a pre-existing conditions. Often it was the business owner or a key employee who had the pre-existing medical condition. 

The passage of the Affordable Care Act in 2010, however, requires that all individual health plans starting in 2014 have no pre-existing condition limitations and no waiting periods. Up until now, only some group plans provided these two items to employees. This major change eliminates the need for group health insurance where employers tries to select one or two plans that meet the needs of all their employees. The days of “one shoe fits all” health insurance is coming to a quick close.

What role will Main Street employers play in the new world of health insurance?

Employers will continue to make a contribution for employees they want to recruit and retain by offering them health insurance. However, employees will need to select and pay for individual health plans. The employer will set up a Health Reimbursement Arrangement (PRA) and contribute toward the cost. The employer will then assist employees with before-tax deduction of their portion of the health insurance cost, which will save employees 20 to 40 percent on their income taxes for every dollar used to purchase health insurance. Employers will then give their employees monthly pre-tax money to pay for their individual health insurance premiums. The upside of this approach for employers is that they will save the 7.65 percent Social Security tax and un-employment taxes, making this approach a real win-win arrangement.

Take, for example, an employee who has a family plan with a wife and two kids. If the plan costs around $700 a month, the employer would save approximately $70 a month just by putting in a PRA plan. Even if employers are unable or unwilling to contribute to the cost of their employees’ health insurance, they would be foolish not to put together a Premium Reimbursement Arrangement because of the tax savings to both them and their employees.

These plans are also completely portable and can go with employees when they change jobs. For the employer, “they are out of the health insurance selection business,” which most hated to begin with. I just heard small business owner saying “Yeah” all around the country. Nor do they have to face annual rate increases because they can set their contribution once and that’s it. Even with the cost of hiring a third party to handle administration of the individual premium distribution, the small business owner would actually save money on those employees who purchase health insurance where they do not contribute.

How does the Affordable Care Act affect the cost of health insurance?

The Affordable Care Act may be a great name for a bill but, unfortunately, the effect of the law will be to raise cost not make health insurance more affordable. The removal of underwriting and the requirement that all Americans be covered even with pre-existing conditions, though a good thing, will result in a health insurance cost increase.

Part of the health insurance rate increase is supposed to be offset by the requirement that all Americans must have health insurance in 2014 or pay a tax. This is the part of the Affordable Care Act that the Supreme Court just upheld. However, the tax is so minimal in 2014 many young healthy people will opt to just pay the tax. For example, the tax in 2014 is $95 for an individual for the entire year, or about the cost of one month’s premium for a young person. The tax penalty goes up to $325 in 2015.

Another tax built into the law affects employers with more than 50 employees. If they do not provide their employees with health insurance, they will have to pay $2,000 per employee per year. There is no such tax for employers with fewer than 50 employees. The tax is much less than the cost of providing a minimum qualified plan, so the feeling is many that employers will drop group health insurance and just opt to pay the tax. Also many of these companies’ employees will qualify for is being called “Premium Credits” because of their household income.

The states have been given the responsibility of administrating and implementing the Affordable Care Act, but the above tax revenue will not be enough to fund the law’s mandated subsidies for working people who fall below 400 percent of poverty level.  For example, for a family of four that earns $80,000 a year, the cost of family coverage is capped by the law at 9.5 percent of income or $7,600 a year. The cost of that qualified family plan under the Affordable Care Act is estimated to be approximately $24,000 a year, which means a “Premium Credit” of $16,400 a year. The question is where will this credit funding come from? Most experts believe the above taxes will not be enough to support the law.

If the law remains unchanged, however, the money will have to come from somewhere because the Affordable Care Act has made these subsidies the law of the land starting in 2014. Many feel the amounts of Premium Credits will have to be reduced before 2014 or the new law will require additional federal funding before it can be fully implementd. No matter where the Premium Credit line falls, many more low-income workers will be getting a Premium Credit than currently exists for health insurance. They still will want their employers to pre-tax deduct the remaining portion of their individual health insurance premiums. These plans will be 100 pecent portable and go with them from job to job.

How can Main Street programs help local employers understand and adapt for the changes in how health insurance is purchased on an individual basis?

National Trust Insurance Services has teamed up with Choice Strategies to provide preferred pricing on Premium Reimbursement Arrangement management. This takes the burden of administration off Main Street employers for less cost than the tax savings. For example, if a single health premium averages $200 a month, the employer’s tax savings is more than $15.30 a month. The cost of administration is only $10 per participating employee per month. We have our own private Health Exchange, or quoting site, to assist employees in finding their best option. We can link the quote site to Main Street websites so local Main Street programs can offer it to their members as a service at no cost to them.

We also recommend scheduling a free webinar for your members to learn firsthand how to get ready for the changes being brought about by the passage of the Affordable Care Act.