Avoid Getting Stung by the Affordable Care Act
If you're one of the many small business owners uncertain about the affects of the Affordable Care Act, take heart.
You'll probably have more flexibility than you think when the ACA goes into effect in 2014, according to a study released Monday by benefits and payroll services giant ADP, of Roseland, New Jersey. Much of the flexibility comes from managing costs carefully around the newly covered employees.
ADP's survey set out to answer one of the most important questions employers face, and that's to what extent their newly eligible employees will participate in employer-sponsored health plans versus the state health exchanges.
Answering that question is a crucial step to figuring out how much health care will cost your business in the years ahead. It's also key to understanding how businesses should construct health benefit plans in advance of the new regulations--or whether they should offer them at all.
"The small business with the right approach [to ACA] will develop a leg up," says David Marini, vice president and managing director of strategic advisory services for ADP, which examined data on 300 businesses with 1,000 employees or more.
In case you're wondering, employers who offered health care paid $7,225 per enrolled employee in 2012 on average, ADP says. And generally speaking, the costs of health care will rise by a percentage equivalent to the increase in the percentage of covered employees.
Come 2014, there will be between 5 million and 15 million newly eligible employees, says Chris Ryan vice president at SHPS, a healthcare benefits solutions provider, and author of the paper.
"The biggest cost in 2014 is the increase in the size of the eligible population," Ryan says.
But the majority of new health-care participants will also be low-wage workers, ADP says. And the ACA's trickiest provisions, including employer penalties and taxes, revolve around the affordability of your plan.
Currently, only 37 percent of workers making between $15,000 and $20,000 annually participate in employer plans, compared to 81 percent of employees earning more than $45,000 annually. One reason for lower participation rates of low-wage workers is that health-care premiums can eat up between 5 percent and 10 percent of such workers' disposable income, ADP says.
But if your business has 50 employees or more, the ACA says your health plan must cost no more than 9.5 percent of disposable income for single self-insured employees, or you'll pay a penalty of $3,000 per worker buying coverage from an exchange.
Across ADP's entire study population, only 8.6 percent of single full-time employees paid 9.5 percent or more of earnings for coverage. And only 1 percent purchased self-only coverage. The remaining 7.6 percent purchased coverage for dependents as well.
Under a recent IRS rule, called the W-2 safe harbor, it turns out that business owners can take advantage of a loophole for unaffordable family coverage. As long as they offer family coverage, along with affordable coverage for the insured employee, the employer won't pay a tax penalty for uncovered employees.
"The best option may be to offer [affordable] self-only coverage," Ryan says.
The rule, however, is controversial since it was passed by the IRS, not Congress. Plus, critics have said it does away with a central tenent of the ACA, which is to ensure affordable coverage for individuals and their dependents. While the loophole may prove to be short-lived, workers who want more affordable family coverage will likely seek it from the exchanges.
Unfortunately, it's unclear whether every state will offer dependent coverage. It also means tax-payers will have to foot the bill. (But hey, you pay taxes too.)
Remember, though, if you don't offer minimally acceptable coverage for your employees, meaning that their coverage pays for at least 60 percent of their health care costs, and you have 50 workers or more, you'll be on the hook for $2,000 per uncovered employee, minus the first 30. Even for a business with just 50 workers, that comes out to $40,000 annually.
While some businesses will want to manage toward part-time workers to avoid paying for coverage and to avoid paying penalties, Marini says, that may be a short-sighted strategy. Offering great benefits, including a good health care plan, is one way of attracting better employees.
"There has been an evolution in thinking and cooler heads are prevailing, and many small businesses are wondering, can I do a better job at managing this than my competitors," Marini says.