Starting October 1, 2013, California will be the home of “Covered California,” the nation’s first insurance marketplace under the Affordable Care Act (ACA), also known as Obamacare. Covered California has two separate programs: the Individual Marketplace for individuals seeking insurance coverage, and the Small Business Health Options Program (SHOP). For small business owners, SHOP acts a hub that aggregates plans and organizes qualified California small business health plans, provides information on insurance prices and benefits, enrolls employees, and consolidates billing. Being prepared for compliance is critical to being ready for full implementation of the law in 2014. Employers need information in plain English to help them understand their rights and obligations under the ACA.
What is SHOP?
Under the Affordable Care Act (ACA), small business owners will be able to purchase health insurance for their employees on a special marketplace called “the Small Business Health Options Program” (SHOP). SHOP is run by Covered California, which also runs the new insurance marketplace for individuals and families. In SHOP, your small business will be part of an insurance pool made up of small businesses across California. The goal is to give small businesses access to more plans and more buying power, just as large businesses have traditionally had.
If your small business currently offers health insurance to employees and have a broker you work with, your broker can also help you pick a plan on SHOP. If your company does not have a broker, you can pick from plans on SHOP regardless. There is no penalty for not enrolling in SHOP and there is no additional fee or charge for using an insurance agent.
What Kinds of Business Can Enroll in SHOP?
The SHOP Marketplace is open to employers with 50 or fewer full-time-equivalent employees (FTEs) for insurance to be provided in 2014. Starting in 2014, small businesses with up to 100 full-time employees (50 or fewer in some states) will be able to compare and buy health insurance on the exchanges for their employees. Starting in 2017, states can allow businesses with more than 100 employees to purchase coverage in the SHOP Exchange.
Does the ACA Require Small Businesses to Provide Health Insurance?
No. The Affordable Care Act does not require that businesses with fewer than 50 full time or FTE employees (defined as 30 hours per week) provide health insurance. But if your business has 50 or more full time employees or FTEs, you could be subject to penalties starting in 2015 if you do not provide insurance. Employers with fewer than 50 full-time-equivalent employees will not face penalties.
What if My Business has Part Time Employees? The Affordable Care Act counts the hours worked, not the number of full-time employees an employer has. If a business’s employees worked an equivalent of 50 full-time hours, the requirement becomes operative.
In other words, cutting workers hours back will not save a company from being responsible for offering health insurance to full-time workers. In addition, franchises are counted as separate businesses, so franchise owners with less than 50 full-time workers will not have to provide health coverage to their full-timers.
What is a “Full-Time-Equivalent” Employee?
The IRS has proposed a new regulation to help employers determine the number of full-time equivalent (FTE) employees they have, to check whether they are in compliance with the employer responsibility obligation under the health care law.
A full-time equivalent employee is defined as an employee who is employed an average of at least 30 hours of per week. The proposed rule states that a FTE employee working 130 hours in a calendar month satisfies the 30 hours of work per week requirement. The proposal prescribes three different methods to determine whether a non-hourly employee qualifies:
- Counting actual hours of service.
- Using a days-worked equivalency, in which eight hours of service counts as a day.
- Using a weeks-worked equivalency, in which 40 hours of service per week counts as a week.
Employers can apply the methods to different classifications of non-hourly employees, as long as it is done consistently and does not understate their hours in service so as to disqualify them from health coverage. New hires will be under a 12-week grace period before their status is reviewed under a look-back formula.
What Options are Available Under SHOP?
Private health insurance companies will offer plans on SHOP. Covered California has developed a standard set of benefits that all plans on the SHOP marketplace need to offer. Health plans in Covered California will be offered in “tiers” of coverage: platinum, gold, silver and bronze.
- Bronze – 60 percent of the benefit costs of the plan covered. This represents minimum affordable coverage.
- Silver – 70 percent of the benefit costs of the plan covered.
- Gold – 80 percent of the benefit costs of the plan covered.
- Platinum – 90 percent of the benefit costs of the plan covered
The difference between the tiers is not what benefits are covered, but the cost of coverage. For example, platinum plans have higher premiums and people pay less when they see the doctor. Bronze plans have much lower premiums, but people pay more when they see the doctor.
Small businesses can decide what level of coverage to offer, and employees may pick any plan offered within the exchange at that level. The four levels are based on the specified percentage of costs the plan will cover:
Once a small business decides which tier of coverage to offer employees, it will then decide how much of the premium to will pay, either a specific dollar amount or a percent of the premium. Under the ACA, a contribution must be at least 50 percent of the premium’s cost. This minimum threshold is required even if you are not applying for the tax credit. Your employees can then pick any plan within that tier, and they will pay the remainder of the premium.
Small businesses will make a single monthly payment to Covered California, which will then handle premium payments to the specific health plans employees choose.
What do Employees Do Once a Small Business Gets SHOP Insurance?
Once a small business decides to get SHOP insurance, the Marketplace will notify your employees and tell them how to sign up. There are tools to help you create an employee roster, set up an employee email distribution list, or download the offer of coverage and distribute it to your employees manually.
Do Small Businesses Have to Cover Employees’ Families, Too?
All of the plans offered in SHOP will be open to spouses and dependents. But small businesses can decide whether to offer insurance to employees only or to their families as well. If you decide against covering family members, they can still seek coverage on the individual market offered by Covered California. Dependents may also be eligible for Medi-Cal.
What is I am Self-Employed?
If you are self-employed with no employees, you are not considered an employer. You can use the individual Marketplace to find coverage that fits your needs. If your small business does have employees (generally, workers whose income you report on a W-2 at the end of the year) you are considered an employer eligible to obtain coverage for your employees on SHOP.
What Businesses are Eligible for the Tax Credit?
Businesses that offer insurance to employees can claim the credit on their income tax returns, if they are eligible. The major qualifying factor is the size of the business. Only companies with 25 or fewer full-time equivalent employees are eligible. Eligibility is further determined by several other factors, including:
- The average annual wages are less than $50,000 per full-time equivalent employee.
- Payment of at least 50 percent of the health insurance premium for its employees.
The tax credits are available on a sliding scale, and is highest for companies with fewer than 10 employees who are paid an average of $25,000 or less. The smaller the business, the bigger the credit. In 2014, the health-care tax credit for companies with fewer than 25 employees will increase from 35 percent to 50 percent, as long as the company participates in SHOP. Tax credits are available for a total of two consecutive years.
Here is an example of how the tax credit works:
Number of employees: 10
Wages: $250,000 total or $25,000 per employee
The amount employee decides to contribute to premiums: $70,000
Tax credit amount: $35,000 (50% of employer’s contribution)
What Happens in 2015?
In 2015, small businesses that do not comply with ACA will have to pay a penalty. The penalty will apply to small businesses that:
- Have over 50 full-time employees and choose not to provide insurance
- Do not pay at least 60% of employee’s premiums
- Provide insurance that does not meet the minimum standards set forth by the ACA (i.e., the “bronze” plan)
- Provide insurance that exceeds 9.5% of family income
If an employer does not offer coverage and at least one employee receives a subsidy in Covered California’s Individual Marketplace, the penalty is $2,000 annually multiplied by the number of full-time employees, excluding the first 30 employees.
If an employer offers coverage but the insurance plan offered is deemed inadequate or unaffordable, and a small businesses’ employees purchase insurance through Covered California and receive a tax credit for doing so, the penalty to the employer is $3,000 annually for each full-time employee receiving the credit, up to a maximum of $2,000 multiplied by the number of full-time employees, excluding the first 30 employees. (This is the same as the maximum for employers who do not offer coverage). An insurance plan is deemed “inadequate” if it does not pay at least 60 percent of health care expenses for a typical population, as defined by the IRS. An insurance plan is deemed “unaffordable” if employees have to pay more than 9.5 percent of family income to purchase it.
Fees are increased each year by an amount equal to the growth in insurance premiums.
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Axis Legal Counsel advises small businesses throughout California on numerous issues, including legal/regulatory compliance, employment, healthcare, risk management, corporate governance, and numerous other matters. Axisprovides on-demand “in-house” corporate counsel advice for small businesses without dedicated legal departments. To obtain information fromAxison any matter, contact firstname.lastname@example.org or call (213) 403-0130.