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California Small Business Owners Can Obtain Health Insurance for Themselves and Their Employees Through the SHOP Exchange

The Affordable Care Act (ACA) does not require businesses with fewer than 50 eligible employees to obtain health insurance for its employees. (Note: In 2015, the first year in which the "employer mandate" is in effect, only businesses with 100 or more employees are subject to the mandate; but in 2015 the cutoff for the employer mandate drops to include businesses with 50 or more employees). That's good. As a small business owner you have options - you can choose to obtain health insurance for your employees or you can choose not to. It's up to you. If you choose not to do so, your employees may still benefit from the ACA by going into the personal health insurance market during the open enrollment period and obtaining coverage for herself and her family; perhaps with the benefit of ACA-provided subsidies. 

But despite the cost and administrative complexity associated with employee health insurance programs, many small business owners do choose to obtain coverage for their employees. Why? Employee recruitment and retention is one reason often given by small business owners. Employees may be more likely to sign on with an employee and to stay with him if health insurance coverage is a part of the compensation package. A happier, healthier, more productive, and less absentee-prone work force is another reason given. And some small business owners just like the peace of mind they get from providing an important benefit to their employees. In addition, small business owners who obtain group coverage for their employees (and perhaps their employees' families) can include coverage for themselves (and their families) at the generally lower group rates.

The SHOP Marketplace: How it Works in a Nutshell

If you have considered obtaining health insurance for your employees, you probably realize that the process can be complicated and time consuming. You are also aware that cost is a factor. Covered California is the new health insurance marketplace operated by the State of California under the ACA. You may already be familiar with Covered California as a marketplace for individuals to shop for, compare and purchase personal and family policies from private health insurance providers, in may cases with the benefit of subsidies in the form of tax credits. Covered California has also created the Small Business Health Options Program (SHOP), in order to provide small businesses in California with the ability to offer multiple health insurance plans to their employees. The program began in late 2014 (to be effective in 2015) and offers four tiers of insurance coverage (denominated platinum, gold, silver, and bronze) from each of six private insurance providers: Blue Shield of California, Chinese Community Health Plan, Health Net, Kaiser Permanente, SHARP, and Western Health Advantage. Each plan contains the coverage and contribution requirements mandated by the ACA, and has been largely  standardized so that you can easily compare benefits, contribution costs (copay and co-insurance requirements and deductibles) and quality in the SHOP Marketplace. Participating employers select the coverage level or metal tier that will be available to employees. Employees then select a health plan within the designated tier. Employers also select the percentage of contribution that they will make toward premiums, and decide whether employees will have the option of including eligible family members in their coverage. SHOP then acts as administrator of the employer program, submitting a consolidated monthly bill to the employer and dealing with the insurance providers. 

Some small business owners can qualify for significant tax credits if they obtain health insurance for their employees through SHOP. Beginning in 2014, these credits are available only to qualifying small businesses that obtain employee health coverage in the SHOP marketplace. Credits range as high as 50 percent of insurance premium expenses in the case of for-profit businesses and 35 percent in the case of tax-exempt organizations. Please see the section below on Tax Credits for more information.

Frequently Asked Questions

          Tell me about employer eligibility and requirements

In 2015, the first year in which the employer mandate went into effect, only businesses with 100 or more eligible employees are required by the ACA to obtain health insurance for employees. However, beginning in 2016, businesses with 50 or more employees will also become subject to this requirement, and this will continue to be the cutoff figure for the ACA employer mandate going forward. This requirement is enforced by tax penalties on those businesses that do not comply. SHOP is currently available to businesses with 50 or fewer eligible employees, although SHOP anticipates becoming available to businesses with 100 or fewer eligible employees beginning in 2016. (Please note that the tax credits available for SHOP users are limited to businesses with fewer than 25 employees. See the discussion of Tax Credits for more information). 

In addition, at least 70 percent of employees must elect to be covered under employee-offered health insurance for the program to be eligible for SHOP. 

The growth of your business will not effect later eligibility. Federal regulations require that groups cannot be terminated or prevented from re-enrolling simply because the group grows beyond the initial eligibility limits -- say from 40 to 60 eligible employees.

          Tell me about employee eligibility and requirements

To be eligible, employees must work an average of 30 hours per week, determined over a month of work. Employers may choose to offer coverage to part-time employees who average between 20 and 29 hours per week. Employees are not required to accept coverage offered by employers. (But note that at least 70 percent of a business's eligible employees must elect coverage under the employer plan in order for the plan to be eligible for SHOP). An employee may choose to obtain coverage in the individual insurance marketplace, including through Covered California, but subsidies available to the employee as a result of the ACA may be affected by the employer's offer of affordable coverage.

          Tell me about the insurance plans that are available

There are six private insurers currently participating in the SHOP Marketplace: Blue Shield of California, Chinese Community Health Plan, Health Net, Kaiser Permanente, SHARP, and Western Health Advantage. Not all insurers offer plans in all parts of the state. For example, SHARP is only available in the San Diego region and Chinese Community Heath Plan is only available in the San Francisco and San Mateo regions. Each insurer offers at least one plan in each plan tier: platinum, gold, silver and bronze. Generally, the tiers indicate the extent of coverage available and the non-premium costs (co-pays, con-insurance, and deductibles) associated with the plan. Platinum plans will have the most extensive coverage and the lowest deductibles, co-insurance and co-pays, but will have the highest premiums. Bronze plans will have the least extensive coverage and the highest co-pays, co-insurance and deductibles, but will have the lowest premiums. In a bronze plan employees would expect to pay about 40 percent of their health care expenses through cost sharing in the form of co-pays, deductibles and co-insurance, in addition to any employee contribution to premiums. By comparison, employee cost sharing in a platinum tier plan would be about 10 percent. All plans include at least the minimum essential coverage mandated by the ACA. Employers and employees will be able to compare the coverages and costs associated with the plans available to them in a reasonably convenient fashion.

          Tell me about plan selection

Both employers and employees play a role in the selection process. The employer will select the tier of coverage (platinum, gold, silver or bronze) that he or she wishes to make available to employees. Each employee then will select the particular plan within that tier that best satisfies his or her needs. 

          Tell me about employer contributions

In general, the employer will elect what percentage of premiums it will pay. However, to be eligible to use the SHOP Marketplace, employers must agree to contribute at least 50 percent of premium costs. The employer's contribution will be determined as follows: first, the employer will select the tier (platinum, gold, silver or bronze) that will be available to employees; second, the employer will select the "Anchor Plan" (or "Benchmark Plan") within that tier on which the employer will base its contributions; finally, the employer will choose the percentage of contribution (based upon the premiums applicable in the Benchmark Plan) that it will contribute -- keeping in mind that the employer must contribute at least 50 percent to be eligible to participate in SHOP. The employer will also choose whether or not to include employee dependents in the offered coverage.

Tax Credits

Small businesses that purchase employee health care through SHOP may be eligible for tax credits. The credits range up to 50 percent of the business's eligible premium expense, depending upon the number of employees, the average annual income of employees, and the percentage of the employer's contribution to premium costs. In general, the fewer the FTEs, the lower the average annual salary, and the greater the employer contribution, the higher the credit. To be eligible for credits, the business must have fewer than 25 full-time equivalent employees (FTEs) for the tax year, the average wages of FTEs must be less than $50,000 per year, and the business must contribute at least 50 percent of the employees' premium costs. Generally, an employee is considered an FTE if he or she works an average of 30 hours or more per week. 

These tax credits have been available since 2010, but the maximum allowable tax credit was increased from 35 percent to 50 percent for for-profit businesses in 2014 (and from 25 percent to 35 percent for not-for-profit businesses), and will remain at that level for the eligibility period. 

If the employer does not have taxable income in the year in which the tax credits are earned, the credits may be carried forward or back. Premiums contributed by the employer and not covered by the tax credits remain eligible as normal business deductions. The tax credits may not exceed the amount that the employer is required to withhold in income and Medicare taxes and may also not exceed the employer's share of Medicare taxes. These credits are available for two years.

The significant "take-aways" regarding the tax credits are:

                    * Beginning in 2014, the credits are only available to small business employers who obtain health insurance coverage for their employees through SHOP.  Employers who maintain insurance through the private market outside of SHOP will not qualify.

                    * The credits have increased beginning in 2014 to up to 50 percent of eligible premium expense, and will continue for two years.

Consult your tax professional about the details of the tax credits and your eligibility.

Employee Health Insurance Outside of the SHOP Exchange

If your small business decides to offer health insurance to its employees (and remember that businesses with less than 50 employees are not required to do so) and if your business is eligible to use the SHOP exchange, you will almost certainly decide to purchase insurance through the SHOP Marketplace because beginning in 2014 that is the only way to obtain the valuable tax credits. However it may be that your business does not qualify for the tax credits. Say, for instance, because average salaries at your company exceed $50,000 per year. In such cases you would still be able to obtain health coverage in the private market. The insurance companies that offer plans through SHOP offer the same or very similar plans in the private market. 

If Your Business Decides Not to Offer Health Coverage

As a small business owner with fewer than fifty employees you may look at the pros and cons of offering health coverage to your employees and decide that it is not right for you. If you have less than fifty eligible employees, the Affordable Care Act does not penalize you for that decision. However your full time equivalent employees will still be required to obtain individual coverage under the individual mandate requirements of the Act (unless their incomes fall below a threshold level), and they will be subject to tax penalties if they do not comply. For this reason you may want to assist your employees by providing them with contact information with Covered California or with a Covered California certified licensed agent like myself.

The process of analyzing and understanding the group health insurance market is time consuming and complicated. Small business owners who are already fully occupied with operating and managing their businesses may want some assistance in understanding what their true options are. As an independent licensed insurance agent and as an authorized agent for the new SHOP marketplace, I can help you navigate through the insurance market and make decisions that are right for your business. Please contact me if I can be of assistance.

Alex Pfeifer
Pfeifer Insurance Brokers
650 762-8070

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