Column 101 - June 30 small employer deadline is closing in

June 30 small employer deadline is closing in


Small employers who are paying for individual policies for their employees on a pre-tax basis have until June 30th to make changes.  If they do not, they may face stiff penalties.

Some small employers have found that group insurance costs were too high for their budgets.  Individual policy premiums have historically been lower than group.  So these small employers would agree to pay the employees' premiums on a pre-tax basis for the employees.  This was often accomplished through a special account call HRA (Health Reimbursement Account) or a FSA (Flexible Spending Account).

The ACA (Affordable Care Act, aka Obamacare) had provision that prohibited this practice. Non-compliance could subject the employers to fines of up to $100 per day!

Like many of the other provisions, enforcement was postponed to give employers time to adjust their plans and practices. Groups of 50 or under have until 6/30/2015 for this transitional relief.

There are other challenges with this strategy that have made it tricky for employers.  For example, if the employer says that "we provide individual benefits reimbursement" after 90 days of employment, they may actually be unable to deliver on that promise.  The reason is that the individual market is under strict open-enrollment rules.  Absent being in the open enrollment period or qualifying for a SEP (Special Enrollment Period), the employee is simply unable to apply for individual coverage.

Those new hires that had chosen to pay the IRS penalty and not enroll, would be forced to wait until the following open enrollment period. So, if the employee had another job offer from a company that could guarantee the benefits, then the employee would likely choose the other job.

However, it's important to note that an employer may still simply increase the employee's wages, pay the payroll taxes and let them buy their own coverage.  The employer and employee lose a bit of tax advantage since the employer will pay payroll taxes on the amount given to the employee and the employee will pay the premium with an "after tax" dollar.

Small employers that are considering changing this arrangement and who wish to provide a small group plan have some good news.  Many of the carriers have dramatically relaxed their participation requirements. 

So rather than being required to cover 70-75% of the eligible employees, some carriers are down to as little 25%.  It's a great time to take a look at the ACA compliant group plans and see how it pencils out for the group.  Employers are not required to pay the entire premium for the employees. For example if the employee's premium is $300 and the employer pays 50%, the employer cost is $150 monthly.  Since the plans are age rated, an older employee will be more costly.

An employer may also designate a flat dollar amount as the premium contribution.  For example,  the employer could pay a flat $200 for each employee and allow the employees to pay the difference out of their paycheck with a pre-tax dollar. To do so, they need to establish a Premium Only Plan (POP) under Section 125.  The cost to do so is usually about $100.

 If the employee is in a 25% tax bracket, the 25% savings would bring the cost of each $100 premium down to $75. Further, the employer pays reduced payroll tax, because the salary deferral reduces the income for payroll tax purposes.  Simply, even though the employee is paying $100, their paycheck is only reduced by $75. 

So, if you are a small employer with the individual arrangement in place, it's now time to look at your options.  The meter is running! Plus good benefits tend to keep good employees!