In October 2013, as part of the Affordable Care Act, small businesses—those with 50 or less employees—were no longer able to offer reimbursement for health insurance premiums. Offering Health Reimbursement Arrangement (HRAs) had been a way for small businesses to assist employees with health insurance premiums, without having to navigate the complexity of offering a group plan. By 2015, many employers—71 percent, in fact1—chose not to offer health insurance to their employees.
The IRS enacted this law to avoid “double-dipping” scenarios: employees wouldn’t be able to access low-cost marketplace insurance, the premium tax credit, and receive tax-free money from their employer to pay all or part of the premium not covered by the credit. Employers couldn’t get a waiver on the penalty to offer the insurance and reduce their income by the money given to an employee. From a health insurance and benefits package perspective, this put small businesses in a bad position.
After three years of trying to get the Small Business Healthcare Relief Act passed to reverse the HRA ruling, it was bundled the 21st Century Cures Act, which was signed into law on December 13, 2016. Section 18001 (the former Small Business Healthcare Relief Act) changed the way small businesses could use HRAs, once again allowing small business owners that don’t offer group coverage to contribute to employees’ HRAs.
This allowance revitalizes the defined contribution model and provides a host of benefits to both the employer and the employee:
- Employees have the freedom of choosing a plan from a public exchange or private exchange that best suits their needs without their selection being driven by employer preference.
- Many group plans only offer a couple of insurance choices to employees, whereas exchange marketplaces may offer many more medical and ancillary product options.
- Employers, and therefore employees, can also leverage mixed coverage options—group and individual coverage no longer have to be mutually exclusive of each other.
- Financial assistance via reimbursements (especially for those who earned out of tax credits) makes monthly premiums more affordable.
- It allows employers, especially those that do not offer group insurance at all, to enhance their benefits packages, helping them attract a stronger talent pool while taking advantage of tax savings associated with HRAs.
But, employers aren’t the only ones that need to be thinking about these new changes. As employers contemplate ways to take advantage of HRAs, insurers and brokers have plenty to consider as well. For insurers with a strong small group business, this change could result in a loss of valuable group members. Being able to enroll those members into individual plans can help retain “members for life” as people shift between group and individual coverage.
Alternatively, insurers can look to this change as a way to build a group business by focusing on the 71 percent of employers who currently offer no coverage. According to the Bureau of Labor Statistics, this 71 percent translates to 33 million Americans working in the private sector for a business with 49 or less full-time employees. This is an incredibly large market that insurers will want to cater to. Creating packages that offer both group and individual options for employers to offer their employees can help insurers retain and even grow their business. How can this be best accomplished?
- Insurer-led private exchanges can be created so the employees can shop as easily, and in many cases more easily, than on public exchange. Plus, offering a private exchange can help employees better navigate the often hard-to-understand defined contribution approaches. Delivering plan options that show final premiums after applying a tax credit or HRA contribution can help employees make the best financial decisions possible, and makes enrollment simple.
- Since many employers may have both group and some individual coverage options, insurers need systems that can deliver both.
- Insurers should seek out HRA partners so they can offer a turnkey solution to small employers that includes both medical and ancillary products and HRA administration.
1Agency for Healthcare Research and Quality, Center for Financing, Access and Cost Trends. 2015 Medical Expenditure Panel Survey-Insurance Component