Many Americans depend on receiving affordable health care coverage through their employer. If you are a small business owner with employees, you might be wondering if you are obligated to provide a group health plan of some sort.
Even if you aren’t obligated, you might wonder if there are benefits to you, as an employer, in providing group health insurance coverage to employees as part of a benefits package. In this guide, we will cover the ins and outs of employer health insurance obligations for businesses of all sizes.
Is it Illegal Not to Offer Health Insurance?
In general, employers are not legally required to offer health insurance to employees. However, under the Affordable Care Act (ACA), employers with 50 or more employees or 50 full-time equivalent (FTE) employees who don’t offer health coverage to at least 95% of full-time employees must pay a penalty called the employer shared responsibility provisions.
Employers covered by the Fair Labor Standards Act (FLSA) are required to provide employees with a notice about the health insurance marketplace and whether they offer employer-sponsored health coverage.
Affordable Care Act (ACA)
Many of the rules governing employer health care obligations come from the Affordable Care Act (ACA), which was enacted in 2010. The goal of the ACA is to make affordable coverage available to everyone, regardless of their circumstances and without having to meet eligibility requirements.
The employer mandate under the ACA applies to businesses with 50 or more FTE employees and requires that these businesses offer health insurance or pay a penalty. The ACA also specified additional rules that individual insurance providers must follow, including a requirement that 80% of insurance premiums must go toward medical care, or the insured individuals were entitled to reimbursement.
The next few sections will outline the effects of the ACA on businesses with more or fewer than 50 FTEs, and you can find additional information on the Healthcare.gov website.
Businesses With 50 or More Employees
The ACA’s employer shared responsibility provisions require that applicable large employers (ALEs) must offer a health plan meeting minimum essential coverage requirements (affordable and provides “minimum value”) or make an employer shared responsibility payment to the IRS. This includes coverage for employee dependents, as well.
An ALE is any employer with an average of 50 or more full-time employees per year or the equivalent. An employee is considered full time if they work at least 30 hours per week or 130 hours per month. FTEs are computed by taking the total number of hours of all part-time employees for a month and dividing the total by 120. (More details can be found on IRS.gov.)
Employers must provide a summary of benefits and coverage form, which explains the details of the health insurance plan, including the deductible, the health insurance premium costs, and other information. Moreover, new employees must be notified of medical plan options within 90 days of hire and have the option to change plans each year during an open enrollment period.
Businesses With Fewer Than 50 Employees
While small employers are not required to offer health plans to their employees, they are incentivized to do so through the Small Business Health Options Program (SHOP), which qualifies them for the Small Business Health Care Tax Credit.
SHOP insurance offers many benefits, including:
- Plan flexibility (You can offer employees one plan or let them choose from different plans.)
- The ability to offer health coverage, dental coverage, or both
- The ability to choose how much to pay toward premiums, including whether to cover dependents
- The freedom to decide how long the waiting period is for new employees before they can enroll
Keep in mind that offering health benefits to employees can attract more skilled workers and increase retention.
Do I Have to Offer Health Insurance to All Employees?
Whether you are incentivized to offer health insurance as an ALE to avoid penalties or are a small employer considering offering health insurance benefits, you might wonder if such benefits have to be applied to all employees.
Here’s where things get a little tricky. There are laws to prevent discrimination. If two or more employees can be considered “similarly situated,” health benefits must be offered to them equally. You can only offer different benefits if there are clear distinctions between employee classifications, such as full time versus part time, different geographical work sites, or distinctly different job types.
Whether or not you are required to offer insurance, if you choose to do so, the employer plans you offer must be equally offered to all individuals in similarly situated groups. This requirement comes from the Health Insurance Portability and Accountability Act (HIPAA), which also applies to discriminatory practices, such as discrimination based on health factors or health history.
Also, if you offer employees an employment contract when you hire them and the contract includes a statement indicating that you will offer health insurance, you will remain obligated to offer that insurance as long as the contract is in effect.
Small Businesses and the Affordable Care Act
If you are a small business owner considering whether to purchase health insurance for your employees, here is a summary of considerations as they pertain to the Affordable Care Act:
- The ACA established the SHOP marketplace, allowing small employers a way to cost-effectively offer coverage to their employees.
- If you offer health insurance to employees, it must be offered to all employees similarly situated when they become eligible.
- You must provide a summary of benefits and coverage (SBC) form describing the health plan, what it covers, and what it costs.
- You may choose to offer flexible spending accounts (FSAs), but employees cannot contribute more than a limited amount. (Employer contribution is not limited.)
- The ACA offers additional incentives for workplace wellness programs, which can reduce costs by up to 30%.
- Once you have more than 50 FTE employees, you will be subject to employer shared responsibility payments if you don’t offer health insurance.
- If you provide self-insured health coverage, you must file an annual return with the IRS, reporting information for each covered employee. If you offer coverage through an insurance policy, the policy issuer will file the return.
- You may qualify for the small business health care tax credit if you cover at least 50% of premium costs for your employees, have fewer than 25 FTE employees, meet certain wage payment requirements, and purchase the coverage through the SHOP marketplace.
The Benefits of Offering Health Plans
If you are a large employer, offering health plans to your employees is the obvious way to go. You will either incur costs by offering a plan or incur costs by having to pay penalties. In the latter case, you have more control over your expenditures, and you can offer your employees a benefit.
The choice of whether to offer insurance is a little more difficult if you are a small employer. However, keep in mind that employee benefits packages that include health insurance are much more attractive to prospective employees and can increase retention. On top of that, offering health insurance plans through SHOP may qualify you for tax credits. Finally, showing employees that you value their health can improve morale, and healthy employees who are well taken care of will take fewer sick days.
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