As small businesses in California consider the purchase of employee health insurance through the newly formed California Health Benefits Exchange, experts in insurance and accounting in the North Bay said that the federal tax credits connected to the program are likely to be a key factor during the coming enrollment season.
Similar to tax credits available for individual plans on Covered California — the state’s version of the federally mandated health insurance exchange and a one-stop shop for comparing participating plans — the credits available to qualifying small businesses stand to significantly impact the cost-competitiveness of those plans compared to the open market, insurance brokers said.
More than 500,000 small businesses employing more than 4.5 million workers in California will be eligible for plans on the exchange, which will first be available to companies with fewer than 50 employees, according to Covered California.
Yet it is unknown how many of those businesses might qualify for the subsidy, as well as the projected enrollment for this inaugural season, according to a Covered California spokesperson. And while the small-business side of the exchange is expected to play a smaller role than the side serving individuals, brokers said they are now looking at how to factor in those elements while helping small group clients determine a course of action in the coming year.
Covered California announced the launch of the so-called Small Business Health Options Program — or SHOP — on Aug. 1. The announcement listed the six providers participating in the 19 regions across the state, with four providers — Western Health Advantage, Blue Shield of California, Health Net of California and Kaiser Permanente — participating in the North Bay.
Companies with up to 25 employees and average annual compensation of less than $50,000 per employee will be eligible for the federal tax credits to offset the costs of providing insurance. The greatest benefit will be for companies with 10 employees or fewer and average compensation of less than $25,000, particularly for those who contribute more to employee premiums.
Those credits are worth up to 35 percent of the cost of premiums in 2013, and scale up to 50 percent for SHOP health plan participants in 2014. Victor McKnight, a principal at EPIC Insurance Brokers in Petaluma, said he anticipated fewer companies will qualify for those credits in California than elsewhere in the U.S.
“If you have a couple of high-comped employees — even if you take the owners out — it’s going to skew the numbers so they won’t get it,” he said. “If we were in Des Moines, Iowa, that would be different.”
Premium contributions to family members in the company will also not count towards the subsidy calculation, potentially impacting the benefit for small family-operated businesses. But for small businesses that do qualify, the credit “can be an incredibly tax-efficient way to provide increases to employee wages,” said Gerarde Monet, tax director at Pisenti & Brinker.
A small business could provide health insurance through the exchange instead of an employee raise, giving the employee a tax-free benefit while giving the employer the credit, Mr. Monet said.
“A final thing to remember is that a tax credit offsets tax liability dollar-for-dollar. It’s much better than a deduction,” he said.
Even with a large tax credit, the very smallest of qualifying employers might face the most difficult decisions in providing benefits, said Bud Martin, senior vice president of employee benefits at Wells Fargo Insurance Services in Petaluma.
“If the employer says, ‘I’m going to offer you coverage,’ and it turns out the (employee) contribution is less than 9.5 percent of the family income, then the family can’t buy (subsidized) insurance on the individual side,” Mr. Martin said.
The tax credit remains one of the key benefits to plans currently available on the exchange, brokers said. Unlike the individual side, the federal contribution to fund those deductions under the Affordable Care Act will expire for small businesses after two consecutive years and force those plans to compete directly with those on the open market.
It remains to be seen what pricing employers will face for plans on the exchange after those credits expire, and Covered California currently does not have projections. Rates in the North Bay are expected to be competitive with open-market premiums in the upcoming enrollment season, according to Covered California.
The exchange will continue to offer benefits that brokers said are likely to appeal to employers. Employees will be able to utilize the exchange’s proprietary technology platform to easily compare and select which plan they prefer based on the employer’s chosen contribution level, ranging from high-deductable “bronze” plans to premium “platinum” plans.
Still, the subsidy remains a key draw.
“There’s not a lot somebody will get by going through the SHOP other than the tax subsidy,” Mr. Martin said. “This is the state’s way of saying, ‘If you want the tax credit, you do it here.’”
Information about the SHOP platform, and specific plan pricing, is still forthcoming as insurance professionals around the state are trained to sign small-business clients up for plans on the SHOP.
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