November 1, 2014 by Tony Novak
Small businesses are cancelling employer-sponsored group health insurance at a faster than expected pace. While speculation of this transition existed as far back as early 2010, only recently has enough evidence been reported by news sources to confirm the trend. A recent Wall Street Journal article suggested that the under 10 employee group market could be almost wiped out over the next two years. Every insurance weighing in on the issue in recent press has reported a similar sharp drop off.
The reasons for this strong trend seem to be:
1) HIGHER NET COST – The value of the insurance subsidies available through the individual insurance exchange exceeds the combined value of the tax deductions and employer tax credits. This, more than anything else, is the driving factor.
2) LACK OF CHOICE – Small group insurance does not give employees enough choice with their health insurance selections.
3) LACK OF INFORMATION – The structure of the small group insurance market leaves a gap in independent professional service for the employees. Employees typically have access only to the health insurance company or those selling the insurance plan).
4) NO ALTERNATIVES OFFERED – A number of employees can and should use lower cost non-qualified health insurance options that are not typically offered through group insurance plans. (I covered some of these in another blog post).
5) DIFFICULTY WITH EMPLOYER TAX CREDIT – A two-year partial tax credit is included in tax law to reduce the cost or employer-paid insurance but few employers have qualified. I don’t know of any that have actually been examined and survived an IRS audit.
6) EASIER ACCESS TO TAX-FREE SUPPLEMENTAL PLANS – It used to be difficult and expensive for a small business to legally provide tax-free payments for out-of-pocket health care expenses other than insurance premiums. The two main options available are Health savings Accounts (HSA), and Flexible Spending Accounts (FSA). Now this process is easier and less expensive for employees covered under an individual Obamacare policy. This ability to make a direct tax-free payment helps ease the financial pain from ACA changes like higher insurance deductibles, increased out-of-pocket expenses and a loss of tax deductions for the individual health insurance. HSAs require a specific type of insurance that is now widely available on the exchange. FSAs allow employees to direct of portion of their pay toward health care expenses not covered by insurance.
Businesses with a higher percentage of white-collar workers, firms with higher-than-average payroll and the group insurance brokers are strongly opposed to this trend. (No doubt I’ll get some nasty emails just for writing this blog post). Yet the new evidence indicates that the trend has enough momentum that it will continue regardless of the commentary.