Employee Healthcare Premiums

Before 2015, the answer to this question was pretty simple for business owners, irrespective of their trades and scale of operations – insurance was a matter of their own decision. But, with the implementation of Affordable Care Act (ACA) in 2015 followed by the “Transition Relief” in January, 2016, this question now carries a much heavier weight. Employers must abide by the new rules of ACA now, in order to avoid being identified as non-conformant business and then getting penalized by the IRS.

Here’s a concise description of the current situation in this regard, in compliance with ACA:

• If the business employs no other people than the owner: No question of a separate employee health care program, obviously.
• If the business employs less than 50 full time employees (FTEs): They are not mandated to offer health care benefits to the employees these businesses are termed as Small business as per ACA. However, should one such small business chooses to provide health care benefits to its employees –
  • Employers with less than 25 FTEs may be eligible for Small Business Health Care Tax Credit up to 50 % of the total premium paid  if they meet certain other criteria as below:
    • Take care of at least 50% of employees’ premium costs
    • Less than 25 FTEs in total, whose average annual wages be less than $50,000
    • Opt for the employer’s own coverage through the same plan that is in use for the employees
  • Employers with 50 or less employees would be able to buy health care coverage through Small Business Health Options Program (SHOP) in favorable rates – once that becomes effective. However, they can always claim a tax deduction on the health insurance premiums paid by them in one financial year.
• Employers with more than 50 FTEs: They qualify as Applicable Large Employers under ACA and are mandated to offer health care benefits to their employees through a company insurance plan. Failing to do so would warrant the penalties owed to IRS, named as Employer Shared Responsibility (ESR) payments. The ESR payment amounts to $2,000 per uninsured employee, exempting the first 30 full-time employees, for any month on which the insurance coverage was not provided. This ESR provision of ACA applies to all types of businesses including for-profit organizations, non-profit organizations and government institutions.

And now, here comes the question: How much should the business owners pay for the health care premiums for their employees?

The answer is quite straight cut. Some employers may choose to pay the full premium for their employee’s coverages, while others may require their employees to pay up a portion of the premium costs, as long as the employee contribution is Affordable, as defined in ACA. As per the ACA, an Affordable premium for insurance may be priced at a maximum of 9.5% of the employee’s yearly household income. However, the small business owners with less than 25 FTEs having annual wages below $50,000 must pay at least half of their employees’ healthcare premium to enjoy the Tax credits from IRS.

Word of caution:

Any business owner must never decide to pay directly into their employees’ individual health care plans, because of the following reasons:

1. Paying premiums for Individual Health Insurance of the employees, instead of a qualified Plan, showcases the Employer as Endorsing that Individual Health Care Plan, even when the plan does not fulfil the required ERISA criteria. This puts the employer in non-compliance with federal laws.
2. When the employer pays for the employee’s Individual Health Insurance without a qualified Plan, those payments become Taxable Income on the Employee.

An employer that pays health insurance, is one of the most valued benefits for an employee and is considered as an important tool for hiring and retaining top talents in the company. In today’s competitive market, business owners of all scales and industries evaluate different strategies to figure out an optimized plan for their employees’ health insurance and pay for the same, even if in Defined Contribution mode.