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THE HISTORY & FUTURE OF SMALL BUSINESS HEALTH INSURANCE
WHITEPAPERS
ZANE BENEFITS WHITEPAPERS | THE HISTORY & FUTURE OF SMALL BUSINESS HEALTH INSURANCE
www.ZaneBenefits.com 1
The History & Future of Small Business Health Insurance
Executive Summary
1. Minimum contribution and participation requirements are forcing small businesses to stop
offering traditional health insurance plans. In order to offer health insurance, small
businesses are required to contribute a minimum percentage of the premium for each
employee (typically 50 to 75 percent). Additionally, coverage may be rescinded if a required
number of employees do not enroll in the plan (typically 75 percent of eligible employees).
2. The number of small and medium businesses (with less than 200 employees) offering
coverage is down from 68 percent in 2000 to 57 percent in 2013.
3. The post-2014 Individual Market’s features of guaranteed acceptance, choice, portability,
and tax credits have made individual health policies attractive to employees.
4. The number of policyholders in the Individual Market reached 30 million in 2012 and is
projected to increase to more than 150 million by 2025.
5. New Defined Contribution Healthcare arrangements allow small businesses to reimburse
employees for their individual health insurance costs – enabling small businesses to offer
employee health benefits for recruiting and retention purposes without absorbing the
premium and administrative costs of sponsoring traditional group health insurance.
6. Due to advantages of the post-2014 Individual Market and the availability of new Defined
Contribution Healthcare arrangements, 60 percent of small businesses will eliminate
traditional employer-sponsored health insurance in favor of Defined Contribution
Healthcare and individual health plans by 2017.
ZANE BENEFITS WHITEPAPERS | THE HISTORY & FUTURE OF SMALL BUSINESS HEALTH INSURANCE
www.ZaneBenefits.com 2
Introduction Since 2000, the percentage of Americans covered by job-based health insurance has
steadily declined. Facing double-digit growth in health insurance premiums, many small
businesses (defined as employers with less than 50 employees) have either eliminated
health benefits or redesigned the plans to include higher deductibles, larger co-payments,
and greater premium-sharing by employees.
This price pressure has created a paradigm shift in the way small businesses offer
employee health benefits – a shift from an employer-driven “Defined Benefit” model to an
individual-driven “Defined Contribution” model. While the transition from employer-
based health insurance to individual health insurance has been gradual since 2000, the
post-2014 enhancements to the Individual Market have accelerated this shift.
As a result, the Individual Market is expected to expand from 30 million insureds in 2012
to more than 150 million insureds by 2025.1
This paper focuses on the first phase of this shift, which will be led by small businesses.
Adopting Defined Contribution Healthcare and individual health policies will allow small
business owners and their employees to save 20 to 60 percent ($4,000 to $12,000 in
savings per family per year) on health insurance. Due to the significant cost advantage for
small business owners and their employees in the Individual Market, 60 percent of small
businesses will eliminate traditional employer-sponsored health insurance in favor of
Defined Contribution Healthcare and individual health plans by 2017.
1 According to the U.S. Census, nearly 171 million Americans were covered by employer-sponsored health insurance in 2012 and nearly 31 million were covered by individual health insurance in 2012 (https://www.census.gov/prod/2013pubs/p60-245.pdf). Dr. Ezekiel J. Emanuel predicts that by 2025, fewer than 20% of employees in the private sector will receive employer-sponsored health insurance (http://boss.blogs.nytimes.com/2014/03/26/why-employers-will-stop-offering-health-insurance). This means by 2025 only 34 million Americans will receive employer-sponsored health insurance, adding an additional 137 million to be insured through the Individual Market. The total Individual Market, then, is expected to grow to 167 million by 2025.
“60% of small businesses will eliminate traditional employer-sponsored
health insurance in favor of Defined Contribution Healthcare and
individual health plans by 2017.”
ZANE BENEFITS WHITEPAPERS | THE HISTORY & FUTURE OF SMALL BUSINESS HEALTH INSURANCE
www.ZaneBenefits.com 3
History of U.S. Employer-Provided Health Insurance
1940s – Creation: Post-World War II
Prior to World War II, most Americans paid for their own medical care. They either paid
their chosen provider directly, or through the Blue Cross nonprofit health insurance
entities which were created to offer guaranteed service for a fixed fee.
Back then, health insurance really was insurance—providing coverage only for major items
like hospitalizations that people could not afford to pay for themselves. Many employees
purchased their own individual or family health insurance policies, sometimes called
personal health insurance policies, just as they do today with homeowners, auto, and life
insurance.
Having witnessed the effects of hyper-inflation on Germany post-World War I, U.S.
leaders and economists were concerned about potential post-World War II inflation. To
manage this consequence, the U.S. Congress and President Roosevelt instituted wage and
price controls during World War II and were determined to maintain them after the war.
In order to grant a concession to labor without appearing to violate wage and price
controls, the federal government exempted employer-paid health benefits from wage
controls and income tax. In effect, this paved the way for wage increases in the form of
non-taxable, employer-sponsored health benefits.
This unreported personal income in the form of health benefits created an enormous
demand for employer-sponsored group health benefits over individual health insurance
policies and incidental medical expenses purchased by employees with their own after-tax
dollars. Employers received a 100 percent federal, state, and city tax deduction for the
cost, and health benefits received by employees were exempt from individual federal,
state, and city taxation.
ZANE BENEFITS WHITEPAPERS | THE HISTORY & FUTURE OF SMALL BUSINESS HEALTH INSURANCE
www.ZaneBenefits.com 4
The potential 2-for-1 tax advantage (depending on the income tax bracket of the
employee) for employer-sponsored health benefits shifted the market away from health
insurance purchased by individuals directly.
By the mid-1960s, employer-sponsored health benefits were almost universal. And, the
employer model worked well while costs remained low and employees stayed with the
same company for their entire career. However, as healthcare costs increased and
employees began to change employers regularly, the system began to erode, starting in the
small employer market.
1980s and 1990s – Guaranteed Issue Health Insurance for Small Businesses
By the late 1980s and early 1990s, the small business health insurance market became
unstable as many insurers only wanted to insure the healthiest groups. As a result, in the
early 1990s, most states adopted a version of the National Association of Insurance
Commissioners’ (NAIC) "Small Employer Health Insurance Availability" Model Act in an
attempt to address this market instability.
The NAIC act stated that insurance companies, as a condition of doing business in a state,
had to “Guarantee Issue” certain plans to small employers (typically defined as 2 to 49
employees). However, small employers could be turned down if they did not meet
minimum participation requirements and/or minimum employer-contribution-to-premium
requirements set by the insurer.
While the NAIC act did make health insurance more accessible to small businesses, it did
not address affordability. Facing double-digit growth in health insurance premiums, many
small employers either ceased offering health benefits or redesigned the plans with higher
cost-sharing by employees.
ZANE BENEFITS WHITEPAPERS | THE HISTORY & FUTURE OF SMALL BUSINESS HEALTH INSURANCE
www.ZaneBenefits.com 5
These annual benefit reductions and/or increased out-lay by employees inevitably led to
an on-going version of adverse selection – a perpetual process referred to as the small
employer group health insurance death spiral.
The death spiral starts when an employee’s cost to participate in the employer plan exceeds
the employee’s willingness to pay. When this happens, the healthiest employees begin to
drop off the employer plan in favor of individual policies. This causes the remaining small
employer risk pool to become “sicker,” resulting in higher insurance premiums on renewal
the following year. Then, the process repeats. Again, the employer reduces benefits to
maintain costs, more healthy employees drop off, and the rate goes up the following year.
This death spiral perpetuates until the small business either: (1) cancels the plan; or (2) is
unable to meet the minimum contribution requirements or minimum participation
requirements set by the insurer, and the plan is canceled by the insurer.
2000s – The Rise of the Individual Market
By the 2000s, the small employer group health insurance death spiral had begun to run its
course. From 1999 to 2013, without accounting for the annual benefit reductions, the cost
to cover a single employee rose from $2,196 per year in 1999 to $5,884 per year in 2013.
Family coverage increased from $5,791 per year in 1999 to $16,351 per year in 2013.2
2 Kaiser Family Foundation (2013). 2013 Employer Health Benefits Survey. Retrieved May 6, 2014 from http://kff.org/private-insurance/report/2013-employer-health-benefits.
“By the late 1980s and early 1990s, the small business health insurance market
became unstable... By the 2000s, the small employer group health insurance death
spiral had begun to run its course.”
ZANE BENEFITS WHITEPAPERS | THE HISTORY & FUTURE OF SMALL BUSINESS HEALTH INSURANCE
www.ZaneBenefits.com 6
Chart: Percentage of Employers Offering Health Benefits 3
Employer Size 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
3-9 workers 55% 57% 58% 58% 55% 52% 47% 49% 45% 50% 47% 59% 48% 50% 45%
10-24 workers 74% 80% 77% 70% 76% 74% 72% 73% 76% 78% 72% 76% 71% 73% 68%
25-49 workers 88% 91% 90% 87% 84% 87% 87% 87% 83% 90% 87% 92% 85% 87% 85%
50-199 workers 97% 97% 96% 95% 95% 92% 93% 92% 94% 94% 95% 95% 93% 94% 91%
All Small and Medium Employers (3-199 workers)
65% 68% 67% 65% 65% 62% 59% 60% 59% 62% 59% 68% 59% 61% 57%
All Large Employers (200+ Workers)
99% 99% 99% 98% 97% 98% 97% 98% 99% 99% 98% 99% 99% 98% 99%
All Firms 66% 68% 68% 66% 66% 63% 60% 61% 59% 63% 59% 69% 60% 61% 57%
3 Kaiser Family Foundation (2013). 2013 Employer Health Benefits Survey. Retrieved May 6, 2014 from http://kff.org/private-insurance/report/2013-employer-health-benefits.
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Single-Coverage Premiums 1999-2013, By Contribution Employee Employer
Source: KFF 2013 Annual Employer Health Benefits Survey
$5,884
$2,196
By 2013, only 57% of small- and medium-sized employers
(defined as employers with fewer than 200 employees)
offered health insurance compared with 99% of employers with 200+ employees.
ZANE BENEFITS WHITEPAPERS | THE HISTORY & FUTURE OF SMALL BUSINESS HEALTH INSURANCE
www.ZaneBenefits.com 7
As a result, the Individual Market expanded and numerous entities were formed to service
the new health insurance consumer including, but not limited to, eHealthInsurance.com,
ExtendHealth, Inc., UnitedHealthOne, and Zane Benefits, Inc.
In 1997, eHealthInsurance.com was founded to service the individual health insurance
consumer online. Today, eHealthInsurance.com has enrolled over 4 million people in
health insurance coverage and is the leading online marketplace for individual and family
health insurance products in the nation. 4
In 1999, Paul Zane Pilzer founded ExtendHealth, Inc. (originally Wellness Services, Inc.) to
distribute Defined Contribution Healthcare and individual health insurance policies
through employers. ExtendHealth eventually focused on offering Defined Contribution
Healthcare to retirees of large U.S. employers. ExtendHealth was acquired by Towers
Watson in 2012 for $435 million.5
In 2003, UnitedHealth Group, Inc. began consolidating several individual health insurance
companies to expand its reach in the individual health insurance market including Golden
Rule, American Medical Security, Oxford Health Plans, and PacifiCare. UnitedHealth’s
individual business unit now operates under the brand UnitedHealthOne.6
Paul Zane Pilzer founded Zane Benefits in 2006 to help small employers take advantage of
new Defined Contribution Healthcare via its proprietary SaaS software platform
("ZaneHealth"). Using Zane’s platform, employers offer a custom Defined Contribution
Healthcare solution that allows the business to reimburse employees for their individual
health insurance policies.7
4 eHealthInsurance (2014). About eHealth Webpage. Retrieved May 5, 2014 from https://www.ehealthinsurance.com/about-ehealth/our-story. 5 Market Watch (2012). Towers Watson to buy Extend Health for $435 mln. Retrieved May 5, 2014 from http://www.marketwatch.com/story/towers-watson-to-buy-extend-health-for-435-mln-2012-05-14 6 UnitedHealthOne (2014). Company Profile Webpage. Retrieved May 20, 2014 from http://www.goldenrule.com/about-us/company-profile. 7 Zane Benefits (2014). Zane Benefits Leadership Team Webpage. Retrieved May 20, 2014 from http://www.zanebenefits.com/company/team.
ZANE BENEFITS WHITEPAPERS | THE HISTORY & FUTURE OF SMALL BUSINESS HEALTH INSURANCE
www.ZaneBenefits.com 8
2010 – Affordable Care Act Passed
As demand increased for individual health insurance, limitations in the Individual Market
were exposed. These limitations included medical underwriting, application denials, and a
lack of standardized plans. At the same time, the small business health insurance market
was in crisis as employer healthcare costs continued to sky-rocket. Together, the
individual and small employer market challenges led to the creation and ultimate passage
of the Affordable Care Act (ACA) in 2010. On March 23, 2010, the ACA was signed into
law. However, major provisions did not take effect until January 1, 2014.
2014 – Major ACA Provisions Take Effect
While the ACA was passed in 2010, the major provisions of the ACA were delayed until
January 1, 2014.
These 2014 reforms fall within three primary objectives for the Individual Market:
1. To standardize plans and provide consumer protections;
2. To provide universal access to health insurance; and
3. To make health insurance more affordable.
1. To standardize plans and provide consumer protections
In order to standardize plans available in the Individual Market and provide better
consumer protections, the ACA requires:
Standard Plan Tiers – Individual health insurance policies are organized by "metal"
tiers -- bronze, silver, gold, and platinum -- with the goal of easier and more
informed comparison shopping.8
8 HealthCare.gov (2014). How do I choose Marketplace Insurance? Retrieved May 21, 2014 from https://www.healthcare.gov/how-do-i-choose-marketplace-insurance.
ZANE BENEFITS WHITEPAPERS | THE HISTORY & FUTURE OF SMALL BUSINESS HEALTH INSURANCE
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Unlimited Essential Health Benefits – Individual health insurance policies must
provide a comprehensive package of items and services, known as “Essential
Health Benefits”. Essential Health Benefits must be covered on an unlimited
(annual and lifetime) basis.9
2. To provide universal access to health insurance
In order to ensure access to individual health insurance, the ACA requires:
Guaranteed Issue – All individual health insurance insurers must “Guarantee
Issue” policies to all applicants, regardless of health status or other factors.10
State Health Insurance Marketplaces – States must make available a public Health
Insurance Marketplace to provide an unbiased location for consumers to
comparison shop for individual health insurance policies. 11
3. To make health insurance more affordable
In order to make health insurance more affordable, the ACA includes:
Premium Tax Credits12 – Americans with household incomes below 400 percent of
the federal poverty line (FPL)13 qualify for premium tax credits which cap the cost
of a qualifying household’s individual health insurance policy as a percentage of the
household’s income.
Medicaid Expansion – States have the option of expanding Medicaid eligibility to
citizens with household incomes up to 138 percent of FPL.14
9 HealthCare.gov Glossary (2014). Essential Health Benefits. Retrieved May 21, 2014 from https://www.healthcare.gov/glossary/essential-health-benefits. 10 HealthCare.gov Glossary (2014). Guaranteed Issue. Retrieved May 21, 2014 from https://www.healthcare.gov/glossary/guaranteed-issue. 11 HealthCare.gov (2014). Get Covered: A one-page guide to the Health Insurance Marketplace. Retrieved May 21, 2014 from https://www.healthcare.gov/get-covered-a-1-page-guide-to-the-health-insurance-marketplace. 12 HealthCare.gov Glossary (2014). Premium Tax Credit. Retrieved May 21, 2014 from https://www.healthcare.gov/glossary/premium-tax-credit. 13 HealthCare.gov Glossary (2014). Federal Poverty Level (FPL). Retrieved May 21, 2014 from https://www.healthcare.gov/glossary/federal-poverty-level-FPL. 14 HealthCare.gov (2014). Is my state expanding Medicaid coverage? Retrieved May 21, 2014 from https://www.healthcare.gov/what-if-my-state-is-not-expanding-medicaid.
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Individual Mandate – The individual mandate, which requires all Americans to
purchase health insurance or pay a tax penalty, is designed to diversify the risk pool
with healthy participants in order to lower costs.15
While plan standardization and guaranteed access have readied the Individual Market for
mass adoption, it is the ACA’s effort to make health insurance more affordable that is
driving the shift to individual health plans.
As a result, the Individual Market is expected to expand to more than 150 million
insureds by 2025.16
15 HealthCare.gov (2014). What if I don't have health coverage? Retrieved May 21, 2014 from https://www.healthcare.gov/what-if-i-dont-have-health-coverage. 16 According to the U.S. Census, nearly 171 million Americans were covered by employer-sponsored health insurance in 2012 and nearly 31 million were covered by individual health insurance in 2012 (https://www.census.gov/prod/2013pubs/p60-245.pdf). Dr. Ezekiel J. Emanuel predicts that by 2025, fewer than 20% of employees in the private sector will receive employer-sponsored health insurance (http://boss.blogs.nytimes.com/2014/03/26/why-employers-will-stop-offering-health-insurance). This means by 2025 only 34 million Americans will receive employer-sponsored health insurance, adding an additional 137 million to be insured through the Individual Market. The total Individual Market, then, is expected to grow to 167 million by 2025.
“The Individual Market is expected to expand to
more than 150 million insureds by 2025.”
ZANE BENEFITS WHITEPAPERS | THE HISTORY & FUTURE OF SMALL BUSINESS HEALTH INSURANCE
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The Shift to Individual Health Insurance and Defined
Contribution Healthcare
Over the next three years, 60 percent of small businesses will eliminate small business
health insurance in favor of individual health plans funded by Defined Contribution
Healthcare arrangements17 because:
1. Small business health insurance costs are not sustainable;
2. Individual health insurance policies provide greater value to employees;
3. Individual health insurance costs are 20 to 60 percent lower; and
4. Defined Contribution Healthcare arrangements allow employers to reimburse
employees for individual health insurance costs.
1. Small business health insurance costs are not sustainable
Nothing in the ACA addresses “adverse selection” (referred to previously as the small
employer group health insurance death spiral).
As the small employer group health insurance death spiral continues to run its course, small
businesses that currently offer health insurance coverage will either: (1) be forced to
cancel the plan; or (2) become unable to meet the minimum contribution requirements or
minimum participation requirements set by the insurer, and have the plan canceled by the
insurer.
17 This prediction is based on a 2014 National Small Business Association Survey that found over the next 12 months, 23% of small businesses plan to drop coverage and provide money toward individual health insurance, with another 15% planning to drop coverage all together (http://www.nsba.biz/wp-content/uploads/2014/02/Health-Care-Survey-2014.pdf). Additionally, a 2011 survey by McKinsey & Company found that up to 60% of educated employers plan pursue alternatives to offering employer-sponsored health insurance including Defined Contribution (http://www.mckinsey.com/insights/health_systems_and_services/how_us_health_care_reform_will_affect_employee_benefits).
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2. Individual health insurance policies provide value to employees
Once educated, many employees prefer individual health policies to employer-provided
plans due to two key advantages:
Choice – With individual health insurance, employees choose the coverage and
doctors that best fit their family’s needs and budget.
Portability – Employees keep their health insurance when they leave the company
because individual health plans are independent of employment.
3. Individual health insurance costs are 20 to 60 percent lower
On average, individual health insurance plans cost 20 to 60 percent less than traditional
group health insurance.18,19
The following U.S. maps show a state-by-state cost-comparison of individual health
insurance premiums offered through the federal Individual Health Insurance Marketplace
in 2014 compared to group health insurance premiums. In all states using the federal
Marketplace, individual health insurance policies are less expensive than group health
insurance even before one takes into account premium tax credits. As the maps show, this
holds true across Bronze, Silver, and Gold plans.
18 Centers for Medicaid and Medicare Services (2013). “QHP Landscape Individual Market Medical” and “QHP Landscape SHOP Market Medical” datasets. Retrieved May 5, 2014 from https://data.healthcare.gov/. 19 Kaiser Family Foundation (2013). Average Single Premium per Enrolled Employee For Employer-Based Health Insurance. Retrieved May 6, 2014 from http://kff.org/other/state-indicator/single-coverage.
“In all states using the federal Marketplace, individual health insurance
policies are less expensive than group insurance -- even before one takes
into account premium tax credits.”
ZANE BENEFITS WHITEPAPERS | THE HISTORY & FUTURE OF SMALL BUSINESS HEALTH INSURANCE
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Comparison of Bronze-Level Individual Premiums to Group Market Premiums
ZANE BENEFITS WHITEPAPERS | THE HISTORY & FUTURE OF SMALL BUSINESS HEALTH INSURANCE
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Comparison of Silver-Level Individual Premiums to Group Market Premiums
Comparison of Gold-Level Individual to Group Market Premiums
ZANE BENEFITS WHITEPAPERS | THE HISTORY & FUTURE OF SMALL BUSINESS HEALTH INSURANCE
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Comparison of Gold-Level Individual Premiums to Group Market Premiums
About the Map Data
Individual Marketplace Rates: Data was derived from CMS data available for the
states using the Federal Health Insurance Marketplace. Rates were based on a 40-
year old, non-smoker.20
Group Health Insurance Rates: Data was derived from the Kaiser Family
Foundation. Rates are from 2012.21
20 Centers for Medicaid and Medicare Services (2013). “QHP Landscape Individual Market Medical” and “QHP Landscape SHOP Market Medical” datasets. Retrieved May 5, 2014 from https://data.healthcare.gov/. 21 Kaiser Family Foundation (2013). Average Single Premium per Enrolled Employee For Employer-Based Health Insurance. Retrieved May 6, 2014 from http://kff.org/other/state-indicator/single-coverage.
ZANE BENEFITS WHITEPAPERS | THE HISTORY & FUTURE OF SMALL BUSINESS HEALTH INSURANCE
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4. Defined Contribution Healthcare arrangements allow employers to reimburse
employees for individual health insurance costs
Defined Contribution Healthcare enables small businesses to offer employee health
benefits for recruiting and retention purposes without absorbing the premium and
administrative costs of sponsoring a traditional group health insurance plan.
Under a Defined Contribution Healthcare arrangement, employees purchase their own
individual health insurance policies and the employer reimburses the employees for their
out-of-pocket premium cost, often up to a specified monthly healthcare allowance.
There are two core Defined Contribution Healthcare arrangements a small business will
consider:
A. A Taxable Healthcare Stipend, or
B. A Tax-free Health Reimbursement Plan (HRP)
A. Taxable Healthcare Stipend
Under this Defined Contribution Healthcare approach, the employer offers all similarly
situated employees a fixed, taxable stipend to purchase individual health insurance,
whether or not they actually purchase health insurance.
The employee's monthly contributions are typically added to his or her paycheck. At the
end of the year, employees receive a form showing the amount of their stipend that they
should report as income on their personal income tax return. As a result, most employees
prefer their employers to establish a Defined Contribution Healthcare arrangement
providing tax-free reimbursement of individual health insurance costs.
Under Section 105 of the Internal Revenue Code (IRC), employers are able to establish a
formal self-insured medical reimbursement plan to reimburse employees for individual health
insurance premiums on a tax-free basis.
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B. Tax-Free Health Reimbursement Plan (HRP)
Under this Defined Contribution Healthcare approach, an employer utilizes Section 105 of
the Internal Revenue Code to establish a formal self-insured medical reimbursement plan to
reimburse employees for their substantiated individual health insurance costs on a pre-tax
basis. Proponents of this arrangement refer to this approach as a Health Reimbursement
Plan (HRP).22 An HRP should not be confused with an employer payment plan allowed under
Section 106.23
When providing tax-free reimbursement of individual health insurance policies through an
HRP, the employer must ensure compliance with federal regulations, including but not
limited to legal plan documents, summary plan descriptions, and new “Market Reforms”
required by the Affordable Care Act.
For example, in order to comply with the rules outlined in IRS Notice 2013-5424, the HRP
must be structured to reimburse employees for only: (a) health insurance premiums up to
a specified monthly healthcare allowance; and (b) unlimited basic preventive health
services as required by Public Health Services (“PHS”) Act Section 2713.25
Failing to comply with the applicable regulations could result in fines of up to $100 per day
per employee if a failure is not corrected within 30 days once it is identified.26 Therefore, it
is expected that small businesses will seek assistance in administering HRPs to ensure
compliance.
22 Zane Benefits (2014). Healthcare Reimbursement Plan (HRP) - What is it? Retrieved May 21, 2014 from http://www.zanebenefits.com/blog/Healthcare-Reimbursement-Plan-HRP. 23 HRPs are often confused with employer payments plans referenced in IRS Notice 2013-54. An employer payment plan reimburses an employee under Section 106 of the IRC. Revenue Ruling 61-146 holds that if an employer reimburses an employee’s substantiated premiums for individual health insurance, the payments are excluded from the employee’s gross income under Code § 106. An HRP, on the other hand, reimburses an employee for individual health insurance under Section 105 of the IRC. 24 Internal Revenue Services (2013). Notice 2013-54, Application of Market Reform and other Provisions of the Affordable Care Act to HRAs, Health FSAs, and Certain other Employer Healthcare Arrangements. Retrieved May 21, 2014 from http://www.irs.gov/pub/irs-drop/n-13-54.pdf. 25 An HRP complies with the PHS Act 2711 annual limit requirements and the PHS Act 2713 preventive health services requirements outlined in IRS Notice 2013-54. PHS Act 2711 provides that no annual or lifetime limits may be placed on essential health benefits (“EHB”). As a result, the HRP may not place an annual limit on the basic preventive health services expenses required by PHS Act 2713. PHS Act 2711 provides that annual limits and lifetime limits may be placed on benefits that are not essential health benefits. Health insurance premiums are not essential health benefits – thus, the HRP may place a “premium-specific” annual limit on premium reimbursements. PHS Act 2713 requires the HRP to cover basic preventive health services without cost-sharing. The HRP meets this requirement. 26 While the maximum penalty is $100 per day per employee, there are built in limitations to this penalty. For example, if the failure is corrected within 30 days of identification, no penalty will be applied. Additionally, there is a built in limitation on the amount of the penalty equal to 10% of the aggregate amount reimbursed by the employer during the preceding taxable year. See IRC Section 4980D (http://www.law.cornell.edu/uscode/text/26/4980D).
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To summarize, due to the high cost of group health insurance and the better value of
individual health insurance, small businesses have begun shifting employees to the
Individual Market and are replacing existing group health insurance premium
contributions with a Defined Contribution toward employees’ individual health insurance
premiums.
“Defined Contribution Healthcare will emerge as the
leading health benefit solution for small businesses.”
ZANE BENEFITS WHITEPAPERS | THE HISTORY & FUTURE OF SMALL BUSINESS HEALTH INSURANCE
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Conclusion
The small business health insurance market is undergoing a paradigm shift from an
employer-driven “Defined Benefit” model to an individual-driven “Defined Contribution”
model.
Minimum contribution and participation requirements are forcing small businesses to stop
offering traditional health insurance plans. In order to offer health insurance, small
businesses are required to contribute a minimum percentage of the premium for each
employee (typically 50 to 75 percent). Additionally, coverage may be rescinded if a
required number of employees do not enroll in the plan (typically 75 percent of eligible
employees). As a result, the number of small and medium businesses (with less than 200
employees) offering coverage is down from 68 percent in 2000 to 57 percent in 2013.
While the transition from employer-based health insurance to individual health insurance
has been gradual since 2000, the post-2014 enhancements to the Individual Market have
accelerated this shift.
The post-2014 Individual Market’s features of guaranteed acceptance, choice, portability,
and tax credits have made individual health policies more attractive to employees than
employer plans. As a result, the number of policyholders in the Individual Market is
projected to increase to more than 150 million by 2025. Additionally, new Defined
Contribution Healthcare arrangements allow small businesses to reimburse employees for
their individual health insurance costs – enabling small businesses to offer employee
health benefits for recruiting and retention purposes without absorbing the premium and
administrative costs of sponsoring traditional group health insurance.
Due to the advantages of the post-2014 Individual Market and the availability of new
Defined Contribution Healthcare arrangements, 60 percent of small businesses will
eliminate traditional employer-sponsored health insurance in favor of Defined
Contribution Healthcare and individual health plans over the next three years.
ZANE BENEFITS WHITEPAPERS | THE HISTORY & FUTURE OF SMALL BUSINESS HEALTH INSURANCE
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What is Zane Benefits?
Zane Benefits is the leader in individual health insurance reimbursement for small
businesses. Since 2006, Zane Benefits has been on a mission to bring the benefits
of individual health insurance to business owners and their employees.
Zane Benefits' software helps businesses reimburse employees for individual
health insurance plans for annual savings of 20 to 60 percent compared with
traditional employer-provided health insurance. Today, over 20,000 customers use
Zane Benefits' software, services, and support to reimburse individual health
insurance plans purchased independent of employment.
Zane Benefits' software has been featured on the front-page of The Wall Street
Journal, the USA Today, and The New York Times. Zane Benefits was founded in 2006
and is based in Salt Lake City, Utah.
Zane Benefits' Partner Program is an opportunity for insurance professionals to
provide clients with custom Zane Benefits solutions. Request a Partner Evaluation.
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DISCLAIMER
The information provided herein by Zane Benefits is general in nature and should not be relied on for commercial decisions
without conducting independent review and analysis and discussing alternatives with legal, accounting, and insurance advisors.
Furthermore, health insurance regulations differ in each state; information provided does not apply to any specific U.S. state
except where noted. See a licensed agent for detailed information on your state. [Rev. April 22, 2015]
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