With the Affordable Care Act in 2010, U.S. businesses were required by federal mandate to provide health insurance to all full-time employees. The alternative to this employer mandate – face strict action and steep penalties from the IRS.
However, the law exempted small businesses with less than 50 employees from being subject to the employer mandate. This continues to be the case even now.
Given a choice, most small businesses prefer to provide health benefits for their employees. Offering a good employee insurance package helps businesses considerably in recruiting and retain talented workers.
However, group health insurance can add to the expenses and complying with requirements can be often difficult for small businesses. In addition, small businesses are confused as to whether they’re sizeable enough to qualify for group coverage and other participation requirements, if any.
How large should a “group” be for availing group health insurance?
A group health insurance policy is just a single policy issued to a group of people and in some cases their dependents. Under the federal mandate, insurers are required to provide group coverage should the business choose to purchase it—regardless of size. Even businesses that have between just 2 and 50 full-time employees are eligible for coverage.
Keep in mind that as owners are counted as employees, partnerships or even sole proprietorships with just one employee also qualify for group health coverage. In addition, a few states consider self-employed individuals as “a group” of one enabling such people also to purchase group coverage.
What are the participation requirements?
Most insurers require businesses list a few minimum requirements while offering a group health insurance policy. In many states, 70 to 75 percent of workers offered group coverage should either have health coverage from another source (Medicare, a spouse’s policy, or even a personal insurance plan) or should enroll for one.
Interested businesses can visit the Minimum Participation Rate Calculator to know of the required percentage of employees to qualify for a group policy.
The Alternative
Compared to the cost and minimum participation requirements, small businesses often choose to let go of group health insurance. Instead of the traditional group insurance, an increasing number are opting for personalized health benefits for their workforce.
Two such popular personalized schemes are the Health Savings Accounts (HSAs) and the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA.) In this, small businesses can give employees tax-free money to spend on health care services and products of their choice.
There are no minimum contribution limits or participation requirements to adhere to. These schemes allow small enterprises to manage their own budget and provide benefits to their employees.
The Section 125 Plan
Commonly referred to as “cafeteria plans,” because participants can pick and choose which particular benefits they would like to avail on a pre-tax basis. It can be defined as a separate written plan for employees who satisfy the conditions of Section 125 of the Internal Revenue Code. The plan is intended to be permanent in nature and detail all benefits as well as the conditions for eligibility and elections.
A cafeteria plan allows employers to grant employees a flexible benefits program that can be used to select benefits that meet their specific requirements. Participants are permitted to choose a minimum of 2 or more benefits that includes a taxable benefit (for eg. cash) and a qualified benefit. Qualified benefits can include group health insurance, accident and health plans, Health Savings Accounts, disability coverage and more.
These funding for these plans can be in several ways. Adequate allowance of a certain number of flex dollars is allocated by the employer as contributions. The employee can use this to buy selections from the plan or opt to cash in the same. Employees can purchase benefit selections through either pre-tax or after-tax deductions. This typically results in a larger amount of take-home pay.
To sum it up, cafeteria plans can bring several benefits to employees as well as employers. The reduction of wages resulting from adopting a cafeteria plan and associated elections is not liable for Medicare or social security taxation. Consequently, this reduces the employer’s liability for these taxes. Moreover, the reduction in wages is also not subject to FUTA (Federal Unemployment Tax Act) taxes as well. However, prohibited benefits that are elected as part of the cafeteria plan are liable to be taxed.