Update: New Rules Create Grandfathering Conundrum in Healthcare Reform
No one expected the healthcare overhaul to be simple. The new regulatory standards governing employer-sponsored plans that were announced in June could mean that as many as 39 percent to 69 percent of employer-sponsored plans will be subject to the new regulations and will not be eligible for grandfathering (i.e. exemption from the new rules). The new provisions outline the limits on what changes are allowed before a plan becomes subject to the new mandatory requirements starting in 2014. In short, the requirements donÂÂ’t allow for most of the alterations that have become standard as businesses try to find affordable solutions. Small businesses, in particular, are liable to be caught in situations where revising existing plans could jeopardize their eligibility for grandfathered status.
Why worry about grandfathered status?
Many business owners would like to keep their existing plans and have grandfathered status but find the looming premium increases too costly to bear. Major healthcare insurance companies appear to be increasing their prices somewhere between 11 percent and 15 percent. Small businesses are reporting quotes that have increased 17 percent or 18 percent - with some seeing premium hikes of up to 24 percent. Insurers say that these increases are needed to offset spiraling costs for hospital care, prescription medicines and doctors. Switching to cheaper plans could bring the new regulations into the picture, creating substantially higher healthcare costs for employers.
While all the heated rhetoric is under way on Capitol Hill, remember that under the Affordable Care Act firms with less than 50 employees have no employer responsibility requirements - in other words, there is no employer mandate for these small businesses to offer healthcare coverage.
Small Business Healthcare Tax Credit
Many small business owners will qualify for some relief if they are eligible for this new tax credit. The Internal Revenue Service began contacting small businesses by mail in April to encourage them to check their eligibility. To qualify, an employer must cover at least 50 percent of the cost of healthcare coverage for some workers (based on single rate coverage).
Here is an overview of some of the key issues raised by recent developments. How individual business owners respond to the new healthcare insurance regulations will depend on many factors. Seek advice from your tax and finance professionals before making any decisions.
- Companies facing steep increases normally get competitive bids from other insurance providers. If they change providers, business owners (who are otherwise eligible ) will forfeit grandfathered status for their healthcare plans, and thus be required under the new laws (effective in 2014) to offer costly additions, such as yearly physical exams and extending coverage to include adult children up to 26 years old.
- Plans that increase the amount patients must pay out-of-pocket (co-insurance) could also be liable to governance under the new healthcare act. The law offers some flexibility in response to rising costs - deductibles may be increased in line with medical inflation.
- Tax credits of up to 35 percent of premium costs for 2010 are designed to help small businesses with 25 or fewer full-time workers (business with fewer than 50 half-time employees might be eligible) to offset rising costs. In January 2014, this rate increases to 50 percent.
All is not lost if you make a mistake. There will be a grace period during which time employers can undo changes that unwittingly may have triggered forfeiture of grandfathering. The White House Office of Health Reform has indicated it will acknowledge attempts to comply that may have slightly missed the mark. Nevertheless, you can avoid headaches later by consulting with your tax and legal experts now.