Unintended Consequences of the ACA for Small Businesses

24 Oct

For employers, the Affordable Care Act takes two distinct approaches: First, for small employers (those with 50 or fewer full-time employees), the ACA does not penalize, but rather incentives the purchase of insurance with subsidies available through the Small Business Health Options Program (SHOP). Second, for large employers (those with 51 or more full-time employees), the ACA does very little. Recognizing that the overwhelming majority of these large employers already offer good coverage, the government merely wants to keep it that way. In essence, the “pay or play” mandate is simply designed to prevent “crowd out”–the businesses dropping coverage to save money because their employees can get federally-subsidized coverage via the health insurance marketplace.

But what about a small business that already provides its employees with excellent coverage? Well, in that case, the incentives and penalties get weird, and the window of opportunity for unintended consequences to enter the picture opens wide.

I know of a small business with between 10 and 20 employees that offers excellent benefits. The health insurance coverage has no deductible and no coinsurance. There is a $30-$40 co-pay for physician visits, but that’s it. And, on top of that, the employer pays nearly 100% of the premiums for each individual employee (about $6,000). The catch is, the employees are fully responsible for the cost of dependent (i.e., family) coverage. Given the generous nature of the coverage, this is not inexpensive (about $11,000). In other words, the total cost of this family coverage is approximately $17,000, with the employer paying for $6,000 of it.

On the health insurance marketplace, family coverage in the part of the country where this business is located runs between $7,344 a year for a bronze plan and $10,560 for a gold plan. Even the most expensive gold plan was less expensive that the company’s current coverage. And the coverage could be even cheaper, but because the employees have access to affordable coverage through their employer, they are not eligible for federal subsidies.

However, given that this is a small business, as defined by the ACA, the employer could simply drop coverage without penalty and instruct its employees to shop for subsidized coverage on the exchange. Doing so would save the employer $6,000 per employee and could save the employee anywhere between $0 and $3,700 a year, albeit with somewhat less generous insurance coverage. So, if this was your company, what would you do? Or, if you were the employee who was told you were no longer getting coverage through your work, but that you could get it more cheaply on your own, how would you react? I’m curious to hear your thoughts.


Posted by on October 24, 2013 in Uncategorized


2 responses to “Unintended Consequences of the ACA for Small Businesses

  1. Roger Hoskin

    October 24, 2013 at 9:52 am

    Ultimately this should be what happens. More and more people would get their own coverage on the exchange and the employer paid benefit ends. Question: will the employer “top-up” the employee’s salary ($6,000) to help pay for self-coverage? To do othewise would imply a salary cut of about $6,000.

    The tax consequences to the employer are the same either way. But are the tax consequences the same for the employee? They should be–this may be one of the rough edges in ACA that will need attention.

    Ending the employer paid benefit would ease “job lock”. Job lock is a situation where employees forgo another oppertunity because they “need” health insurance–pre existing conditions of self or a family member and what not. I know of no empirical studies that illustrate job lock, but the evidence would be almost impossible to obtain. I suspect it goes on. Ending job lock would reallocate labor to the advantage of the employee and the economy as a whole; the impact on employers would probably be mixed.

  2. Well Said

    October 25, 2013 at 10:16 pm

    The salary cuts that Roger mentioned have been there for quite a while, perhaps just not as visible.


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