Given all the changes and fluidity with the WA Healthplanfinder Business website and program, we thought it’d be a pretty good idea to review the recent history, the current situation, and then what’s coming down the road.
Sorry for the length of this post. But this is complicated and very important stuff…
The good news: better site, better support tools
First, a little history. We used WA Healthplanfinder Business in our CPA firm to offer employee coverage. Our experience setting up an employer account with the exchange was OK, but not stellar.
The website worked fine for the most part, but the user interface wasn’t very intuitive. However, one software bug did stand out: if an employee who received an invitation from their employer to sign up for coverage clicked a button saying “Use My Existing Account”, the site simply returned a giant server error page.
For what it’s worth, we should note that once we finished setting up our small business account on Washington Healthplanfinder, the website was very easy to use. Adding new employees to the account and removing employees who have left your team is as effortless and intuitive as it should be.
Looking to 2017, it appears that open enrollment for small businesses should be a smoother experience. The exchange’s website now provides a page devoted to helping small business owners set up their accounts on the exchange. I would highly encourage anyone who creates a small business account to first read the Enrollment Guide (available at the webpage linked above). It walks you through the process of setting up an account and includes everything I wish I had known when I set up our firm’s account last year. And if you have problems setting up your account, even with the help of the enrollment guide, do call one of their business field representatives. They’re very knowledgeable and we’ve had a great experience working with them.
Disappointingly, however, it sounds like the notorious “Use My Existing Account” bug has not yet been fixed. I interviewed the exchange’s communications director, Michael Marchand, for this article and he had this to say in response to a question I asked about the bug, and about the website’s performance in general:
You’re asking me a pretty detailed technical question that I don’t have an answer for right off the top of my head, but we do make changes to the system annually. In any given year we usually have 2-3 major releases, not including smaller releases to fix smaller bugs and issues. That’s a much quicker cadence than many established companies offer, and that’s part and parcel of the fact that we had only 18 months to build a system for 7 million people. The experience is significantly different than what people had a year or so ago.
The bad news: no statewide coverage this year
In 2016 WA Healthplanfinder Business offered coverage options for small businesses statewide. However, in 2017, thanks to UnitedHealth withdrawing from the exchange, small businesses in most Washington counties won’t have the option to apply for group coverage through the exchange.
Businesses in Clark and Cowlitz counties will be able to choose from plans offered by Kaiser Foundation Health plan.
Why losing options through the exchange is a big deal for small businesses
You might be thinking to yourself, well, any small business that has an incentive to offer employee health insurance is already doing so, right? Who would even need to use the new SHOP exchange? So why would this even be a big deal?
In a nutshell: HRAs and EPPs.
But first, some background. And apologies ahead of time for going so far into the weeds on this, but it’s all relevant to understanding the issue (especially for public policymakers), I promise.
Before the Affordable Care Act (“Obamacare”) was enacted, many of the smallest businesses offered health insurance to their employees through plans that are nowadays described as “health reimbursement arrangements,” or “HRAs” for short, and “employer payment plans,” or “EPPs” for short.
What happened was this: for a long time, small businesses provided health insurance benefits to their employees by simply writing a check reimbursing the employee for their individual insurance premiums or out-of-pocket medical expenses. Small businesses and their employees would get the same tax benefit for such arrangements as they would have had with a more formal plan; the small business gets a deduction for the expense, but the employee pays no income taxes on the benefit, nor do either the employee or the employer pay any payroll taxes on the benefit.
The reason such informal arrangements worked is because IRC § 105(b), IRC § 125, and various IRS pronouncements had determined that such plans could qualify for this tax benefit, provided that the plans met certain requirements.
One way this arrangement could work was by saying the reimbursement arrangement was a health reimbursement arrangement (HRA) as described in IRS Notice 2002-45 and Rev. Rul. 2002-41. Another way this could work was by saying this arrangement was a group health plan as described in Rev. Rul. 61-146, sometimes referred to as “employer payment plans.” And a final way this could work was by saying the arrangement was a health flexible spending account (FSA) formed under a § 125 cafeteria plan.
Fast forward to 2013, when the IRS publishes Notice 2013-54. In this short 14pp document, the IRS noted the following relevant changes to the way health insurance is regulated under the ACA:
- If a group health plan has two or more participants, it is subject to the new market reform rules
- Under the new market reform rules, a group health plan may not establish any annual limit on the dollar amount of benefits for any individual
- Non-grandfathered group health plans need to provide certain preventative services without imposing cost-sharing requirements on the plan participants
OK, this seems like what we’ve all heard before on the news about the ACA. But now let’s take a more careful look at the tax law we cited before; the primary source authorities small businesses cited when claiming a tax benefit for their informal reimbursement arrangements.
As discussed in Notice 2013-54, an HRA is an arrangement where an employer reimburses an employee for medical expenses up to a maximum dollar amount. The authorities for giving such arrangements preferential tax treatment are IRC § 105(b), IRS Notice 2002-45 and Rev. Rul. 2002-41.
HRAs can be distinguished from health FSAs under § 125 cafeteria plans because HRAs are not associated with salary reductions. As long as the HRA follows the guidelines of Notice 2002-45, the reimbursement amounts qualify for preferential tax treatment. Notice 2002-45 also stipulates that, by definition, HRAs provide reimbursements for medical expenses up to a maximum dollar amount for the coverage period.
According to Notice 2013-54, an HRA will not fall afoul of the new ACA rule against annual limits if the HRA is integrated with primary group health plan coverage provided by the employer and the primary group plan complies with the new market reform rules. However, the Notice also points out that an employer-sponsored HRA cannot be integrated with an individual plan of an employee’s. Therefore, an HRA used by employees to purchase individual market coverage, or to receive reimbursements for preventive services, violates the ACA’s market reforms.
For example, a small business could purchase a single group health insurance policy for its employees and then say, “Hey employees, in addition to this primary health insurance benefit, we’re also going to offer you an HRA that we’ll integrate with that health insurance plan for your out-of-pocket costs.” That could work. But if an HRA is all the employer offers, then the employer has established a group health plan and that plan is noncompliant with the new market reforms.
Employer payment plans (EPPs) are similar to HRAs. However, while an HRA reimburses employees for medical expenses in general, an employer payment plan reimburses employees for all or part of their health insurance premiums. The authority for giving such arrangements preferential tax treatment is Rev. Rul. 61-146.
According to Rev. Rul. 61-146, an employer payment plan could work like this: the employee would go out and buy individual health insurance. Once doing this, the employee would, in some way, substantiate the amount of the insurance premium to their employer. The employer could then either (1) reimburse the employee for premiums the employee already paid, or (2) pay the insurance company the premiums directly. If the accounting for this is done correctly and the reimbursement amount doesn’t exceed the premium, then the reimbursement amount qualifies for preferential tax treatment.
So here, again, we run into the annual limits problem. For an EPP to qualify for this special tax treatment, the reimbursement amount cannot exceed the amount paid for a premium. So, by definition, EPPs must establish limits on what they pay out to plan participants. The ACA disallows any group health plan from having an annual limit, and thus EPPs are, by definition, noncompliant group health plans. In addition, EPPs are problematic because they cannot be integrated with any individual health insurance policy the employee purchases.
In short, there will never be an EPP that is ACA-compliant.
A health FSA is a benefit where employees are reimbursed for medical care expenses. When the health FSA is offered through a § 125 cafeteria plan, the employee doesn’t recognize the reimbursement as income. These plans are often paired with a salary reduction agreement.
It’s important to note that the market reforms don’t apply to plans covering “excepted benefits.” Excepted benefits include stuff like accident-only coverage, disability income, certain dental and vision benefits, and certain long-term care benefits.
Notice 2013-54 clarified that if a health FSA is paired with a group health plan that complies with the new market reform rules, the health FSA will be considered to provide only excepted benefits. However, if an employer doesn’t structure its health plan in such a way that the FSA qualifies as excepted benefits, then the FSA is subject to the new market reform rules.
The notice finally concludes that, because by definition a health FSA considered to provide excepted benefits has been integrated with a compliant group health plan, health FSAs that don’t provide excepted benefits must necessarily be FSAs that are not integrated with a compliant group health plan. Therefore, these FSAs will fail to meet the new market reform rules because they fail to meet the no-cost-sharing-for-preventive-services requirement.
For example, a small business could purchase a single group health insurance policy for its employees and then say, “Hey employees, in addition to this primary health insurance benefit, we’re also going to offer you a health FSA for vision and dental.” That could work. But if a health FSA is all the employer offers, then the employer has established a group health plan and that plan is noncompliant with the new market reforms.
Bringing it All Together
In summary, if a small business claims that its reimbursement policy for its employees’ individual health care costs falls under one of the categories of plans described above, it still does get the tax benefit it always has. To emphasize, the tax laws didn’t change.
However, because each of these types of plans is considered a group health plan, the plans need to comply with the new market reform rules. And the nature of these plans means that by definition they violate the new market reform rules unless the plan can somehow be integrated with a primary group health plan that complies with the market reform rules.
If you’re wondering right now why these boring rules are even a big deal, here’s why: if the small business claims for tax reasons that its health insurance premium reimbursement policy is an EPP, the business is subject to the $100 per employee per day penalty for establishing a noncompliant plan under the market reform rules. And if the small business offers an HRA or a health FSA that isn’t formally integrated with an ACA-compliant group health plan, again, that $100 per employee per day penalty kicks in.
Take a moment to let that sink in. That’s a $36,500 per employee per year penalty for failure to follow the new rules. It would kill a small business to offer a noncompliant employee health insurance benefit.
OK then, a small business owner might say. But if I just don’t claim the tax benefit of an EPP, can I still reimburse my employees for their individual health insurance premiums?
The Department of Labor answered this question with a resounding “no” in an FAQ it published on the subject in November of 2014. Regardless of whether the payment is pre-tax or post-tax, the DOL said a cash reimbursement arrangement is a noncompliant group health plan under the new market reform rules. The DOL’s logic is that renouncing the tax benefits of these plans still does nothing to address the fact that these reimbursement plans are group health plans that cannot be integrated with the individual plans that employees purchase.
The IRS confirmed the DOL’s interpretation of the rules when it published Notice 2015-17. The IRS clarified in this notice that the only way an employer can fix a noncompliant premium reimbursement plan is to completely abandon it.
What’s the Impact?
Losing the ability to set up HRAs and EPPs was a big deal for small businesses. These reimbursement programs were an easy way for small businesses to provide a good health benefit that accommodated a diverse group of employees.
Example: Steve’s friend Andy is a type I diabetic. When Andy was involved in a number of startups during the 90s, having control over his own health insurance was a huge deal. Various employers came and went during the dotcom bubble, but Andy never had to worry about gaps in his coverage or getting stuck with a small group health plan that provided inadequate coverage for his health care needs because these small startups often used EPPs to provide employee health insurance benefits.
Many small businesses have employees with diverse needs from their health insurance, and are in situations similar to Andy’s dotcom-era employers. Top talent may have special needs for their health insurance, and in order to stay competitive small firms need a way to offer good, flexible benefits. And not only did EPPs provide employees with control over their health insurance, they also relieved small business owners of the administrative burden of researching different small group plans. To continue with the example above, the typical small business owner was never going to do as good of a job at picking health insurance for Andy as Andy could, because it was only Andy who knew what it was like to have type I diabetes and wrangle with a health insurance company over the issue.
HRA and EPP plans also meant that small businesses didn’t need to worry about issues like minimum participation requirements when providing their employees an insurance benefit. Note that many small businesses have difficulty signing up for formal group health plans because it’s tricky to meet minimum participation requirements. For a very small business, failing to entice even just one employee into your plan often means you fail to meet the minimum participation rules.
So Why WA Healthplanfinder Business?
The SHOP exchanges, when actually available, provide a practical alternative to HRAs and EPPs for small businesses for two reasons: the flexibility of the “employee choice” program and the exemption from minimum participation requirements during open enrollment.
Employee choice is a SHOP exchange program that enables small businesses to contract with multiple insurers, and thus let employees choose between a variety of insurance companies and networks (within restrictions). Employers set up this group health plan through the SHOP exchange, and there are some basic rules for coverage that integrate the group health plan and prevent employers who use SHOP from discriminating in favor of highly-compensated employees.
And here’s the deal with those minimum participation requirements: a special rule says that businesses that apply for coverage through SHOP exchanges during the open enrollment period (November-December each year) don’t have to meet minimum participation thresholds.
Interestingly, when I asked Marchand why he thought SHOP exchanges across the country were having more difficulty gaining traction than the individual exchanges, he had this thought to share:
The most important piece of any product, if you’re trying to get people to buy it, is what problem is it solving for the people you’re trying to sell it to. I’m not sure in this state, given how association plans work, and how small businesses nationally find insurance for their insurance, there is necessarily a problem that can be solved.
Hopefully I’m not getting too political, but here’s my response to that line of reasoning: I think there is a problem to be solved. The smallest businesses, those who have been left in the lurch by Notice 2013-54, have a problem that needs to be solved. The small tech startups, the small professional and creative service firms that have up until now relied on HRAs and EPPs as their only feasible option for delivering employee health insurance benefits, they have a problem that needs to be solved. Maybe Congress will eventually overcome its gridlock on the Affordable Care Act and come up with some solution for these smallest of businesses that doesn’t involve state exchanges. But until that happens, if ever, small business owners need a practical alternative to HRAs and EPPs. And the employee choice portion of the SHOP exchanges has the potential to be that alternative.
With no SHOP exchange options in most counties and no ability to establish an HRA or EPP, the smallest businesses in Washington State are in a tight spot due to oversights in the Affordable Care Act. This is unfortunate; it would be a real boon to small businesses if we could get the employee choice portion of the exchange figured out.
It would also be nice for small business owners to have an automated, low-effort option for purchasing employee health insurance online other than Zenefits, given what we now know about some of the nonsense that’s been going on over there. And while there are other companies such as Gusto working to fill that niche, it’s worth noting that an efficiently-delivered traditional small group plan is still not the same thing as employee choice.
And just to make this final point: if your small business is a one-man-band sole proprietorship, single-member LLC, or S corporation, don’t worry too much about this issue. You can generally purchase a health plan for yourself through the individual exchange and take the self-employed health insurance deduction on the premiums. (For situations where this isn’t the case, consult a tax adviser).