Your small business clients know that the health insurance exchanges set up under the Patient Protection and Affordable Care Act (PPACA) are coming — and soon — but they may not realize that they create cost savings above and beyond the current rules governing deductibility of premiums and eligibility for certain tax credits.
Small business clients are eligible to sign up for a specially created Small Business Health Options Program (the SHOP exchange), but clients are unlikely to have realized that the rules of the game have changed with the advent of SHOP. By signing up for the SHOP exchange, your small business clients can create a powerful employment benefit for their employees — in the form of dramatic tax savings — without any corresponding requirement that employers with fewer than 50 employees actually finance the employees’ health care.
SHOP exchange basics
Under the PPACA, every state is required to establish a health insurance exchange that is specifically designated for small business use. The SHOP exchange allows small business clients with fewer than 50 full-time employees to sign up (eligibility requirements will expand in 2016 to allow clients with up to 100 employees to sign up).
The purpose of the SHOP exchange is to allow small business employees access to a variety of health insurance options (though it is predicted that only one option will initially be available, with expanded options not actually available until 2015). Further, by encouraging these employees to purchase health insurance, the SHOP exchange is meant to eventually decrease costs for employers who do choose to contribute to employee insurance costs.
Customer service representatives called “navigators” will be available to guide the employer and employee through the process of signing up for the exchange and navigating the various insurance options that will eventually be made available.
SHOPs changing the rules
Under current rules, to derive any type of tax benefit from offering health insurance to employees, the employer is generally required to pay at least 50 percent of the premiums. In many cases, this requirement discourages employers from providing health insurance at all. Even under the PPACA, many small businesses with fewer than 50 full-time employees are not actually required to provide health insurance.
Enrolling in the SHOP exchange, however, does not create a requirement that the small business owner pick up a portion of employees’ health insurance premiums tab. The employer can choose to pay a portion of the premium, but is also permitted to enroll simply so that employees have access to the exchange — the employer can pay nothing.
SHOP exchange benefits
While health insurance purchased in an employment situation may be purchased with pre-tax dollars, an employee who purchases health insurance independently pays with after-tax dollars and is permitted to deduct only the premium cost to the extent that it exceeds 10 percent of adjusted gross income (if the employee chooses to itemize deductions). The deduction limit applies even if the employer does not sign up for the SHOP exchange, but the employee purchases health insurance independently through the exchange.
By signing up for the SHOP exchange, your small business clients can allow employees to pay for health insurance with pre-tax dollars even if the employer itself is not paying for a portion of the premium. Even if the employer does not wish to contribute, the exchange can save employees thousands in taxes, creating a powerful employment benefit with minimal effort on the part of the employer.
If the employer does decide to contribute, and pays at least 50 percent of employees’ premium costs, it may be eligible to take a small business tax credit. However, the credit is available only to employers with fewer than 25 employees.
Even if your small business client has no intention of contributing to the cost of employee health insurance premiums, simply signing up for the SHOP exchange can allow that client to provide a significant tax benefit to employees and will eventually provide access to a variety of insurance options for employees.
For previous coverage of possible changes to expect under the PPACA in Advisor’s Journal, see The Affordable Care Act Raises the Stakes for HSAs.
For in-depth analysis of health insurance purchased in the business context, see Advisor’s Main Library: F—Business Health Insurance.
Your questions and comments are always welcome. Please contact the Panel of Experts.