Written by Lisa Klinger, J.D. & Susan Grassli, J.D.
As of January 1, 2016, the Affordable Care Act definition of “small” group employer (for purposes of insurance market size) increases from 50 to 100 employees. One significant impact of this change is that the ACA’s small group rating limitations (e.g., age-banded rates) will apply to employers with 51-100 employees. These employers were previously considered “large” employers so their rates were set using various factors such as claims history, industry and location. In the small group market, carriers can set rates based only on age, family size, geography and tobacco use (although California has prohibited tobacco use as a rating factor).
Under a special transitional rule, however, employers with 51-100 employees who will be re-defined as small employers as of January 1, 2016, will have the option of delaying this impact by renewing their current large group policies on or before October 1, 2016. Since the last date to renew in 2016 will be October 1, many carriers are suggesting that such employers renew by October 1, 2015, so their 12-month renewal date will be October 1, 2016.
Additionally, as of January 1, 2016 the calculation to determine employer size under these insurance market reforms will be the same method that is used under Employer Mandate provisions. Specifically, this means that in addition to counting full time employees, employers also must count full time equivalents to calculate employer size. A full time equivalent is calculated by adding the hours of all employees who work less than 30 hours per week and dividing by 30 (if calculating per week) or dividing by 120 (if calculating per month). Groups with a total of 100 or less (counting both full time employees and full time equivalents) will be considered small employers.
Should You Renew Early to Delay Small Group Rating?
Renewing early to delay small group rating may be a good strategy for many employers with 51-100 employees, but for certain employers this will NOT be a good strategy. There are various factors an employer must consider.
- The health risk and age of the group, for example, an employer in a high-risk industry that has a young workforce may have lower rates as a small employer than as a large employer.
- The employer’s claims history and industry, for example, an employer in a low-risk industry with good claims experience may have higher rates under small group rating than it did in the past under large group rating.
- Whether an employer will lose its delayed effective date under the Employer Mandate provisions of the ACA.
Why Renewing Early Might Cause Employer Mandate Penalties to Apply Earlier
This third factor — possibly losing the delayed effective date under the Employer Mandate — is critical to consider and requires some additional explanation. The definition of “small” employer varies under different provisions of the ACA. For purposes of the Employer Mandate, employers with 50 or more employees (including “full time equivalents”) are “large” employers. The effective date of these provisions generally is 2015; however, many employers with 50-99 employees qualified for a one-year delay to 2016 because they met certain requirements. One of the requirements is that the employer cannot change its plan year after February 9, 2014. An employer with 50-99 employees who renews in 2015 will be changing its plan year after February 9, 2014, so would potentially lose its one-year delay. It is unclear whether losing the delay means the employer would be exposed to possible Employer Mandate penalties as of January 1, 2016, or January 1, 2015. Clarification from regulators would be welcomed. Either way, these penalties could be significant so it is important to understand the potential cost before making a decision to renew early. (The delayed date for 50-99 size employers is in the IRS final regulations issued February 9, 2014, section D.6 of the Preamble.)
Employers Who Might Want to Renew Early Despite Losing Delayed Date for Employer Mandate
Some employers who renew early will not owe a penalty under the Employer Mandate even if they lose their delayed effective date back to January 1, 2015. Specifically, an employer will not be subject to penalties if:
- It offers “minimum essential coverage” to at least 70% of full-time employees, and
- It offers minimum value affordable coverage to all full-time employees, or
- No full-time employee qualifies for a subsidy to buy coverage in the exchange in 2015 or 2016, even if the employer does not offer coverage to at least 70% of full-time employees.
Additionally, an employer who has a non-calendar year plan and renews early might only lose its delayed effective date in 2016 meaning , as mentioned above, exposure to penalties may possibly be January 1, 2016 instead of January 1, 2015. If this is the case, such employer could renew early and then make sure to offer minimum value affordable coverage as of January 1, 2016 to at least 95% of full-time employees to avoid penalties.
Employers Who Might NOT Want to Renew Early Due to Losing Delayed Date for Employer Mandate
Employers with 50-99 employees who might not want to renew early are those who have offered only “management carve-out” plans or have offered coverage to less than 70% of full-time employees in 2015. For the reasons noted above, these employers would be subject to Employer Mandate penalties if any full-time employee qualifies for a subsidy for exchange coverage.
Employers for Whom Renewing Early Does Not Apply
- If you renewed early in 2013, this does not apply to you
- If after you have more than 100 full-time employees plus full-time equivalents, this does not apply to you. You will be considered large group and will shop large group rates.
- If you have a self-funded plan, this does not apply to you.
First, if you like your anniversary date and do not want to change to a different month, you may not want to renew early.
Second, renewing as of October 1, 2015 could result in different plan years for the cafeteria plan (which, for example, may be from January to December) and the medical plan (which, for example, may be from October through September). An employer might want to amend its cafeteria plan to have a short plan year in 2015 (i.e., ending September 30, 2015), so that going forward the cafeteria plan year syncs up with the medical plan year.
Third, renewing early also could result in your medical policy having a different renewal date (and different open enrollment period) than your other lines of coverage (such as dental, vision, life, disability).
Fourth, the small group market has several additional health care reform requirements that do not apply to the large group market, including guaranteed issue and renewability (which might benefit some employers) and the requirement to cover essential health benefits (which might add additional costs for some employers).
Next Steps for Employers
Employers with 51-100 employees need to carefully consider all factors before deciding whether or not to renew early to delay being subject to small group rating and other insurance market reforms that apply only to small groups. Please contact your Leavitt advisor to discuss your options.