While 2022 is still months away, it’s not too early to be thinking about health coverage for next year. While not every small business may have offered this employee benefit in the past (only 30.8% of firms with fewer than 50 employees did so in 2019) (the most recent year for statistics), the tight labor market virtually makes it a must now. However, the options for providing this benefit are numerous and can be tailored to your company’s needs. But you need to act now.
Determine if you must offer coverage
If you are an “applicable large employer” (ALE), under the Affordable Care Act you must offer affordable minimum essential health coverage to full-time employees or pay a penalty. You’re an ALE if you have at least 50 full-time and full-time equivalent employees (you count part-times for determining ALE status but aren’t required to provide them with health coverage although you can choose to do so). For 2022, “affordable” means premiums don’t cost employees more than 9.61% of their household income.
Check the IRS for rules on determining ALE status.
Even if the law doesn’t require you to offer health coverage, you may be forced to do so in order to keep current employees and attract new ones. Health coverage is, perhaps, the most important thing to employees other than the amount of their paycheck.
Project what you can afford
Revenues have been unpredictable, in part, because of the pandemic. Nonetheless, you need to estimate what you can afford to pay for health coverage on behalf of employees. This will enable you to decide how to approach premiums. Will the company pay the entire amount (or the entire amount for an employee, with the employee paying for a spouse and/or dependents)? Will the company enable employees to pay their share on a pre-tax basis (which requires you to set up a premium-only cafeteria plan for this purpose)?
In determining cost, factor in tax breaks which effectively reduce out-of-pocket expenses. Company-paid health insurance premiums are deductible. And a small business may qualify for a tax credit (these dollar 2021 amounts; 2022 amounts adjusted for inflation aren’t available yet) if it pays at least 50% of the premiums. But premiums taken into account for the credit are not deductible.
Even if you don’t pay anything toward employee health coverage, a premium-only cafeteria plan may be a win-win. Employees aren’t taxed on the portion of their wages applied toward premiums. And the company doesn’t pay employment taxes on these amounts.
Choose the type of coverage for your situation
There is a myriad of options to consider:
- Group health coverage. As a small business, you are likely in the small group health market, which affects the premiums charged by the insurers. Check now for rates in 2022. For example, in Buffalo, NY, premiums will increase 8.7% for some small group plans.
- High-deductible health plans. You can offer a high-deductible health plan (HDHP), which costs much less than traditional coverage; insurance doesn’t kick in until a deductible is satisfied. The HDHP can be combined with a health savings account from which employees may pay their out-of-pocket costs. The IRS has set parameters for 2022.
- Qualified small employer health reimbursement arrangements (QSEHRAs). This allows small employers (those that are not ALEs) to reimburse employees for their individually-obtained health coverage. The law caps the amount that may be reimbursed in 2022; it varies for self-only coverage and family coverage. The 2022 caps have not yet been announced (in 2021 they were $5,300 and $10,700, respectively).
- Individual coverage health reimbursement arrangements. Like QSEHRAs, these plans reimburse employees for their individually-obtained coverage. But unlike QSEHRAs, they may be used by a business of any size and the reimbursement amount is set by the employer; not the government.
As a supplement to group health coverage, you may offer Excepted Benefit Health Reimbursement Arrangements (EBHRAs), which pay for things not covered by the policy (e.g., vision, dental, hearing). The annual reimbursement cap is fixed by the government ($1,800 for 2022).
Provide required notice
If you offer health coverage, you must give certain notice to employees about their participation and other details. This might entail giving them a plan summary document, which may need to be updated for 2022. The Department of Labor has model notices you can use for your situation.
The notice usually must be given 90 days before the start of the plan year. If you have a calendar-year plan starting January 1, 2022, be sure to provide the necessary notice by October 3, 2021.
Surprisingly, an article in Harvard Business Review earlier in 2021 asked: “Are Employer-Sponsored Health Plans on Their Way Out?” The article addressed traditional group coverage, explaining the new coverage alternatives such as those discussed above. The answer for small business owners—whether and what coverage to provide—depends on their situation. But now’s the time to decide.