Health Care Reform For PEO Clients

Until today, most literature from the PEO industry with regard to health care reform has had a positive undertone.  The popular sentiment is that health care reform creates more rules and regulations for small business owners to follow. As the regulations increase, so does the difficulty of the maintaining HR compliance, and thus the Professional Employer Organization value proposition is that much more appealing. However, despite all of the optimism for market growth in the PEO industry, there are some issues that need to be paid closer attention to. I will point a few out in this article.

Loss of Management carve-out, Section 105(h), Grandfathered Plans

Section 105(h) prevents discrimination in the workplace as it pertains to employee benefits and employees income levels. Its intent is for employers to offer the same plans and contribution strategies to rank and file employees and executives alike. Health care reform has mandated that effective 2010 all group plans must comply with Section 105(h) unless they have grandfathered status. To obtain grandfathered status you must not have made any changes to your group plan design (co-pays, RX costs, etc.) – Not an easy feat to accomplish in the world of rising premiums.

What does this mean for PEOs?

If a PEO makes changes to their group plan descriptions during their annual benefit enrollment period from 2010 and on they will likely lose grandfathered status. PEOs regularly change plan descriptions yearly to keep costs low for clients. If a PEO loses their grandfathered status they will no longer be allowed to provide management carve-outs, which is a strategy used to offer different levels of benefits to different classes of employees. An example of a management carve-out is an employer paying 50% of coverage for regular employees, and 100% of coverage for executives. For instance a company with 103 employees; 100 lowly compensated factory workers paying for 50% of their health coverage, and 3 highly compensated executives paying 0% of their health coverage. They will be forced to choose to either increase employer contribution for the factory workers, or limit employer contributions executives–either way they must be equal. There are several major PEOs that will lose grandfathered status this year and a few that will retain it.

Increased Medical Costs

As we roll into July, we’re on the precipice of receiving official information from many national PEOs in regard to their annual health increases, and they are all going to be higher than normal.  Health insurance carriers have passed an additional 4-6% increase on to PEOs in order to cope with the rising costs brought on by health care reform.  So if your increase was 12% last year, expect 16-18% this year! The following Health Care Reform mandates are effective in 2010 and have directly caused additional cost:

1. Expanded eligibility for groups of employees who are not currently eligible and for dependent children up to age 26
2. Elimination for lifetime and annual maximums
3. Elimination of pre-existing limitation for dependent children under age 19

Many PEO clients have heard that increases this year should be lower than usual due to health care reform. They are gravely mistaken, the three points listed above do nothing but expand coverage and incur costs for all medical carriers; it’s unrealistic to think a PEO has the ability to counter this.

Tax Credits – A Mixed Bag

Are PEO clients eligible to receive tax credits even though they are co-employed? Yes. Will tax credits make it cheaper for small employers to provide health coverage and therefore open up more markets for PEOs? Yes. Will existing PEO clients get a big check from Uncle Sam? Probably not. Most have already heard that businesses with fewer than 25 employees and wages averaging less than $50k per employee are eligible for a credit. Most have also heard that the credit is equal to 35% of employer’s premium costs.  However most haven’t realized that the 35% credit gradually phases out if your average wage is over $25k and you employ more than 10 employees. According to NAPEO, the average PEO client is 17 employees, so already the tax credit will be mitigated due to employee count. Furthermore, most PEOs have switched their marketing focus from blue-collar industries (with lower average wages) to white-collar industries where average wages of $25k are non-existent.  The impact of this credit is severely limited for most PEO clients. PEOs will have their work cut out for them in the upcoming years, and most have dedicated additional resources to understand and manage for the upcoming changes so that their clients don’t have to. However, PEOs are not commodities and are not created equally, so PEO shoppers will need to be more educated on who is who in the PEO industry in order to make the best choice for their future. To determine which PEO is right for your business, contact us for a free comprehensive PEO comparison.