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 St Vincent Medical Center Los Angeles plan design (co-pays, RX costs, etc.) other than adding or dropping employees.
What does this mean for PEOs?
If a PEO makes changes to their group plan descriptions during annual benefit enrollment this year they will lose grandfathered status. PEOs regularly change plan descriptions yearly to keep costs low for clients.
If a PEO loses 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. 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 HCR mandates are effective in 2010 and have directly caused additional cost:
Expanded eligibility for groups of employees who are not currently eligible and for dependent children up to age 26
Elimination for lifetime and annual maximums
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 Psychotherapy Definition Psychology as I often mention, PEOs are not commodities and are not created equally, 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 PEO Spectrum for a free vendor comparison and cost analysis.