Health Care Reform and Small Business: Is a PEO the Answer?

When it comes to ongoing changes in health care reform, small businesses need all the help they can get. And for many of those small businesses, a Professional Employer Organization (PEO) — where employees become part of a much bigger benefits and administrative employment group — could be the solution to their health-benefits challenge.

What Are Examples of Health Care Reform Impacting Small Businesses?

When the comprehensive health care reform law known as the Affordable Care Act (ACA) passed in March 2010 it made bold and dramatic changes to the way Americans secure both their health insurance and health care services. The ACA implemented potential tax penalties on businesses and individuals to encourage shared financial responsibility of health insurance costs. Since then, health care reform has gone through some changes.

Although the tax penalty for an individual who does not carry basic health insurance was reduced to zero in the tax year of 2019, the same is not true for businesses. The ACA mandates that applicable large employers (ALEs), employers with in general, an average of at least 50 full-time, including full-time equivalent employees, during the prior calendar year, must offer affordable and adequate coverage to full-time employees and their dependents or risk potentially paying a stiff assessment if at least one full-time employee receives a premium tax credit when purchasing coverage from a government marketplace. These employer-shared responsibility provisions for healthcare coverage are also sometimes referred to as "the employer mandate." But what about small businesses? Even though small employers are not subject to the provision, the effect of health care reform is felt in several ways.

With the continued rise of healthcare costs, benefits that improve healthcare affordability remain popular among employees. To help prevent employees from leaving a position to work for ALEs that must offer affordable and adequate health insurance to full-time employees or risk a potential assessment, small-business employers need to find ways to provide similar health benefits for their workforce. One strategy comes in the form of health benefit accounts. For health insurance, some small business employers are using a PEO to access cost-effective health insurance options.

Health care reform has also given small businesses an opportunity to stand out. It's one thing to provide health insurance to avoid penalties, it's quite another to provide this benefit on your own volition. Opting to provide health insurance sends a strong message that you care about the well-being of your employees. A PEO relationship is a strategic one that could be used to provide affordable health insurance solutions while positioning your business as a desirable place to work.

Small-business employers who responded to health care reform by providing health benefits are well positioned for ancillary advantages. Health insurance and health benefits accounts could help improve the physical and mental well-being of your staff, translating into fewer sick days, increased productivity, fewer health claims, and create an overall happier work environment. Additionally, many pre-tax benefits associated with health benefits can help your workers keep more of their income.

Current Affordable Care Act Requirements

Health care reform and small-business requirements are always in flux. Staying current with health care reform could help employers be prepared. Here's a brief review of ACA requirements that both small and large businesses must meet for 2023.

• Small businesses with 25 or fewer employees earning annual wages under $61,400 (tax year 2023) could take advantage of offering health insurance through the health insurance marketplace, Small Business Health Option Program (SHOP). Please note that states choose whether to define smaller employers as having 1-50 or 1-100 FTEs. In CA, VT, CO, and NY the threshold is at 100 FTEs.
• These small businesses — together with agents and brokers — can create an account, choose a SHOP-certified agent or broker and verify their eligibility for coverage. The small business must also pay 50 percent of the employee premiums.
• Larger employers with in general, an average of 50 or more full-time employees, including FTE employees during the prior calendar year must offer adequate and affordable coverage for their full-time employees and their dependents or potentially face financial assessments. For the tax year 2023, the 4980H(b) assessment is $360 per month or $4,320 annualized. There are no exclusions from the assessment for ALEs.
• Small businesses taking advantage of tax incentives by offering health insurance through the marketplace and ALEs subjected to the health care reform shared responsibility provision must comply with Affordable Care Act (ACA) reporting requirements.

How a PEO Can Help

A professional employer organization or PEO creates a model where a small or mid-size business forms a contractual relationship with a larger benefits and administrative employment group. PEOs are a popular resource for small businesses in search of options for outsourcing administrative services for HR management, payroll processing, payroll tax filing, risk management, employee benefits administration, and assistance with maintaining compliance with state and federal laws and regulations.

When it comes to health care, PEOs can be an efficient lifeline for small businesses. With their comprehensive resources and expertise, a PEO may be the best bet for staying compliant with ACA regulations or taking advantage of health care reform.

How does a PEO reduce costs related to healthcare plans? While it does not assume these responsibilities in full for clients, a PEO could help assist you as you navigate your health care obligations regarding these critical areas:

• Calculating the number of FTE employees*
• Determining eligibility, contributions, and employee classifications
• Reporting of qualified medical coverage
• Compliance with tax-related changes
• Changes related to health savings accounts
• Associated tax reporting
• Providing open enrollment guidance and HR support

Paychex HR PEO offers your business:

• Access to more plan designs at competitive prices
• One-stop shopping for most, if not all, benefit and insurance needs, including medical, dental, life, disability, vision, and other insurance such as workers' compensation.

Navigate Health Care Reform With PEOs

Health care reform and small businesses are more inextricably bound than ever before. Learn more about how a PEO can help you find your way through your health insurance obligations and simplify your life as a small-business owner.

Professional employer organization (PEO) services provided by Paychex Business Solutions, LLC (Florida employee leasing license GL7), Oasis Outsourcing, LLC (Florida employee leasing license GL42), and their affiliates, which are licensed or registered to provide PEO services where required by law.

*Please note that this is not a precise calculation. An employer may need to perform additional calculations when the payroll crosses months.