Trade-off: Small businesses drop health insurance, pay employees to buy own coverage

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NEW YORK — When Monty Hagler learned his employee insurance premiums could rise as much as 38 percent, the small business owner decided he couldn't afford coverage that complies with the health care overhaul.

He considered a variety of plans from different carriers, but they were too expensive or bare-bones.

"Unless we dramatically changed our plan and went with the most basic plan, I said, 'this is not sustainable,'" says Hagler, owner of RLF Communications, a Greensboro, North Carolina-based marketing company.

So Hagler told his 12 staffers he would give them money starting in May to buy their own insurance, coverage likely to be better than what he could offer. He joined a growing number of small business owners who are forgoing coverage and paying staffers more to compensate for the lost benefits. Health insurer Wellpoint said last month its roster of small businesses has shrunk by 12 percent so far this year. Nearly 3 percent of 1,600 small businesses surveyed by the Society for Human Resource Management plan to give employees subsidies next year so they can buy their own coverage on private insurance exchanges.

LOSING COVERAGE AT WORK

Insurance brokers are getting more inquiries about individual coverage, a sign to them that many people are losing coverage at work. The brokerage HealthMarkets Inc. has had a 40 percent pickup in applications for individual insurance since the open enrollment period for insurance ended March 31. Spring and summer are normally a slow period for policy purchases.

"We're seeing this happen with increasing frequency and we're believing we'll see it with greater frequency this fall," says Ken Fasola, CEO of HealthMarkets, based in North Richland Hills, Texas. If policy cancellations do rise this fall, it would likely be due to the fact many small businesses renewed their coverage before Jan. 1, 2014, when policies were required to comply with the health care law. As those policies come up for renewal, owners will have to decide whether to buy the new insurance.

Owners like Hagler aren't required to offer insurance. The health care law exempts companies with fewer than 50 workers. But many of these owners provided coverage because insurance is a benefit that helps retain staffers and recruit top talent. But workers may get a better deal on government-run health insurance exchanges, especially if they qualify for government subsidies that will lower premium costs for individuals and families. The government will subsidize coverage on the exchanges for individuals earning up to $45,960. The income limit for a family of four is $94,200.

About half of Hagler's employees bought their insurance on the North Carolina exchange, while others got insurance through their spouses' plans or bought it privately.

Kim Sink, the company's director of projects and production, says she's grateful Hagler gives her a stipend that covers two-thirds of her $711 monthly premium.

"I'm tickled that he still helps me. Most employers don't in this day and time," she says.

Giving workers extra compensation to help buy insurance can result in higher income tax for the employees, and it can also mean employers will owe payroll tax on the money. Benefits attorneys and accountants recommend owners talk to a tax professional to see what their options are.

A BETTER DEAL?

Some owners bring in insurance brokers or benefits consultants to help workers find new insurance.

"We explained to them, you probably are going to come out ahead. You will get a stipend and a subsidy and coverage will be better than what you were going to get with the group plan," says Ashley Hunter, owner of HM Risk Group, an insurance brokerage based in Austin, Texas.

The coverage now available to individuals in Texas is more comprehensive than the insurance Hunter provided her own staffers under a group plan. And it's cheaper. Hunter paid 80 percent of premiums under the plan she dropped as of this month. Under the plan, an employee paid $140 a month. But with the stipend and government subsidy, the employee is paying $24.12 a month, Hunter says.

Many of Hunter's small business clients are also dropping coverage for their workers.

Workers can do better on their own because they have more options than businesses, says John O'Donnell, president of Insurance Consultants of Central Florida, a broker based in suburban Orlando, Florida.

"Small groups have to pick from two or three plans, whereas employees can go to the individual market, exercise more flexibility and have more autonomy," O'Donnell says. He estimates 10 percent of his company's small business clients have ended insurance and given their workers money for coverage or are seriously considering it.

Laura Adamski was looking at a nearly 30 percent increase for a policy that was up for renewal Sept. 1 and also chose to end her coverage. She's still working with her accountant on a plan to compensate the 12 employees of her Aurora, Illinois-based advertising and design business, Cygnet Midwest. Right now she's not sure how those payments will be structured.

"It's hanging over me," she says. "I have the three months to work on that."

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Follow Joyce Rosenberg at http://www.twitter.com/JoyceMRosenberg

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