With the advent of the Affordable Care Act (ACA), calculating an employee’s portion of their health insurance premium became much more difficult. Traditionally, health insurance premiums were presented as five-tier rates:
- Employee and spouse
- Employee and child
- Employee and children
Age Isn’t Just a Number
For small employers (less than 50 full-time equivalent employees), the ACA mandates that health insurance carriers base premiums on each individual employee’s age. This means that the health insurance premium may be different for every employee! As you may imagine, this can cause several difficulties not the least of which is the potential administrative burden of tracking different withholdings for each employee.
The Older the Employee, the Bigger the Burden
The first and most prevalent negative impact is the burden imposed on an employer’s older workers. With age banded rates, younger workers premiums are the least expensive and older workers are more expensive. The ACA permits health insurers to charge an older employee up to three times the rate a 21-year old employee may be charged. The impact of this is that an older employee’s portion of their premium may not be affordable for them and may cause them to waive coverage or personally enroll in the health insurance marketplace.
Why Does That Matter to an Employer?
If fewer employees enrolling in a group health plan, an employer may be in danger of not meeting minimum participation guidelines established by their health insurance carrier. This puts their entire benefit plan at risk. Also, employees talk! Older employees who may have special skills given their longer tenure may be dissatisfied upon learning that a younger worker may be paying one third of their cost for the same coverage. An employer runs the risk of losing these valuable employees to a competitor with more parity in the structure of their benefit plans.
Isn’t this Age Discrimination?
Another impact of the variable rates for small groups is the risk of age discrimination in fact or appearance. While the ACA mandates these age banded rates for small employers, there still may be some risk regarding age discrimination claims.
- Age Discrimination in Appearance – An older employee who may have been terminated for cause may feel they were in fact terminated due to the additional cost of their health insurance as compared to a younger peer. Even if there is no basis in fact for this claim an employer may have to spend time and resources defending themselves against a spurious claim.
- Age Discrimination in Fact – Even if employer’s human resource manager is well versed in permitted factors to be considered when hiring an employee, a business owner may still find themselves in a sticky situation. Say a business owner reviews age banded health insurance rates and are confronted by the potentially much higher cost of hiring an older candidate. They may then be tempted to use this as a basis of choosing younger candidates instead. This is not permitted and may expose the employer to unwanted litigation.
Composite Rates are the Solution
Our team at McConkey includes an Actuarial Services Department. Our actuarial experts evaluate the age banded rates for an employer, examine the enrollment, and calculate a composite rate. The outcome is shown as the traditional five-tier rates that were the norm before the ACA. Although health insurance carriers must still present rates as age banded, an employer is permitted to base an employee’s contributions on the actuarially calculated composite rates. Using these composite rates accomplishes:
- Less employee dissatisfaction as each employee rates will be based upon their enrollment tier rather than age
- Better retention of older and perhaps more experienced employees as the cost of benefits is spread more equitably among all employees
- Less chance of not meeting minimum participation threshold for a group health plan
- Less administrative burden with consistent costs and withholdings among all employees
- Reduced risk of age discrimination claims
Given the five points above, using composite rates to determine your employees’ contributions to the cost of their health insurance premiums is considered a “best practice.”