Incentives for Small Business Health Benefits Could Be Improved

April 22, 2014 (PLANSPONSOR.com) – Regulations designed to encourage small employers to offer employees health benefits could be improved, research suggests.

A report from the Congressional Research Service (CRS) notes the Patient Protection and Affordable Care Act (ACA) contains several provisions to encourage employer-sponsored health coverage, particularly among small businesses. The provisions that most directly relate to small businesses are (1) an employer penalty for not providing health insurance, (2) a tax credit to increase the affordability of health care for the smallest firms, and (3) small business health insurance exchanges designed to increase plan options and lower plan costs.

Analyzing the most recent employer size and insurance coverage data, CRS found the ACA’s employer penalty is structured so that it could exempt approximately 96.2% of employer firms simply because they would be too small, and thus fall below the employer penalty threshold of 50 full-time equivalent (FTE) employees. These exempt firms account for approximately 27.6% of all workers. However, after accounting for firms that already provide insurance, less than 1% of employer firms could be subject to the employer penalty. Although 72.4% of all employees work for firms that are large enough to be potentially subject to the penalty, only about 1.8% of employees work in firms that do not already offer health insurance.

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The report says less than 4% of small businesses that could have been eligible for the small business health care tax credit in 2010 actually claimed it. According to a report by the Government Accountability Office (GAO), many business owners felt the credit was too small of an incentive to begin offering insurance; even if these small employers offered health insurance, some employees declined coverage because they could not afford their share of the premium; and the rules were too complex.

CRS says small business health exchanges could help reduce some barriers to accessing relatively affordable health coverage in the small-group market. By pooling risk among multiple businesses and reducing administrative costs, average insurance costs could reduce costs for these firms. On the other hand, firms with relatively healthier employees could see a rise in insurance costs.

CRS discusses potential revisions to the law proposed by critics of the employer penalty. One issue of concern is the incentive for firms to reduce part-time employee hours below the 30 that define “full-time” employment (under ACA) as a means to exclude these employees from coverage. CRS notes several bills have been introduced to increase the definition of “full-time” to at least 40 hours per week. Although this change would reduce the incentive at 30 hours per week, it would introduce an incentive to reduce hours among those that work around 40 hours (a larger share of all workers), CRS contends.

The report suggests the current small business health care tax credit could be expanded to encourage more small businesses to offer health care coverage, and potentially avoid the employer penalty.

According to the report, the Obama Administration and some lawmakers have proposed to amend the small business tax credit to encourage and expand its use to more businesses. President Obama’s FY2014 budget proposes expanding and simplifying the credit. The budget recommends increasing the eligibility cut-off from 25 to 50 workers, changing the phase-out formula so more firms will qualify for at least part of the credit, and simplifying the calculation of the credit (by removing a requirement that an eligible employer pay a uniform percentage of the premium for each employee and also eliminating a cap on the credit based on the average health insurance premium in the employer’s state).

In addition, in the 113th Congress, the Small Business Health Care Tax Credit Improvement Act of 2013 (H.R. 3046) would amend the tax credit to increase the maximum number of FTEs from 25 to 50, modify the phase-out of the credit, and repeal the limitation based on state health insurance premium averages. In addition, the Small Business Tax Credits Improvement Act (S. 1325) would also increase the maximum number of FTEs to 50, and increase the maximum wages cap to $37,500, among other provisions to increase the number of firms that could be eligible for the credit and the possible benefits awarded.

The CRS report is here.

DB Plans to Increase Alternative Investments

April 22, 2014 (PLANSPONSOR.com) – New research indicates defined benefit (DB) plans will turn increasingly to alternative investments during 2014.

A recent survey of investment consultants by global analytics firm Cerulli Associates confirms that U.S. institutional investors across client segments have increased their exposure to alternative assets since 2007. Cerulli’s research indicates as institutional investors increasingly take an objective-based approach to portfolio construction, hedging and risk management allocations will grow in importance within institutions’ portfolios.

Investment consultants polled by Cerulli expect DB pensions will increase allocations to hedge funds (65% of consultants), other private investments (56% of consultants) and private equity and venture capital (50% of consultants) during the next 12 months. In addition, they anticipate nonprofits will increase their proportion of alternative investments during the next year, specifically allocations to other private investments (75% of consultants), private equity and venture capital (58% of consultants), and hedge funds (46% of consultants).

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“The 2008 financial crisis left institutions in search of more consistent portfolio returns across different economic environments,” says Michele Giuditta, associate director at the Boston-based Cerulli. “There is new thinking around portfolio construction, leading institutions to reevaluate their models for governance, asset allocation, and implementation.”

The report explains, “One challenge of a risk-based allocation is the lack of consistency among institutions’ classification methods. As this shift continues, traditional asset classes and style boxes are increasingly irrelevant. Blurring asset class boundaries typically leads to higher allocations to alternatives, as institutions seek assets whose returns are less correlated with domestic equities.”

More information about the research, including how to purchase a copy, can be found here.

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