Smart Benefits: Small Employers—RI Exchange Or Private Plan?
Monday, August 26, 2013
Rating Formula Sets Winners & Losers
The federal government requires the rates be age-based and specifies that an older person cannot receive rates more than three times that of a younger one.
With this rating formula, rates look low for younger individuals in their 20s and 30s, moderate for those in the 40s, but climb steadily higher for those in their 50s and 60s.
But age isn’t the only factor behind the figures. For employer plans offered through the exchange’s SHOP, employees may have a choice of plan designs so individual selection can also influence price.
Small Employers Face Big Decisions
Employers and employees of small groups who decide to purchase through the exchange rather than the private market will face the biggest adjustment. That’s because small employers historically selected only one or two plan designs to offer the entire group and received one group composite rate, representing an average of employee age and gender. Now, if employers purchase through the exchange, they must choose between two models: single plan or the Full Employee Choice Model. Either way, rates will be based only on age.
Instead of just offering one plan to employees, the Full Employee Choice Model will allow employers to give their employees a selection of options. Employees will receive a set amount of dollars, which they can apply toward the cost of any one of 16 plan designs. The employer will receive a composite rate for the base plan, and the employee’s age and plan choice create individual employee rates.
Private Market Changes as Well
Age matters in the private market as well. If an employer decides to continue purchasing through BCBSRI and UnitedHealthcare of New England, the carriers will now bill employers a list of individual rates for all their employees versus one group composite rate – although it appears BCBSRI will also provide a composite rate to allow employers to select a benchmark plan and establish contributions.
Since employers will be billed the true age rates of their employees, if there are age changes or employees are added or subtracted, it looks like the employer will need to pay the difference at that time, rather than having guaranteed rates for one year. And employers won’t be able to pass on these cost differences to employees.
An Employer Dilemma?
Because employers will now see true age rates, they need to make sure they use composite rates to set contributions. If not, there could be a potential dilemma for employers, particularly those with more than 20 employees or more.
That’s because the Age Discrimination in Employment Act (ADEA) prohibits employers with more than 20 employees from discriminating against any individual with respect to compensation or the terms, conditions, or privileges of employment because the individual is age 40 or over [ADEA § 623(a)].
The ADEA, ERISA and the IRS have some duplicate provisions, including a prohibition on reducing benefits because of age or ceasing benefit accruals or contributions because of age. If an employer sets a contribution, and by doing so, creates more out-of-pocket expense for an employee over age 40 than a younger one, does that fact that their plan is more expensive create an unfair practice?
An employer would have to defend itself against a charge by giving another reasonable factor, other than age, for why the older employee is paying more for the new age-adjusted rate. And that becomes difficult to do when the federal government is mandating that only age be used as a factor of determining rates.
To avoid the risk, employers should make sure they have a composite rate to determine the group's average rate, and require employees with similar family compositions to pay the same contribution. This approach to composite rating differs slightly from current practice since other variables currently get factored into composite rates, and employers never see individual ratings.
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