California state insurance regulators and the officials of Covered California, the new health benefit “exchange” created by the Affordable Care Act (ACA), must make some very difficult decisions about a seemingly minor aspect of small group health insurance: Employee Participation and Employer Contribution Rules

Currently, a small business must have a minimum of 75 percent of the eligible employees enrolled in a group health plan (i.e., “EE Participation”) AND the employer must pay at least 50 percent of the employee only premium (i.e., “ER Contribution”).  There are some slight variations to these two rules but generally all small businesses must comply with these two requirements.

The BIG, hugely impactful decision Covered California, DOI and DMHC must make is: must an insurance company consider an employee enrolled in an individual health insurance plan (either in the exchange or outside of the exchange) to have a valid “waiver” of the group plan; or, should the insurance company consider the individual coverage as a “declination” of group coverage.  Employees who “waive” coverage do not count against the “participation” requirement. Employees who “decline” coverage DO count against the participation requirement. This could make or break small group health insurance.  Let me explain.

Currently, if an employee has coverage through a spouse’s group health plan – say an employee’s husband works at the telephone company and the small group employee is covered as a dependent on the telephone company’s plan, then the small group employee can “waive” coverage.  Coverage with Medicare and or Medi-Cal is also a valid waiver.

Conversely, insurance companies consider an employee who has an individual medical insurance plan and chooses to keep the individual plan – rather than enrolling in the company’s group health plan – to be a “declination” of coverage. The semantical difference is critically important for a small business that wants to establish a group health plan.

Consider the hypothetical example of a small business with 10 employees (EEs.) If 2 EEs are covered as a dependent by a spouse (or parent if under age 27) then these would be valid waivers and we would need 75 percent (6 EEs) of the 8 remaining employees to enroll in the plan to meet the participation requirements.  If that same company also had 3 EEs who purchase individual coverage and declined the group plan, then the group would only have 5 out of 8 eligible employees enrolling, or 62.5% (5 divided by 8.)  The group would not meet the minimum participation requirements (75%) and could not offer group coverage.

Why this is a critical question: Beginning in 2014, individuals whose household income is between 133 – 400 percent of the Federal Poverty Level (roughly $15,400 and $46,000 per year for a single person)  will be eligible for a tax subsidy for their health insurance when they purchase coverage through the Exchange (Covered California.)  Low-wage employees who qualify for a subsidy have a financial incentive to purchase an individual policy through the exchange because the cost of their medical insurance will be lower than the full cost of the plan.

A small group employer with low wage employees would want employees to obtain coverage in the exchange because that would reduce the amount the small group employer would have to pay for his/her employee’s benefits .  If individual coverage is a valid waiver, EE’s enrolling in the Exchange and receiving a subsidy would not adversely impact a small group’s ability to obtain a group health plan.

Conversely, if insurance companies consider individual coverage (through the Exchange or outside of the Exchange) as a declination of group coverage (as they currently do); then low-wage EEs would have to forego the tax subsidies and receive their coverage through their employer’s group plan.

Many employers may want their employees to purchase an individual plan – especially if the employee could obtain a subsidy through the exchange – because it would save the employer the cost and the head-ache of offering a group plan.  If individual coverage is a valid waiver, then small group plans in 2014 may only cover direct family members. Employees would have individual coverage for which they may receive a subsidy from the government or, their employers may even pay a portion of the cost (premium) of the individual plan.

Let’s hope that the regulators at the California Department of Insurance and the Department of Managed Health Care and the decision makers at Covered California give a lot of thought to this issue. It could make or break the small group market.