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Management Practices

Insuring Your Future

Stacey Soble | March 2, 2015 | 11:53 AM
Marilyn Ihloff, owner of Ihloff Salons and Spas, designed a plan to recoup costs associated with becoming compliant with the Affordable Care Act a full year before the legislation was enacted. (photo credit: Jeremy Charles)
Photo By Jeremy Charles

After years of debate, amendments and changes, the Affordable Care Act (ACA) has arrived. Larger salons and spas are witnessing the first tremors of how it will impact their bottom lines.

Marilyn Ihloff of Ihloff Salon and Day Spas in Tulsa, Oklahoma, is one salon owner who studied the forecast and planned ahead. In fact, she launched her salon’s health care coverage a full year before it was required, so she could design a system that’s compliant but also offset additional costs.

So what does the ACA require, exactly?

On March 23, 2010, the ACA was signed into law with the intent of providing affordable, quality health care to all Americans. Per the ACA, insurance sold through exchanges is offered in four tiers, covering 60, 70, 80 and 90 percent of health service costs, respectively. Employer-sponsored plans must meet the same qualified coverage standard as plans sold on the exchange. All group health plans will have to be certified as qualified health plans and a minimum table of required benefits will be established to prevent employers from offering low-benefit “sham plans.”

The ACA currently says 30 hours per week constitutes a full-time employee. It also states that businesses with more than 100 full-time employees must offer health care to employees starting January 2015. In January 2016, businesses with more than 50 full-time employees will also be required to do so.  

Ihloff owns three salons in the Tulsa area and employs 143 people with about 100 of them being full-time.

NAVIGATING NEW TERRITORY

Although Ihloff wasn’t responsible for providing a health care plan until 2015, she decided to put the plan in starting in January 2014. “I think it’s so wacky that we are the only civilized country that doesn’t provide health care to its citizens,” she says. “I’m glad we finally have some sort of initiative that’s taking care of it.”

As for the salon industry, Ihloff believes the rule that any business with more than 50 full-time employees must provide insurance isn’t necessarily the right way to construct the guidelines.

“The metric is off,” she says. “It should be tied to a combination of number of employees and average wages. An engineering firm may have only six employees and make the same amount of money as my salon with 143 employees,” she says.

However, Ihloff recognized she had to work with the system as it is, so she began planning her budget when she realized she must offer her employees a health care plan—an expense she had never previously incurred. “We’re now paying 60 percent of a health care plan, which is the requirement, for employees who work 30 hours or more—if they want it,” she says.

The ACA states full-time is 30 hours per week, although that is currently being debated and may change in the future. It also states the insurance offered to employees can’t be more than 9.5 percent of wages. “This has been interesting because if people want the insurance, they have to work 30 hours,” Ihloff says. “Because we’re having to ante up and provide insurance, they need to put in the hours.”

For Ihloff, 60 percent means paying $248 per month, per employee. The individual employee pays $165 per month. All eligible employees did not sign up—some had better plans under their spouses, and some are under the age of 26 and are still covered by their parents.

“We did have some sign up and cancel because they couldn’t afford it,” Ihloff says. However, in 2015, cancellation won’t be an option without incurring a tax penalty. Because Ihloff launched a year early, employees could try it and cancel without a penalty. This year, employees who go without health insurance will pay a tax penalty.

CRUNCHING NUMBERS

Covering her employees in 2014 cost Ihloff’s salon approximately $165,000. After working closely with her CPA, HR person and insurance broker (Ihloff has a finance degree herself), a plan was put in place to offset that cost with the help of another resource—her software company.

With the help of Salon Biz, Ihloff was able to create a surcharge in her software to help offset the cost of health insurance. “For lower-priced items (under $25) like waxing, the surcharge is $.50,” she says. “Anything less than $75 is a $1 surcharge, up to $120 is $1.50 and anything more than $120 is $2.”

The salon’s clients only see a final amount on their receipts. There is no extra line item that designates the surcharge. It also is not included as part of weekly sales totals, so it’s not a part of the stylists’ commission.

Edwin Neill, principal at Neill-TSP who markets SalonBiz software, stresses the importance of salon owners stepping up and protecting their profits as they begin to investigate what the Affordable Care Act will mean for their salons’ revenue.

“Owners are going to have to take into account health care costs in setting service provider compensation,” Neill says. “Some salons have already done so successfully by adding an additional service charge onto each client ticket.”

Neill adds, “This allows for additional revenue that can cover the cost of ACA compliance while not changing the commission rate paid to stylists. However, salons should be careful to check the laws in their jurisdictions. While service charges to clients are usually acceptable, a charge specifically to cover the ACA may not be.”

Ihloff implemented her surcharge on January 1, 2014, when her ACA-compliant health care plan went into place. The surcharge brought in $130,800 last year, offsetting most of the health care costs. “We’re still about $30,000 off,” Ihloff says. “But we all sat together and sweated bullets over this.” Ihloff’s CPA predicted they would bring in right around $134,000, so she was pleased with their accuracy and was armed with more knowledge for this year’s budget.

THE KEYS TO IMPLEMENTATION

Ihloff has a CPA and HR person she has worked with for years. In addition, she worked very closely with a broker for health insurance. These people were key to choosing the right plan for her salon, creating a budget and supplying correct information on the ACA, which is always changing.

Looking for an insurance broker might seem overwhelming, but Ihloff advices checking with the insurance company that handles your liability and commercial package first.

“See about health care specialists in their organization,” she says. “They will guide you through.”A quick Google search on health care brokers should also yield results and provide information on what companies specialize in the area.

Even though Ihloff had a great team in place and plenty of sage advice, she has still continued to learn as she goes. For example, she originally used a local company with a good reputation for the health insurance she provided. This year, she had to shop around the bigger insurance companies to find one with a better rate.

Marilyn Ihloff (seated), owner of Ihloff Salons and Spas with three locations in Tulsa, Oklahoma, with three of her team members: Brian Murphree, manager of the Ihloff South Memorial location; Adrian Braggs, designer level stylist; and Hailey Rowan senior level stylist. (Photo by Jeremy Charles.)

“Some of my employees hadn’t been to a doctor in years,” she says. The result? More claims and costs, so a higher premium. But Ihloff wants a healthy workforce, so she continues to shop for the best plan at the most reasonable price for her employees.

UNDERSTANDING PENALTIES

Great Clips CFO Steve Overholser has been studying the ACA and all its changing facets for years, and he even speaks on the topic at salon industry events, offering clarification and advice on the ever-changing ACA rules. He also helps Great Clips franchise owners across the country navigate the new laws and figure out the right strategies for their businesses.

With franchise owners ranging from someone who owns 40 salons to someone who owns one or two, every owner’s needs are quite different.

One of the hottest ACA topics affecting Great Clips owners is one that’s currently under debate in Congress: what equates a full-time employee? “Under the current law (January 2015), anyone who works 30 hours or more per week over a defined period of time is full-time,” Overholser says.

According to Overholser, there are two ways to determine if someone is full-time. The first is to offer a job as a full-time, salaried position. The second is a variable-hour employee, which can be measured in a couple of ways.

“As a business owner, you can designate a time period—between three and 12 months—to determine whether or not employees are full-time,” he says. “You don’t know if they are full-time until you look back at their hours.” 

After studying the hours, an owner might find employees working more than 30 hours for a month or two, but overall less than that—especially if their business is seasonal.

“Looking at the measurement period is important,” Overholser says. “You don’t want to look at too short of a period of time due to seasonality.”

At Great Clips, 80 owners have more than 100 employees who are full-time equivalent, so they will be affected by the new ACA law in 2015. Another 150 owners have more than 50 full-time equivalent employees, and will be required to provide insurance in January 2016.

Steve Overholser, CFO, Great Clips.

“These plans must not cost the employee more than 9.5 percent of that person’s income,” Overholser says. So, for example, if the plan’s premium is $400 per month, you, the owner, must offset the cost so the employee pays no more than 9.5 percent of their income.

“Part of problem in the salon industry is tips aren’t typically reported,” Overholser says. “And you can only factor in 9.5 percent of reported income.”

Although some owners, such as Ihloff, have planned for the new law and implemented a health care plan, others have not and might not ever. Instead, they might just choose to pay the penalty.

“There are two types of penalties,” explains Overholser. “The first penalty is based on whether or not you offer coverage. If you choose not to offer coverage, the penalty is $2,000 per year, per full-time employee.”

The ACA law currently states if the employer fails to offer health coverage meeting certain standards to every full-time employee and any one employee receives tax-subsidized coverage through an individual exchange, the employer must pay a $2,000 penalty for every full-time employee. (The first 30 employees are not counted in figuring the penalty. However, for 2015 only, the number is the first 80 employees.)

“For some business owners, this penalty is probably a lot less than offering a full-time plan, and it’s more cost-effective not to offer coverage,”Overholser says.

If you’d rather not pay penalties but offering full coverage is too costly, Overholser suggests looking at the minimal essential coverage. Under the rules, you can offer this type of plan, which is different than a full bronze plan (plans are labeled bronze, silver, gold and platinum).

“It covers all the required preventative screening and tests and is required to cover some degree of hospitalization,” he says. “It’s a less robust plan than the fully compliant plan but eliminates your susceptibility to penalty.”

Great solution, right? Not so fast. By offering this plan, you’ll be subject to a second penalty—not offering a compliant plan. This section of the law states that if the employer offers coverage but an employee obtains tax-subsidized coverage through the individual exchange, the employer must pay a $3,000 penalty for that employee.

Although any employee is free to decline the employer plan and shift to the exchange, the tax credit is available only if the worker’s required contribution to the employer plan for single coverage is more than 9.5 percent of the employee’s income or the plan pays less than 60 percent of the cost of covered services. 

“The IRS has created a safe harbor test by looking at the employee’s W-2 income but the law itself uses household income,” Overholser says. “In other words, the income of the spouse is in reality considered in the affordable test, but you as the employer are not allowed to ask for the information.”


NAVIGATING THE SYSTEM

With the current law stating full-time is considered 30 hours per week (there is a proposal to up that to 40 hours a week, but as of January 2015, it had not been changed), some lower-paid stylists are faced with a dilemma.

If they are eligible for a subsidized plan on the market place for no more than 3.5 or 4 percent of their income, they will no longer be eligible if their employer provides a compliant plan for 9.5 percent of their income (just for single coverage—the employer is not required to cover spouses). Family coverage could be as high as 18 percent for these employees.

At Great Clips, 80 owners have more than 100 employees who are full-time equivalent, so they will be affected by the new ACA law in 2015. Another 150 owners have more than 50 full-time equivalent employees, and will be required to provide insurance in January 2016.

“In this case, stylists may not want to be full-time when they can go out to the market place and get cheaper insurance there,” Overholser says. “Essentially what will happen if the rules don’t change is you’ll see stylists working 38-40 hours per week or they’ll be working 29. When people think it through and realize how much money they are giving up, there will be all kinds of strategies.”

Overholser says owners will have to strategize as well. They’ll eventually ask themselves: “Do I want to avoid all penalties, or am I okay paying some?”

The second penalty for not offering a compliant plan is only applicable if an individual employee declines your coverage and goes to the market place and buys a public policy.

 “Let’s say you have 10 people who have unaffordable coverage, but only three go out and buy insurance,” Overholser says. “The penalty would only apply on the three who get policies through the public market place. So as an employer, you still don’t know what this is going to cost you.”

That’s when guesswork comes in. Overholser advises owners to look at their business and ask, “How many are going to sign up? How many want fully robust coverage? How many will take my smaller plan?”

Next he says to ask yourself, “Am I going to add a minimal essential plan or bronze-level plan? How much will I contribute to that plan? How many full-time employees do I want to have? How many part-time?”

He adds, “You must make some assumptions and do the math—the penalty would be $3,000 per year multiplied by the number of people who got public policies.”

Great Clips franchises are a not a full-service business and do a lot of discounting, which precludes them from using a surcharge like Ihloff did. To offset the costs, Overholser coaches owners to increase the volume of haircuts instead. But mainly, he encourages them to look at their business and figure out what is the best plan of action based on their employees and size.

BUYER BEWARE

Some salons already offered a health care plan before the ACA took effect. They are not immune to the law—in fact, they must convert their plan to be ACA-compliant.

“One of the biggest issues owners are having is with insurance carriers,” Overholser says. “For most insurance carriers, there were rules about eligible employees. The old rules said 75 percent of them had to sign up or present a waiver saying they were covered elsewhere. If you didn’t meet those requirements, a carrier could look at your organization and price your policy. Premiums would go up because you had a lot of claims per participant (it would be assumed that only employees who expected to have claims would sign up)—carriers had pricing abilities.”

But under the new rules, carriers are on an even playing ground with pricing. “Instead, the carriers are being hard-core about participation rules,” Overholser says. “They are charging a surcharge on top of the premium if you can’t get the required participation percentage.”

Because of this, it’s difficult for business owner to get enough participation to get cheapest premiums.

“Right now, the government is allowing these surcharges because as individual penalties get higher, they believe the people opting out will have to get insurance because the penalty will be so bad,” Overholser says.

For more information on compensation, visit neilltsp.com.

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