The Affordable Care Act in the Salon Industry: A Case Study
Doing the Math
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 SalonBiz, 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 III, principal at Neill Corporation 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.
Making the Plan Work
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.
“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.
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Thank you for the insight, Pat.
I have been in business in NC for 20 years this year and 16 years before that in WV. While insurance costs have truly increased immensely over the years, we have always offered it. Now it is a bit different, but still we are able to pay 60% for FT employees.
When determining the 30 hours per week benchmark, my agent told me many years ago to add up all of the hours an employee works in a year and divide by 52. That will give you the “real” number of hours per week they work.
We try to set full timers up on a 35-40 hour per week schedule. Anything much less than 35 does not average out. Once they have their vacation days, personal days, sick days, holidays, etc. very few of them put in an actual 2000 hour work year.
So, it could help to know exactly how many hours per week your employees really work.
Also, we also know that there are only so many slices in a pie, The money must come from somewhere to pay for benefits such as this. We are able to manage as a result of our Team Bast Pay structure which allows for expenses, including a moderate payroll first, and if there is extra left over, the team gets it in the form of a bonus. So less $$$ up front as salary + more dollars on the back end if, and only if all expenses are met.
FYI: I would caution posting “older case studies” for the ACA. Salons who reimburse their workers for health care costs will face tax penalties beginning Wednesday, July 1st.
Prior to the passage of the Affordable Care Act, with its mandate that all Americans purchase insurance and requirement for businesses to offer employees insurance plans, many salons provide coverage by directly reimbursing medical costs or for the cost of private insurance plans. Salons do it because that’s a less complicated process than dealing with an official health insurance plan, but continuing to do so after July 1 could cost them hundreds of dollars in fines each day.
Business groups are calling attention to what they say is an obscure part of ACA that could crush small businesses who are unaware of it.
“It’s the biggest penalty that no one is talking about,” said Kevin Kuhlman, policy director for the National Federation of Independent Businesses, on Tuesday, June 30th.
The penalties will only affect businesses with less than 50 employees. Those with more than 50 employees are already required to offer a health insurance plan.
The new rule is the result of an Internal Revenue Service interpretation of part of the ACA. It seems intended to force employers to offer a group health insurance plan (or leave their employees to fend for themselves on the health insurance exchanges).
The IRS says those reimbursements — technically known as “employer payment plans” — are “considered to be group health plans subject to the market reforms, including the prohibition on annual limits for essential health benefits and the requirement to provide certain preventive care without cost sharing.”
The end result?
“Such an arrangement fails to satisfy the market reforms and may be subject to a $100/day excise tax per applicable employee (which is $36,500 per year, per employee) under section 4980D of the Internal Revenue Code,” according to the taxmen.
Business groups say the punishment doesn’t fit the crime.
“Reimbursing employees for the cost of insurance or medical services is a way for small businesses to help their workers without the administrative headache of setting up a costly group plan,” said Kuhlman. “Most small employers don’t have HR departments or benefits specialists, so this is a simpler, easier way to help their employees.”
The prohibition on employer reimbursement was supposed to start last year, but the IRS postponed implementing it until July 1, 2015.
This was great information and very timely for us. I agree that providing health insurance is something that shows we care about our employees but it also carries a big price tag. Thank you for sharing your idea on sur charge. We personally take the financal hit to make sure we offer insurance.
Our industry has mainly young women and they would not be taking care of themselves as well without assistance.
Great advice shared as always! Thank you Neill Corp.