SEMA News—September 2013

BUSINESS
By Mike Imlay

Retailer Spotlight

ModBargains.com Delivers Data, Product and More

Located in La Habra, California, the company was co-founded in 2004 by CEO Mike Brown, then 19, and President Ron Hay, then 24. Their original business plan called for a sort of online clearinghouse of special automotive parts promotions and deals similar to those offered by tech-industry bargain sites. But the venture quickly morphed into something much bigger—and better.

“It just wasn’t that much fun,” conceded Brown. “So we started to focus on actually connecting people with parts instead. Since then, the business model has continued to evolve from parts broker to connecting people with parts based on our knowledge to inventory and installations.”

Hay added: “We started as a BMW aftermarket accessories company. We’ve recently begun to branch out into all sorts of cars: Nissans, Infinitis, Mercedes-Benzes, Scions, Camaros and Mustangs. We’ve just been expanding. Back then, there was a lot of fragmentation in the market. There weren’t a lot of shops specializing in what we were doing, and the prices seemed really high. Were they really the best products? Where were the reviews, the information? There weren’t a lot of product details out there.”

Filling that gap became the pair’s immediate goal, and social media seemed the ideal way to attain it. They worked with both manufacturers and customers to gather product data, photos and video and then harnessed multiple forms of social media to deliver that information to consumers. Essentially, ModBargains.com has positioned itself as the expert “middleman” that connects manufacturers with the public. The company often fields hundreds if not a thousand consumer inquiries a day. Ultimately, the goal is to help potential customers find exactly the right product for their particular applications. To that end, the staff is composed of employees who specialize in different vehicles, brands and scenes, from sport compacts to American muscle.

“Not everyone we talk to buys from us,” said Brown. “Some people call us, get information and still end up buying from their local shops. There are things that local shops do that we don’t, and there are things we do that they don’t. Each of us has different roles and contributions, and there are a lot of customers to go around. We try to have more alliances than enemies.”

That attitude has led the company to tremendous growth in only a few short years.

“For the first year and a half, there was no office space,” Brown recalled. “I was working on a laptop while I was attending classes.” By 2010, however, the company had moved to its current 5,000-sq.-ft. headquarters, which boasts a reception area, work stations for 26 employees, an installation bay, a shipping department and plenty of inventory space. An
additional 8,000-sq.-ft. warehouse is located close by, and the company works closely with about 50 specialty manufacturers to meet customer demands. Moreover, ModBargains.com is highly organized. Its departments encompass administration and accounting, online and social media, sales, processing and customer loyalty, shipping, receiving and installation.

“Installations are the newest part of our business, but they really work for us,” said Brown, who estimated that the company does between 15 and 20 installs per week. “We get to learn more about our customers, interact with them and take that knowledge and pictures and videos of their installations and feed that to tens of thousands of other consumers who need information about products.”

Hay explained that ModBargains.com uses before-and-after pictures, videos and sound clips to get information out to the masses through Instagram, Facebook, YouTube, online forums and other
social media.

“It’s also about us contributing—not only with our customers by giving them the right information for their vehicles, but also with our manufacturers,” he said. “We have direct information about customers that we have to get to manufacturers: ‘This is what customers want; this fits or doesn’t fit; we’ve tested it here in our installation bay and it doesn’t work; or customers don’t like this or that color....’ We can help the industry grow because we’re helping the manufacturers.”

Inspiring the Staff

“We’ve carefully picked the staff who connect with our customers on the phone, through e-mails, on forums, message boards and social media,” said Brown. “Over the last year and a half, we’ve spent a significant amount of effort on maximizing the strengths, abilities and character of everyone.”

One strategy has been to use book groups. Brown and Hay choose personal and professional-improvement titles, ask employees to read 20 pages per week, then break the staff into weekly discussion groups of five.

“I was nervous when I first started the groups,” said Brown. “There was probably a little bit of ‘what the heck is this’ at first, but as people started to actually see an impact not just at work but in their personal lives, and see their relationships start to change; they really got behind it.”

Brown said that the company has developed a list of 10 core values that the co-founders believe in strongly and would like to see their employees adopt,
behaving in ways they’d like to see their customers treated.

“Instead of focusing on things like part numbers and what’s the new product, we like to focus on our people and ourselves, trying to become the best people we can be,” he explained. “We like to develop a culture where people enjoy coming to work and feel like there’s some sort of purpose. We’re not here to be this big company and sell parts. We’re here to help fellow car enthusiasts modify their cars in a smart, fun way that makes them happy.”

Like every young retail operation, ModBargains.com has faced more than its share of challenges. One has been convincing manufacturers and WDs that they’re legitimate retailers amid a world of drop-shippers.

“The name of our company—especially as we’ve evolved—leads to a lot of misconceptions,” Hay explained. “We’ve enjoyed a good reputation with our customers, but we haven’t always enjoyed that same reputation with the industry. Explaining our company has always been a challenge.”

Brown and Hay enjoy working with all types of aftermarket companies. They don’t lead out by undercutting prices and prefer manufacturers with healthy distribution networks that maintain and enforce their minimum advertising pricing.

In the end, ModBargains.com strives to “be memorable” to customers.

“We’re a really specific, boutique expert retailer that just happens to get a lot of customers from the Internet,” Brown concluded.

SEMA News—September 2013

BUSINESS
By Mike Imlay

Retailer Spotlight

ModBargains.com Delivers Data, Product and More

Located in La Habra, California, the company was co-founded in 2004 by CEO Mike Brown, then 19, and President Ron Hay, then 24. Their original business plan called for a sort of online clearinghouse of special automotive parts promotions and deals similar to those offered by tech-industry bargain sites. But the venture quickly morphed into something much bigger—and better.

“It just wasn’t that much fun,” conceded Brown. “So we started to focus on actually connecting people with parts instead. Since then, the business model has continued to evolve from parts broker to connecting people with parts based on our knowledge to inventory and installations.”

Hay added: “We started as a BMW aftermarket accessories company. We’ve recently begun to branch out into all sorts of cars: Nissans, Infinitis, Mercedes-Benzes, Scions, Camaros and Mustangs. We’ve just been expanding. Back then, there was a lot of fragmentation in the market. There weren’t a lot of shops specializing in what we were doing, and the prices seemed really high. Were they really the best products? Where were the reviews, the information? There weren’t a lot of product details out there.”

Filling that gap became the pair’s immediate goal, and social media seemed the ideal way to attain it. They worked with both manufacturers and customers to gather product data, photos and video and then harnessed multiple forms of social media to deliver that information to consumers. Essentially, ModBargains.com has positioned itself as the expert “middleman” that connects manufacturers with the public. The company often fields hundreds if not a thousand consumer inquiries a day. Ultimately, the goal is to help potential customers find exactly the right product for their particular applications. To that end, the staff is composed of employees who specialize in different vehicles, brands and scenes, from sport compacts to American muscle.

“Not everyone we talk to buys from us,” said Brown. “Some people call us, get information and still end up buying from their local shops. There are things that local shops do that we don’t, and there are things we do that they don’t. Each of us has different roles and contributions, and there are a lot of customers to go around. We try to have more alliances than enemies.”

That attitude has led the company to tremendous growth in only a few short years.

“For the first year and a half, there was no office space,” Brown recalled. “I was working on a laptop while I was attending classes.” By 2010, however, the company had moved to its current 5,000-sq.-ft. headquarters, which boasts a reception area, work stations for 26 employees, an installation bay, a shipping department and plenty of inventory space. An
additional 8,000-sq.-ft. warehouse is located close by, and the company works closely with about 50 specialty manufacturers to meet customer demands. Moreover, ModBargains.com is highly organized. Its departments encompass administration and accounting, online and social media, sales, processing and customer loyalty, shipping, receiving and installation.

“Installations are the newest part of our business, but they really work for us,” said Brown, who estimated that the company does between 15 and 20 installs per week. “We get to learn more about our customers, interact with them and take that knowledge and pictures and videos of their installations and feed that to tens of thousands of other consumers who need information about products.”

Hay explained that ModBargains.com uses before-and-after pictures, videos and sound clips to get information out to the masses through Instagram, Facebook, YouTube, online forums and other
social media.

“It’s also about us contributing—not only with our customers by giving them the right information for their vehicles, but also with our manufacturers,” he said. “We have direct information about customers that we have to get to manufacturers: ‘This is what customers want; this fits or doesn’t fit; we’ve tested it here in our installation bay and it doesn’t work; or customers don’t like this or that color....’ We can help the industry grow because we’re helping the manufacturers.”

Inspiring the Staff

“We’ve carefully picked the staff who connect with our customers on the phone, through e-mails, on forums, message boards and social media,” said Brown. “Over the last year and a half, we’ve spent a significant amount of effort on maximizing the strengths, abilities and character of everyone.”

One strategy has been to use book groups. Brown and Hay choose personal and professional-improvement titles, ask employees to read 20 pages per week, then break the staff into weekly discussion groups of five.

“I was nervous when I first started the groups,” said Brown. “There was probably a little bit of ‘what the heck is this’ at first, but as people started to actually see an impact not just at work but in their personal lives, and see their relationships start to change; they really got behind it.”

Brown said that the company has developed a list of 10 core values that the co-founders believe in strongly and would like to see their employees adopt,
behaving in ways they’d like to see their customers treated.

“Instead of focusing on things like part numbers and what’s the new product, we like to focus on our people and ourselves, trying to become the best people we can be,” he explained. “We like to develop a culture where people enjoy coming to work and feel like there’s some sort of purpose. We’re not here to be this big company and sell parts. We’re here to help fellow car enthusiasts modify their cars in a smart, fun way that makes them happy.”

Like every young retail operation, ModBargains.com has faced more than its share of challenges. One has been convincing manufacturers and WDs that they’re legitimate retailers amid a world of drop-shippers.

“The name of our company—especially as we’ve evolved—leads to a lot of misconceptions,” Hay explained. “We’ve enjoyed a good reputation with our customers, but we haven’t always enjoyed that same reputation with the industry. Explaining our company has always been a challenge.”

Brown and Hay enjoy working with all types of aftermarket companies. They don’t lead out by undercutting prices and prefer manufacturers with healthy distribution networks that maintain and enforce their minimum advertising pricing.

In the end, ModBargains.com strives to “be memorable” to customers.

“We’re a really specific, boutique expert retailer that just happens to get a lot of customers from the Internet,” Brown concluded.

SEMA News—September 2013

SEMA Provides “Fuel for Thought”

SEMA has a long history of monitoring federal and state legislative topics that are of interest to the automotive industry as well as the association’s member companies and their customers. One key topic of current concern is the Renewable Fuel Standard (RFS)—a law that requires annual increases in the amount of ethanol to be added to gasoline. The SEMA Action Network (SAN) recently helped organize antique-car owners and motorcyclists from all over the country to participate in a “Fuel for Thought” rally on Capitol Hill in opposition to the RFS.

This issue is important to automotive enthusiasts because ethanol’s chemical properties pose a risk to older cars and motorcycles. Ethanol absorbs water, which can lead to metal corrosion. It can also dissolve certain rubbers and plastics. Most older vehicles and many motorcycles are not constructed with ethanol-compatible materials.

SEMA has been actively engaged on this topic and recently won victories in Florida and Maine to eliminate the ethanol requirement for fuel sold in those states.

SEMA News—September 2013

SEMA Provides “Fuel for Thought”

SEMA has a long history of monitoring federal and state legislative topics that are of interest to the automotive industry as well as the association’s member companies and their customers. One key topic of current concern is the Renewable Fuel Standard (RFS)—a law that requires annual increases in the amount of ethanol to be added to gasoline. The SEMA Action Network (SAN) recently helped organize antique-car owners and motorcyclists from all over the country to participate in a “Fuel for Thought” rally on Capitol Hill in opposition to the RFS.

This issue is important to automotive enthusiasts because ethanol’s chemical properties pose a risk to older cars and motorcycles. Ethanol absorbs water, which can lead to metal corrosion. It can also dissolve certain rubbers and plastics. Most older vehicles and many motorcycles are not constructed with ethanol-compatible materials.

SEMA has been actively engaged on this topic and recently won victories in Florida and Maine to eliminate the ethanol requirement for fuel sold in those states.

SEMA News—September 2013

SEMA Provides “Fuel for Thought”

SEMA has a long history of monitoring federal and state legislative topics that are of interest to the automotive industry as well as the association’s member companies and their customers. One key topic of current concern is the Renewable Fuel Standard (RFS)—a law that requires annual increases in the amount of ethanol to be added to gasoline. The SEMA Action Network (SAN) recently helped organize antique-car owners and motorcyclists from all over the country to participate in a “Fuel for Thought” rally on Capitol Hill in opposition to the RFS.

This issue is important to automotive enthusiasts because ethanol’s chemical properties pose a risk to older cars and motorcycles. Ethanol absorbs water, which can lead to metal corrosion. It can also dissolve certain rubbers and plastics. Most older vehicles and many motorcycles are not constructed with ethanol-compatible materials.

SEMA has been actively engaged on this topic and recently won victories in Florida and Maine to eliminate the ethanol requirement for fuel sold in those states.

SEMA News—September 2013

SEMA Provides “Fuel for Thought”

SEMA has a long history of monitoring federal and state legislative topics that are of interest to the automotive industry as well as the association’s member companies and their customers. One key topic of current concern is the Renewable Fuel Standard (RFS)—a law that requires annual increases in the amount of ethanol to be added to gasoline. The SEMA Action Network (SAN) recently helped organize antique-car owners and motorcyclists from all over the country to participate in a “Fuel for Thought” rally on Capitol Hill in opposition to the RFS.

This issue is important to automotive enthusiasts because ethanol’s chemical properties pose a risk to older cars and motorcycles. Ethanol absorbs water, which can lead to metal corrosion. It can also dissolve certain rubbers and plastics. Most older vehicles and many motorcycles are not constructed with ethanol-compatible materials.

SEMA has been actively engaged on this topic and recently won victories in Florida and Maine to eliminate the ethanol requirement for fuel sold in those states.

SEMA News—September 2013

SEMA Provides “Fuel for Thought”

SEMA has a long history of monitoring federal and state legislative topics that are of interest to the automotive industry as well as the association’s member companies and their customers. One key topic of current concern is the Renewable Fuel Standard (RFS)—a law that requires annual increases in the amount of ethanol to be added to gasoline. The SEMA Action Network (SAN) recently helped organize antique-car owners and motorcyclists from all over the country to participate in a “Fuel for Thought” rally on Capitol Hill in opposition to the RFS.

This issue is important to automotive enthusiasts because ethanol’s chemical properties pose a risk to older cars and motorcycles. Ethanol absorbs water, which can lead to metal corrosion. It can also dissolve certain rubbers and plastics. Most older vehicles and many motorcycles are not constructed with ethanol-compatible materials.

SEMA has been actively engaged on this topic and recently won victories in Florida and Maine to eliminate the ethanol requirement for fuel sold in those states.

SEMA News—September 2013

SEMA Provides “Fuel for Thought”

SEMA has a long history of monitoring federal and state legislative topics that are of interest to the automotive industry as well as the association’s member companies and their customers. One key topic of current concern is the Renewable Fuel Standard (RFS)—a law that requires annual increases in the amount of ethanol to be added to gasoline. The SEMA Action Network (SAN) recently helped organize antique-car owners and motorcyclists from all over the country to participate in a “Fuel for Thought” rally on Capitol Hill in opposition to the RFS.

This issue is important to automotive enthusiasts because ethanol’s chemical properties pose a risk to older cars and motorcycles. Ethanol absorbs water, which can lead to metal corrosion. It can also dissolve certain rubbers and plastics. Most older vehicles and many motorcycles are not constructed with ethanol-compatible materials.

SEMA has been actively engaged on this topic and recently won victories in Florida and Maine to eliminate the ethanol requirement for fuel sold in those states.

SEMA News—September 2013

Confused About the New Health Care Law?

SEMA members need to know…

The “Affordable Care Act” continues to sow confusion for many SEMA members. To follow is a concise summary of the law’s key provisions and timetables for implementation.

When did “Obamacare” take effect?

It is being phased-in over 10 years beginning in 2010, with new requirements and benefits being added each year. The most consequential change occurs on January 1, 2014, when individuals are required to obtain minimum levels of insurance, on their own or through their employer or the government (Medicare/Medicaid).

Is my company required to offer health insurance?

My company already offers insurance. Is that enough?

As of 2014, most plans offered by insurance companies will cover 10 categories of “minimum essential health benefits,” from hospitalization to prescription drugs. For large companies, check with your insurance professional to confirm that your plan meets the law’s requirements or is otherwise exempted. For small companies, there is no obligation to provide coverage, although the government encourages it.

Can the worker pay a portion of the premium?

Yes, but the worker’s portion must be “affordable.” It is not affordable if it exceeds 9.5% of the worker’s household income. A company that is required to offer insurance faces a $3,000 penalty for each full-time worker that obtains a federal health care subsidy because their portion was deemed “unaffordable.”

Most Policies to Cover “Essential Health Benefits”

As of 2014, most policies offered through the exchanges and in the individual and small group market must include minimum levels of coverage in 10 categories deemed to be essential. Service categories include doctor/outpatient, emergency, hospitalization, maternity/newborn, pediatric, mental health, substance abuse, rehabilitation, laboratory, preventive and wellness, along with coverage for prescription drugs, oral and vision care.

Exchanges

For years, SEMA lobbied in favor of legislation that would allow small companies to purchase nationwide insurance or bargain collectively across state lines, thereby infusing competition into the marketplace. The Affordable Care Act provides a variation on that approach through “exchanges.”

The exchanges are set to be operational by October 1, 2013, in order to voluntarily enroll people in coverage that will take effect on January 1, 2014. Under the exchange, small businesses and individuals will be offered a menu of private-sector health plans that have been established under common rules regarding the offering and pricing of insurance. The exchange has the ability to pool a large number of potential consumers and help organize a more competitive marketplace.

Exchanges will be state-based. Each state has the option of opening the exchange to businesses with 50 or fewer workers, or 100 or fewer workers. There will be four benefit categories of exchange plans, plus a separate catastrophic plan. All of the plans will provide essential health benefits with an initial out-of-pocket limit of $6,250 per individual or $12,500 per family. The plans will differ in the amount of covered costs: 60% (bronze), 70% (silver), 80% (gold) and 90% (platinum).

Individual Mandate

Individuals will be required to obtain “essential minimum coverage” for themselves and their dependents, beginning in 2014, to ensure that everyone participates in the system. This “universal coverage” will increase the risk pool and potentially reduce overall costs. If individuals do not obtain coverage, a penalty will be assessed in 2014 in the amount of $95 or 1% of annual income, whichever is greater. This penalty will increase in 2015 to $325 or 2% of annual income and again in 2016 to $695 or 2.5% of annual income. Penalties for family coverage will be higher, but will not exceed the annual income percentage caps listed above. After 2016, the penalties increase by a cost-of-living adjustment. The government will provide subsidies for lower-income and unemployed individuals.

Employer Mandate*

Companies with 50 or more full-time (working 130+ hours per month) or “full-time equivalent” employees must offer health insurance by 2014 or be penalized as soon as any full-time employee receives a government subsidy under the individual mandate. If the penalty is triggered, the government will impose a fee of $2,000 for all full-time employees, minus the first 30 full-time employees. For example, a company with 51 full-time employees would be assessed a fine of $42,000 annually.

Even when offering insurance, a company is exposed to one other potential penalty based on “affordability.” If the worker is picking up a portion of the premium cost, it must be affordable. It is not affordable if it exceeds 9.5% of the worker’s household income or if the plan does not cover at least 60% of medical costs. Also, deductibles for fully insured small group plans are limited to $2,000 for employee-only coverage and $4,000 for family coverage, and then indexed to inflation. Verifying affordability may require a complex computation but there is a safe-harbor option based solely on the worker’s income. The issue of affordability is generally associated with lower-wage workers. It is consequential since the company will face a $3,000 penalty for each individual full-time worker that obtains a health care subsidy from the federal government.

Small Business Tax Credits

The law provides an immediate tax credit to small employers that purchase insurance if they have no more than 25 employees with average annual wages of less than $50,000. The credit varies according to size, wages and the amount of employer contribution for the premium. Beginning in 2014, small businesses that purchase through an exchange will be eligible for a two-year tax credit, based on firm size and average annual wages.

Taxes

In 2013, a new 0.9% surtax was added to the 1.45% Medicare payroll taxes paid by individuals earning more than $200,000 per year or joint filers earning more than $250,000 per year. Another 3.8% Medicare tax was imposed on the same individuals/couples on investment income from capital gains, interest, dividends, annuities, royalties and rent.

In 2013, the threshold for claiming medical expense deductions rose from 7.5% of adjusted gross income to 10%. (The threshold remains at 7.5% for individuals 65 or older until 2016.) Contributions to health care flexible spending arrangements were limited to $2,500, and then indexed to inflation.

As of January 1, 2014, health insurers are forbidden from turning away people with pre-existing conditions. A $25 billion federal fund will help insurance companies cover the costs of previously uninsured people with medical problems. The fund will be financed by a three-year fee imposed on employers for each person insured under a plan. The fee will start at $63 at the end of 2014 but decrease to about $40 in 2015 and $28 in 2016. Some employers are expected to pass along the fee
to workers.

Health Insurance Premium Costs

Implementation of the new health care law has so many complexities and unknown variables, it is nearly impossible to predict its effect on the cost of health care premiums. For example, the exchanges are intended to stabilize prices through marketplace competition but it is unclear whether companies and individuals will fully participate in the exchanges. SEMA will continue to advocate for meaningful reforms intended to reduce premium costs.

Employer Mandate Delayed: The employer mandate penalty has been put on hold for one year. The requirement that companies with 50 or more full-time workers offer health care insurance or pay a $2,000 fine per employee above the first 30 full-time workers will still take effect on January 1, 2014, but not be enforced until 2015. The delay gives the business community more time to understand and comply with the law.

2010

• Children permitted to stay on parents’ policies until 26th birthday
• Lifetime limits on coverage prohibited

2011

• Insurers must justify rate hikes more than 10% to the state
• Insurers must spend at least 80% of profits on health care or provide rebates

2012

• Very large employers (250 or more workers) must begin reporting the value of health care benefits on employees’ W-2 statements

2013

• 0.9% surtax is added to the1.45% Medicare payroll taxes paid by those earning more than $200,000 per year or joint filers earning more than $250,000 per year
• 3.8% Medicare tax is imposed on investment income from capital gains, interest, dividends, annuities, royalties and rent
• Health care flexible spending account contributions limited to $2,500

2014

• Exchanges for small businesses take effect
• Individuals must have minimum insurance or pay a penalty
• Large companies (50 or more full-time workers) must offer affordable coverage or risk a fine of $2,000 per employee, excluding the first 30 employees [penalties delayed until 2015]
• Insurance companies barred from denying coverage or charging significantly higher premiums for individuals with a pre-existing illness
• Three-year fee will be imposed on employers to create a $25 billion fund to cover associated insurance costs

2015

• Penalty for individuals without insurance rises to $325, capped at greater of $975 per family or 2% of family income
• Doctor’s income to be based on quality rather than quantity of care provided

2016

• Penalty for individuals without insurance rises to $695, capped at the greater of $2,085 perfamily or 2.5% of family income and then tied to inflation

2017

• Businesses with more than 100 workers may buy coverage through exchanges, if state permits
• States have the authority to implement their own plans

2018

• 40% excise tax on insurers takes effect for high-cost health insurance plans

For additional information: www.sema.org/healthcare
SEMA Government Affairs Office: 202-783-6007

SEMA recommends that member companies review their current situation, consult with health care insurance professionals and determine how best to proceed.

What if I still have questions?

Please take the time to review the information contained in this booklet. For specific inquiries regarding your company, please consult with a qualified insurance professional. SEMA is maintaining additional information at www.sema.org/healthcare

SEMA News—September 2013

Confused About the New Health Care Law?

SEMA members need to know…

The “Affordable Care Act” continues to sow confusion for many SEMA members. To follow is a concise summary of the law’s key provisions and timetables for implementation.

When did “Obamacare” take effect?

It is being phased-in over 10 years beginning in 2010, with new requirements and benefits being added each year. The most consequential change occurs on January 1, 2014, when individuals are required to obtain minimum levels of insurance, on their own or through their employer or the government (Medicare/Medicaid).

Is my company required to offer health insurance?

My company already offers insurance. Is that enough?

As of 2014, most plans offered by insurance companies will cover 10 categories of “minimum essential health benefits,” from hospitalization to prescription drugs. For large companies, check with your insurance professional to confirm that your plan meets the law’s requirements or is otherwise exempted. For small companies, there is no obligation to provide coverage, although the government encourages it.

Can the worker pay a portion of the premium?

Yes, but the worker’s portion must be “affordable.” It is not affordable if it exceeds 9.5% of the worker’s household income. A company that is required to offer insurance faces a $3,000 penalty for each full-time worker that obtains a federal health care subsidy because their portion was deemed “unaffordable.”

Most Policies to Cover “Essential Health Benefits”

As of 2014, most policies offered through the exchanges and in the individual and small group market must include minimum levels of coverage in 10 categories deemed to be essential. Service categories include doctor/outpatient, emergency, hospitalization, maternity/newborn, pediatric, mental health, substance abuse, rehabilitation, laboratory, preventive and wellness, along with coverage for prescription drugs, oral and vision care.

Exchanges

For years, SEMA lobbied in favor of legislation that would allow small companies to purchase nationwide insurance or bargain collectively across state lines, thereby infusing competition into the marketplace. The Affordable Care Act provides a variation on that approach through “exchanges.”

The exchanges are set to be operational by October 1, 2013, in order to voluntarily enroll people in coverage that will take effect on January 1, 2014. Under the exchange, small businesses and individuals will be offered a menu of private-sector health plans that have been established under common rules regarding the offering and pricing of insurance. The exchange has the ability to pool a large number of potential consumers and help organize a more competitive marketplace.

Exchanges will be state-based. Each state has the option of opening the exchange to businesses with 50 or fewer workers, or 100 or fewer workers. There will be four benefit categories of exchange plans, plus a separate catastrophic plan. All of the plans will provide essential health benefits with an initial out-of-pocket limit of $6,250 per individual or $12,500 per family. The plans will differ in the amount of covered costs: 60% (bronze), 70% (silver), 80% (gold) and 90% (platinum).

Individual Mandate

Individuals will be required to obtain “essential minimum coverage” for themselves and their dependents, beginning in 2014, to ensure that everyone participates in the system. This “universal coverage” will increase the risk pool and potentially reduce overall costs. If individuals do not obtain coverage, a penalty will be assessed in 2014 in the amount of $95 or 1% of annual income, whichever is greater. This penalty will increase in 2015 to $325 or 2% of annual income and again in 2016 to $695 or 2.5% of annual income. Penalties for family coverage will be higher, but will not exceed the annual income percentage caps listed above. After 2016, the penalties increase by a cost-of-living adjustment. The government will provide subsidies for lower-income and unemployed individuals.

Employer Mandate*

Companies with 50 or more full-time (working 130+ hours per month) or “full-time equivalent” employees must offer health insurance by 2014 or be penalized as soon as any full-time employee receives a government subsidy under the individual mandate. If the penalty is triggered, the government will impose a fee of $2,000 for all full-time employees, minus the first 30 full-time employees. For example, a company with 51 full-time employees would be assessed a fine of $42,000 annually.

Even when offering insurance, a company is exposed to one other potential penalty based on “affordability.” If the worker is picking up a portion of the premium cost, it must be affordable. It is not affordable if it exceeds 9.5% of the worker’s household income or if the plan does not cover at least 60% of medical costs. Also, deductibles for fully insured small group plans are limited to $2,000 for employee-only coverage and $4,000 for family coverage, and then indexed to inflation. Verifying affordability may require a complex computation but there is a safe-harbor option based solely on the worker’s income. The issue of affordability is generally associated with lower-wage workers. It is consequential since the company will face a $3,000 penalty for each individual full-time worker that obtains a health care subsidy from the federal government.

Small Business Tax Credits

The law provides an immediate tax credit to small employers that purchase insurance if they have no more than 25 employees with average annual wages of less than $50,000. The credit varies according to size, wages and the amount of employer contribution for the premium. Beginning in 2014, small businesses that purchase through an exchange will be eligible for a two-year tax credit, based on firm size and average annual wages.

Taxes

In 2013, a new 0.9% surtax was added to the 1.45% Medicare payroll taxes paid by individuals earning more than $200,000 per year or joint filers earning more than $250,000 per year. Another 3.8% Medicare tax was imposed on the same individuals/couples on investment income from capital gains, interest, dividends, annuities, royalties and rent.

In 2013, the threshold for claiming medical expense deductions rose from 7.5% of adjusted gross income to 10%. (The threshold remains at 7.5% for individuals 65 or older until 2016.) Contributions to health care flexible spending arrangements were limited to $2,500, and then indexed to inflation.

As of January 1, 2014, health insurers are forbidden from turning away people with pre-existing conditions. A $25 billion federal fund will help insurance companies cover the costs of previously uninsured people with medical problems. The fund will be financed by a three-year fee imposed on employers for each person insured under a plan. The fee will start at $63 at the end of 2014 but decrease to about $40 in 2015 and $28 in 2016. Some employers are expected to pass along the fee
to workers.

Health Insurance Premium Costs

Implementation of the new health care law has so many complexities and unknown variables, it is nearly impossible to predict its effect on the cost of health care premiums. For example, the exchanges are intended to stabilize prices through marketplace competition but it is unclear whether companies and individuals will fully participate in the exchanges. SEMA will continue to advocate for meaningful reforms intended to reduce premium costs.

Employer Mandate Delayed: The employer mandate penalty has been put on hold for one year. The requirement that companies with 50 or more full-time workers offer health care insurance or pay a $2,000 fine per employee above the first 30 full-time workers will still take effect on January 1, 2014, but not be enforced until 2015. The delay gives the business community more time to understand and comply with the law.

2010

• Children permitted to stay on parents’ policies until 26th birthday
• Lifetime limits on coverage prohibited

2011

• Insurers must justify rate hikes more than 10% to the state
• Insurers must spend at least 80% of profits on health care or provide rebates

2012

• Very large employers (250 or more workers) must begin reporting the value of health care benefits on employees’ W-2 statements

2013

• 0.9% surtax is added to the1.45% Medicare payroll taxes paid by those earning more than $200,000 per year or joint filers earning more than $250,000 per year
• 3.8% Medicare tax is imposed on investment income from capital gains, interest, dividends, annuities, royalties and rent
• Health care flexible spending account contributions limited to $2,500

2014

• Exchanges for small businesses take effect
• Individuals must have minimum insurance or pay a penalty
• Large companies (50 or more full-time workers) must offer affordable coverage or risk a fine of $2,000 per employee, excluding the first 30 employees [penalties delayed until 2015]
• Insurance companies barred from denying coverage or charging significantly higher premiums for individuals with a pre-existing illness
• Three-year fee will be imposed on employers to create a $25 billion fund to cover associated insurance costs

2015

• Penalty for individuals without insurance rises to $325, capped at greater of $975 per family or 2% of family income
• Doctor’s income to be based on quality rather than quantity of care provided

2016

• Penalty for individuals without insurance rises to $695, capped at the greater of $2,085 perfamily or 2.5% of family income and then tied to inflation

2017

• Businesses with more than 100 workers may buy coverage through exchanges, if state permits
• States have the authority to implement their own plans

2018

• 40% excise tax on insurers takes effect for high-cost health insurance plans

For additional information: www.sema.org/healthcare
SEMA Government Affairs Office: 202-783-6007

SEMA recommends that member companies review their current situation, consult with health care insurance professionals and determine how best to proceed.

What if I still have questions?

Please take the time to review the information contained in this booklet. For specific inquiries regarding your company, please consult with a qualified insurance professional. SEMA is maintaining additional information at www.sema.org/healthcare