6.5 The Small-Group and Individual Insurance Market

The Small-Group and Individual Insurance Market

Quick Answer: The ACA rebuilt the individual and small-group markets around a single state risk pool, guaranteed issue and renewal, modified community rating on only four factors (age 3:1, tobacco 1.5:1, geography, family size), essential health benefits, and actuarial-value metal tiers. None of those requirements reach the large-group or self-funded markets — which is the structural reason small employers with good risk keep leaving the pool through level funding. For 2026, the expiration of the enhanced premium tax credits restored the 400% FPL subsidy cliff.

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1. Market Definitions and Why They Matter

The PACE Act of 2015 is a frequently tested detail: the ACA as enacted would have forced every state to redefine "small group" as 1–100 employees beginning in 2016. PACE repealed that mandate and returned the decision to the states. A small number of states — including California, Colorado, New York, and Vermont — did adopt the 1–100 definition, so a 75-employee employer can face community rating in one state and experience rating in another.

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2. Modified Community Rating: Four Factors and No Others

In the individual and small-group markets, an issuer must place all of its enrollees in a state and market into a single risk pool and may vary premium only by:

1. Age — subject to a maximum 3:1 ratio for adults, applied through a standard federal age curve unless the state adopts its own. Rates cannot vary by age for enrollees under 21 beyond the prescribed curve.
2. Tobacco use — maximum 1.5:1 ratio; many states prohibit or narrow tobacco rating entirely.
3. Geographic rating area — as established by the state.
4. Family size — through per-member rating, counting no more than the three oldest covered children under age 21.

Prohibited outright: health status, claims experience, medical history, genetic information, gender, industry or occupation, and duration of coverage. This is the sharpest contrast with the large-group underwriting and experience-rating methods covered in Section 6.1 — the rating toolkit a CEBS candidate learns for large groups is largely unlawful in the small-group market.

Essential Health Benefits and Metal Tiers

Individual and small-group plans must cover the ten essential health benefit categories, benchmarked to a state-selected base plan, and must fit an actuarial value metal tier: Bronze 60%, Silver 70%, Gold 80%, Platinum 90%, each with a de minimis variation band. Catastrophic plans are available to enrollees under age 30 or those with a hardship or affordability exemption. Cost-sharing reduction variants of silver plans are available on-Exchange to eligible enrollees between 100% and 250% of the federal poverty level.

Medical Loss Ratio

Issuers must spend at least 80% of premium on claims and quality-improvement activities in the individual and small-group markets, and 85% in the large-group market, or rebate the shortfall. Rebates are distributed by September 30 following the reporting year and are calculated on a three-year average. For an employer receiving a rebate on a group policy, the portion attributable to employee contributions is a plan asset under ERISA and must be used for the exclusive benefit of participants — typically as a premium holiday or a cash distribution — generally within three months of receipt.

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3. Risk Stabilization: What Survived and What Did Not

Only risk adjustment is permanent. Candidates regularly confuse the three; the distinguishing question is whether the program was time-limited by statute.

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4. How Small Employers Leave the Pool

A small employer with a young, healthy workforce is a subsidizing member of a community-rated pool. Several routes out exist, each with a different trade-off.

• Level-funded plans (Section 6.2). The employer becomes technically self-funded, escaping community rating, EHB, and state premium taxes, and receives a surplus refund in good years. This is the dominant exit route, and its cumulative effect is to leave the remaining community-rated pool with worse average risk.
• Individual Coverage HRA (ICHRA), available since January 1, 2020. The employer reimburses individual-market premiums and medical expenses on a tax-favored basis instead of offering a group plan. Employees must be enrolled in individual coverage (or Medicare); the employer must offer the ICHRA on the same terms within permitted employee classes; it cannot offer the same class both an ICHRA and a traditional group plan; and it must permit an annual opt-out. An ICHRA that is affordable and provides minimum value satisfies the employer mandate, and an employee offered an affordable ICHRA is ineligible for a premium tax credit.
• QSEHRA, available to employers with fewer than 50 full-time equivalents that offer no group health plan. The 2026 limits are $6,450 self-only and $13,100 family.
• Short-term limited-duration insurance (STLDI). For policies sold or issued on or after September 1, 2024, federal rules limit STLDI to a three-month initial term and four months total including renewals. STLDI is not minimum essential coverage, is medically underwritten, and does not satisfy the employer mandate.
• Association Health Plans. The 2018 DOL rule that would have broadened AHP formation was vacated in litigation and formally rescinded by DOL in a final rule effective July 1, 2024. AHPs are once again analyzed under the traditional criteria: unless the association is a bona fide employer group, coverage is generally "looked through" to the underlying employers and regulated by their own market size.

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5. What Changed for 2026: The Subsidy Cliff Returns

The enhanced premium tax credits first enacted in 2021 and extended in 2022 — which eliminated the 400% FPL eligibility ceiling and reduced required contribution percentages at every income level — expired December 31, 2025. For 2026:

• Premium tax credit eligibility again terminates above 400% of the federal poverty level, restoring the subsidy cliff in which one additional dollar of household income eliminates the entire credit.
• Required contribution percentages below 400% FPL reverted to the pre-2021 schedule, raising net premiums for subsidized enrollees.
• Marketplace enrollment declined most sharply in the income band just above 400% FPL.

This is not a political footnote for a benefits professional; it changes three concrete design decisions. ICHRA affordability becomes harder to achieve because the employee's net individual-market cost rises. Pre-65 retiree strategies that route retirees to the individual marketplace (Section 10.2) become materially more expensive for retirees with pension income above the cliff. And part-time and variable-hour workforce strategies that assumed the marketplace as a low-cost fallback need to be re-priced.