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Dropping Health Care Coverage No Easy Decision for Employers

March 28, 2012
Related Topics: Health Care Costs, Health Care Reform, Finance/Taxes, HR/Workforce Trends, HR Services and Administration, Benefit Design and Communication, Health Care Benefits, Benefits, Legal

Midsize employers considering "paying" rather than "playing" in response to the passage of federal health care reform legislation may be surprised at how much it will cost them, based on the outcomes of analyses being performed by their brokers and actuaries.

According to these analyses, because employer and employee health care benefit contributions are made on a pretax basis, it wil cost employers considerably more than the $2,000-per-employee fee for dropping coverage, if the law survives legal challenges being heard by the Supreme Court.

Employees' contributions to the cost of health benefits—generally between 20 percent and 25 percent of the total cost of coverage—would become subject to federal, state and Federal Insurance Contribution Act taxes. Although the employee would be required to pay the additional federal and state taxes, employers would be required to pay their share of FICA and Medicare taxes on those new "wages."

These taxes would be even higher if employers decide to increase employee salaries to help defray the cost of buying health insurance through the state insurance exchanges that will be established under the Patient Protection and Affordable Care Act.

Employers thinking about converting even a portion of the cost of benefits to wages "have to look at the tax aspect from a corporate deductibility perspective, the FICA landscape and employee turn-over," said Karen Vines, Wichita, Kansas-based vice president of benefits at insurance brokerage IMA Inc., which introduced its Play or Pay Analyzer tool this year.

Most employers should expect some change in enrollment in response to PPACA, especially if they have large numbers of part-time employees who are ineligible to enroll in their health care plans, according to Brian Blalock, Chicago-based managing director and health actuary at retirement plan services provider Verisight Inc., which is headquartered in Walnut Creek, California, and has developed PPACAcalc, an online tool available to employers, brokers and consultants.

The tool provides 2014 cost estimates for numerous scenarios under the key provisions, including if an employer terminates its plan and converts a portion of the amount paid for health care coverage into wages; if an employer scales back benefits to meet the 60 percent minimum actuarial value allowed under PPACA; or if an employer decides to stay the course and continue to provide benefits at current levels.

The tool also takes into consideration that the $2,000-per-employee assessment is not tax-deductible, Blalock said. "In addition to migration and enrollment changes, the penalties that could be implemented in 2014 could be substantial, especially if an employer has a large proportion of employees who are low-wage or seasonal and is not paying any of those employees' current health benefit costs."

In addition, employers that terminate their health care plans can expect employee turnover to grow, especially if they are among the first in their industry to do so, said IMA's Vines.

So, for example, if a 450-employee company has a turnover rate of 15 percent, with projected turnover costs of 20 percent toll, even a 2 percent increase would increase costs significantly, she said.

"We are giving financial decision-makers the opportunity to budget all options, even if they make no changes and keep benefits where they are," said Tom Hutchinson, president and senior benefit consultant at Chicago-based insurance broker Mid American Group Inc., which is using the Verisight PPACAcalc to evaluate its clients' benefit plans.

For example, "for groups that do nothing and their 30-hour employees become eligible, they see their costs go up dramatically. But if they drop coverage, costs are higher also because of the loss of the tax deduction and increased salaries," he said.

Under PPACA, the $2,000-per-employee penalty is triggered when an employer does not offer coverage to full-time workers, with full time defined as working at least 30 hours a week.

"It certainly was an eye-opener to understand the potential cost implications on our business starting in 2014, from a pay vs. play perspective," said Paul Inson, vice president of human resources at Denver-based Alpine Access Inc., a home-based call center provider that employs around 5,000 workers, after reviewing its report from IMA's Play or Pay Analyzer.

"We have a lot of part-time workers and thousands of work-at-home employees who are on limited medical plans today," he said. To comply with the minimum essential benefits requirements under PPACA, Alpine Access would have to increase benefits for workers now enrolled in its limited medical plans, Inson said. Conversely, "if we exit and pay the penalty, those are additional costs that we don't have today," he said.

Joanne Wojcik writes for Business Insurance, a sister publication of Workforce Management. To comment, email

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