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Health plan termination may not save employers money

Analysis shows hidden costs of not offering health cover

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ORLANDO, Fla.—Many employers who think they will save a lot of money by terminating their health care plans and bumping up employees' salaries to enable them to buy coverage in state insurance exchanges are likely to be disappointed.

When comparing the costs of continuing coverage vs. dropping coverage, “The numbers come out awfully close,” said Ed Bray, director of compliance with Burnham Benefits Insurance Services Inc. in Irvine, Calif.

Speaking last week at the WorldatWork Total Rewards 2012 Conference & Exhibition in Orlando, Fla., Mr. Bray said if an employer doesn't offer coverage, it will not necessarily save money.

The passage of health care reform legislation in 2010 has been a catalyst for financial modeling by employers to compare the costs of continuing group coverage with the costs of discontinuing it.

That is because the law gave employees a viable alternative to employer-sponsored coverage through provisions authorizing state insurance exchanges, where participating health insurers will start issuing policies on Jan. 1, 2014, and the elimination of pre-existing condition exclusions.

In addition, in the case of lower-income employees without employment-based coverage, the health care reform law provides premium subsidies to partially offset the cost of policies purchased in exchanges. The subsidies, though, decline sharply with income and are not available to those earning more than 400% of the federal poverty level.

To come up with possible cost savings that could be achieved through plan termination, several calculations have to be made, Mr. Bray said.

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“You can't just compare the penalty and (current) coverage costs,” Mr. Bray said, referring to the $2,000 per full-time employee penalty the Patient Protection and Affordable Care Act will impose starting in 2014 on employers not offering coverage.

In doing the calculations, several factors have to be considered, Mr. Bray said. For example, the $2,000 penalty is not tax-deductible, which boosts its actual cost for employers.

In addition, when employers bump up employees' salaries to reflect how much employers previously paid for coverage, that amount will be added to employees' taxable income, which will increase payroll taxes—which are based on employees' taxable income—paid by their employers.

Employees' taxable income also will be higher because employees now typically pay for their share of the group premium through pretax contributions. The end of those pretax contributions would result in further increases in employees' taxable incomes and another boost in the amount of money employers are shelling out in payroll taxes.

When all those factors are considered, the costs savings resulting from terminating coverage are likely to be small, Mr. Bray said.

And money isn't the only factor employers need to weigh in deciding whether to continue coverage. Employees might have myriad plans to choose from in the exchanges, Mr. Bray said. Comparing the features of exchange plans could be very time consuming and a distraction that could affect employee productivity, he said.

At the same time, there are several key unknowns about exchange coverage. For example, it isn't known if the exchanges will be hit with adverse selection, in which those with health problems are more likely to seek coverage than healthier individuals.

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If significant adverse selection results, exchange coverage premiums will rapidly increase, putting pressure on employers to boost employees' pay to offset some of the increases.

“You have to look at beyond 2014,” said Doug Ramsthel, a Burnham Benefits vp, who also spoke at the session.

Meanwhile, while federal health care regulators have issued numerous rules to help employers comply with the law, many issues have yet to be addressed.

For example, rules have yet to be developed on a health care reform law provision that requires employers with at least 200 employees to automatically enroll employees who don't select a health care plan, while rules to test whether a plan discriminates in favor of highly compensated employees haven't been published.

“The good news is we have gotten guidance on some issues,” Mr. Bray said.

And in some cases, the guidance can change. For example, federal regulators proposed limiting a health care reform law affordability test to individual coverage. Under that test, coverage would not be considered affordable if the premiums paid by an employee exceed 9.5% of wages.

If the premium percentage paid by the employees exceeds 9.5% and the employee is eligible for a federal premium subsidy and uses it to buy coverage through an insurance exchange, the employer would be liable for a $3,000 penalty.

But this month, the Treasury Department said it will take another look at whether the penalty should apply if the cost of coverage for family coverage exceeds the 9.5% threshold.

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