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Dropping health care coverage no easy decision for employers

Dropping health care coverage no easy decision for employers

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 will 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% and 25% 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, Kan.-based vp 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, Calif., 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% 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, Mr. 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 Ms. Vines.

So, for example, if a 450-employee company has a turnover rate of 15%, with projected turnover costs of 20% of payroll, even a 2% 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, vp 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, Mr. Inson said. Conversely, “if we exit and pay the penalty, those are additional costs that we don't have today,” he said.


In addition, the report included likely turnover costs if a large portion of Alpine Access' employees opted to leave to work for a competitor that offered health care benefits. Conversely, by offering health benefits, the company could gain highly qualified employees from competitors that choose not to, he said.

“We certainly didn't understand the nuances of that,” Mr. Inson said. “But once our brokers did the math, the report (that came) out was stunning, and it certainly caused us to pay attention.”

Mr. Inson said Alpine Access has not decided what course to take.

“We're in a tough industry, with low margin and significant competitive pressures. But we want to be fair to our people, so at this point we're weighing all of our options carefully,” he said.

After Mid American used the PPACAcalc tool on cost projections for Rosemont, Ill.-based Cole Taylor Bank, Linda Hammerton, the bank's senior vp of total rewards, said she was surprised by how much the tax liability would increase for the bank and its employees, as well as how much cost-shifting would occur if the bank were to direct employees to state insurance exchanges to buy health care coverage.

Cole Taylor Bank, a unit of Taylor Capital Group Inc., has 650 employees in 20 states. Just over 100 of those employees in Michigan are enrolled in the bank's health benefits program, while 374 Illinois employees are enrolled in the bank's health benefit plans. The bank offers a choice of four plans, including two health maintenance organization plans, a preferred provider organization plan and a high-deductible health plan, all of which are self-funded and administered by Blue Cross & Blue Shield of Illinois.

Ms. Hammerton said she originally thought the $2,000-per-employee penalty imposed under PPACA on employers that terminate their plans was low, and that it might persuade some employers to drop coverage. But after her broker ran the numbers, she saw that while it would lower the bank's benefit costs, the cost shift would be so great to employees that the bank would probably have to raise salaries for nonexecutive employees earning greater than 400% of the federal poverty level, thereby increasing costs and payroll taxes for the bank and its employees.

For purposes of doing the analysis, total household income was calculated at 150% of an employee's salary.

“I'd been thinking that the penalty is too low, and so I was assuming that if a company only had to pay the $2,000 penalty to drop coverage, that most would consider that seriously,” Ms. Hammerton said. “Not only does that shift the cost to the person, it changes the benefit from being pretax to post-tax, so the government is collecting taxes on the value of health care benefits, which were always sheltered before.”

Ms. Hammerton said she is performing a strategic evaluation of plan costs to present to Cole Taylor Bank's top executives this summer. However, no changes to benefits are likely to occur until 2014, when PPACA takes effect.

Frank Poremski, chief financial officer at Children's Home and Aid Society of Illinois in Chicago, said the analytics helped him better understand PPACA's impact on the nonprofit's benefit costs, regardless of which path it eventually chooses to take. The organization has 900 mostly full-time employees, many of whom are low-income, which may make them eligible for federal premium subsidies if they purchase coverage via the insurance exchanges.

“To me, it's more about how we design our plans moving forward, making sure we have the right plan options and the right coverage levels to minimize the impact of penalties while still maintaining coverage for our staff,” said Greta Jones, director of human resources at Children's Home and Aid. “This gives us a sense of direction instead of shooting at a dartboard in the dark. Now we know where the dartboard is located and the different circles on it, so we know where to aim.”