Many big retailers including Target, Home Depot and Wal-Mart recently announced moves to drop health benefits for their part-time employees, claiming the move is better for workers now eligible to receive federal subsidies or tax credits under the Affordable Care Act (ACA) for policies purchased through a public insurance exchange.
With every passing day, more of the nation’s employers move closer to facing their own “play or pay” decisions—whether or not they will offer health benefits or (if they employ 50 or more full-time employees or part-time equivalents) pay a penalty instead. Many major provisions of the ACA have been phased in as of January 2014, while the remaining provisions are expected to take effect by 2020.
These decisions are far from easy; the ensuing financial, legal and competitive implications are profound, and the clock is ticking.
Some employers believe that the play or pay mandate will raise their costs and force them to make workforce cutbacks. As a result, they’re considering the “pay” option—i.e., eliminating their health care coverage altogether and paying the penalty on their full-time employees. Others are leaning toward “play,” which means they’ll offer employees health coverage that meets the ACA's requirements. While employers should look carefully at both options and do their best to calculate the outcomes, the likely solutions will be creative combinations of approaches, making some reductions to benefits while enhancing others.
Under the ACA, seemingly small decisions on compensation can have significant ramifications for employers and employees alike. Consider the following:
- There are income break points relative to the poverty level at which federal subsidies for exchange-based policies decrease dramatically, and a break point when subsidies are eliminated altogether. This could have a tremendous impact on employees who could incur an added expense of $2,500 or more when, for example, a small year-end bonus is added to their income.
- The amount of tax credit a person can receive is based on the premium for the second-lowest cost Silver Plan available on a public exchange where the person is eligible to purchase coverage. The Silver Plan is one that provides essential benefits and has an actuarial value of 70 percent, meaning that, on average, the plan pays 70 percent of the cost of covered benefits for a standard population of employees. The amount of the tax credit varies with income such that the premium that a person would have to pay for the second-lowest cost Silver Plan would not exceed a specified percentage of their income (adjusted for family size).
- Employers might decide to cut back employees' hours because a pay cut and reduced coverage costs are more advantageous than providing them with a higher salary and health care as a full-time employee.
- Employees may ask for reduced hours, slightly lower pay or to put more into their 401(k) in order to qualify for a richer subsidy, or any subsidy at all.
- Employers may redefine job descriptions and compensation so that when employees are hired, they can choose a less than 30-hour position that has some other enhanced benefits, or a 30-hour-plus position that has health care but lacks other enhancements.
For those employees who qualify for a subsidy, the value can be tremendous. As a result, subsidies can significantly change the value employees place on employer-based health care plans, depending on their family income and specific circumstances.
Consider that employers who seek to avoid ACA penalties by offering a health benefit covering 60 percent of health costs (the minimum under the ACA) may create retention issues when employees realize what they are not receiving. For example:
- An employee who makes $35,000 a year is offered a plan with an actuarial value of 60 percent at a charge of $150 per month for himself, regardless of family cost. Essentially, his employer is taking away his ability to have a subsidy pay a significant portion of his costs on an exchange plan.
- On an exchange plan, this employee would pay roughly $111 a month for a 94 percent plan to cover his entire family. In this scenario, the employee would be better off financially working for a company that paid him a little less and offered no benefit.
Bottom line, the minimum offering strategy can eliminate an employees’ ability to get subsidies for themselves and their families.
As a result, health care coverage may not be the retention tool it once was. The upside: Employees with health issues may not feel forced to stay in their jobs. The downside: Employees may change employers more freely, thus creating serious retention issues. A “total compensation” approach may be warranted.
Continuing to offer health benefits spouses may be more harmful than helpful, given that employers are not required to offer spousal coverage. If spouses are eligible for subsidies, then purchasing coverage on a public exchange may be less costly for them than an employer's plan that requires spouses to pay the majority of the premium rate.
It’s important to remember who can get a subsidy:
- Individuals or families who do not have access to affordable and minimum value insurance through an employer, Medicare, Medicaid, Tricare (which provides civilian health benefits for military personnel, military retirees and their dependents) or any other entity.
- Household income must be below 400 percent of the federal poverty level and above 100 percent of the federal poverty level.
- A plan’s affordability is based on the single employee monthly contribution rate, regardless of how much it costs to add other family members. If either spouse has access to affordable care, the family is considered to have access to affordable care. However, if the employer offering affordable coverage does not provide any coverage for spouses, then the spouse may receive a subsidy.
While employers may be required to cover more people as a result of the ACA, they have options for reducing coverage costs. For example:
- Employers could reduce their lowest-cost coverage to stay just above the 60 percent minimum value threshold.
- They could reduce workers’ hours below the “full-time employee” level.
- They could consider paying targeted penalties (e.g., not providing “affordable coverage” to certain segments of their workforce).
Choosing to drop coverage for any population, however, has other financial implications. For instance:
- Employees may demand additional compensation from employers so as to cover the cost of health care they must now purchase on their own with after-tax dollars.
- Employers who haven’t properly budgeted for nondeductible ACA "pay or play" penalties may compound their financial burdens, especially if they don’t make long-term plans for penalty increases.
As with many other workforce-related decisions employers make, the main objective will be to remain financially competitive while still attracting and retaining the employees they require.
Seeking professional guidance and benchmarking company plans against competitors within a region, industry and business size remain the best long-term solutions for controlling health care costs and making strategic decisions that move beyond ACA compliance into true cost control territory.
Rob Calise is board chairman of United Benefit Advisors. This article was adapted from The Employer’s Guide to ‘Play or Pay, a UBA white paper. © 2014 United Benefit Advisors. All rights reserved. Republished with permission.
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