PPACA Series: Strategy Two - Eliminate your Health Plan
The Affordable Care Act includes a plethora of new regulations, employer requirements, and potential penalties for employers that have group health plans. Almost from the moment it passed, many pundits suggested that frustrated employers should simply eliminate their group health plan and pay the penalty which they predicted would be cheaper than the cost of their current health plan. As we have discussed in the prior articles, no single strategy is the correct strategy for all employers and such blanket recommendations have proven to be flawed. In some cases the elimination of the group medical plan could in fact be the lowest cost option. But before you run off and make a rash decision to eliminate your health plan, we must explore the real cost of this approach in a little more detail.
When an employer looks at the cost of his employee medical plan he must look at it objectively, without bias towards ACA if he is to make the best possible decision. In this case we must understand the employer mandate requirements of ACA or the “Pay or Play” penalties. If an employer over 50 full-time equivalent employees chooses to not offer a health plan after January 1, 2014 he will be subject to an annual tax penalty. This penalty is equal to the total number of full-time employees (not full time equivalents!) less the first 30 employees times $2,000. For example, if a restaurant owner has 70 full-time employees and 100 part-time employees that work 15 hours a week on average then he has 120 full-time equivalents and is subject to the penalty. When he calculates the “Pay or Play” penalty, however, he only has to use his full-time employees (70) less the first 30 resulting in an annual penalty of $80,000 (70 FT ee’s – 30 times $2,000).
Now that we know the potential penalty we need to see what the employer is currently spending for the group medical plan. If he has 70 full-time employees that are eligible for the plan, usually only about 70% will participate in the plan meaning he is paying premium on only 49 participants. He is also likely only paying 60% of the premium, so if his current premium is $300 then his cost is only $180 per participant per month. His cost for the entire group for the year would be about $105,840 (49x180x12 months). It looks at first glance like the owner could save money by eliminating the plan but the calculation is incomplete.
Before an analysis of the potential cost savings of eliminating your plan is complete an employer must consider two other key factors; payroll and taxes. If a company currently has a group health benefit then it is logical that those employees that are currently participating will probably assume that when you take this benefit away that they should receive a raise to offset this reduction in compensation. While they will now have access to the coverage on the Exchange the rates will probably not be less than what your current group rates are. As a result, to keep your employees whole you’ll have to add approximately $74,088 to payroll or risk loosing your best employees. In fact, once the employees understand that their current group health premiums were pre-tax and their new individual premium will be non-tax deductible they may expect you to increase their salary even more. Some of your employees (lower income) will be eligible for premium subsidies under the Exchange which could offset the need for the raises to offset the loss of the group plan but detailed analysis of your specific payroll will be necessary to estimate this benefit. The other key factor to consider when analyzing the potential Pay or Play penalty is the tax deductibility of these two options. The ACA Pay or Play penalty is not a deductible business expense while the health premium you may be paying for yuor employees is, thus the real net cost of the health plan must be reduced by the corporate tax rate (say 30% for example) resulting in a real net cost of only $74,088 in our example. In addition, most employers utilize an IRS Section 125 cafeteria plan to fund the employee portion of premium resulting in a reduction in the employees gross pay which significantly reduces the payroll tax for the employer (and the employee).
As you can see, the potential cost saving of eliminating your group health plan involves some very detailed and clients specific calculations. The provisions of ACA added to the complexity of our tax code make this option complicated to estimate. In the next couple months the actual Exchange rates will be provided by the carriers and more accurate estimates of real costs can be prepared. You should request this calculation be prepared by your current broker or consultant as part of your upcoming renewal. If you would like assistance with a review of this option please feel free to contact us and we would be glad to work with you to explore this alternative.
“Want to learn more? PPACA is a complex law and will affect each employer differently. McInnes Group provides this blog series as a sample of various strategies that may work for some employers. We encourage you to contact Dennis at email@example.com or at their website at www.mcinnesgroup.com to get specific advice to help you develop a customized strategy for compliance.”
Previous posts in the PPACA series:
Strategy One - Minimum Compliance
Non-Discrimination Rules under PPACA
The Three Strategies for Healthcare Reform
3 Steps to Managing your Workforce
Ten new words you’ll need to know to understand healthcare reform
Understanding the Patient Protection and Affordable Care Act