As full implementation of health care reform in 2014 approaches, employers of all shapes and sizes are working to determine what health care reform means to their organizations and employees. While future columns will focus on other benefit topics, including specific strategies employers are implementing to ensure compliance with the law’s requirements and efforts to control costs, this month’s column relates to the most basic question employers are considering: should they “pay” or “play?”
For those who may be unfamiliar with the “pay or play” decision point, health care reform presents employers with two primary options. They can choose to drop medical coverage and “pay” a penalty, which, for most employers, will be roughly $2,000 per year per full-time employee, or they can “play” by offering coverage that is deemed to provide “minimum essential coverage” at an “affordable cost.”
When Health Care Reform was initially passed, there was a broad based expectation that most employers would find it preferable to drop coverage and pay the fine. However, as the metaphorical smoke is beginning to clear on recent regulations, including employer “safe harbors” regarding the employee affordability calculation, it appears as if the vast majority of employers will determine that continuing to offer coverage is their best option.
Here are a few of the primary reasons:
- Most employer plans currently meet (or exceed) the requirements under the law. While slight tweaks are likely needed, a drastic overhaul is most likely not required.
- Employer penalties for failing to offer coverage are not tax deductible as a business expense and many expect the penalties will increase as time progresses.
- Medical coverage purchased on the individual market, outside of the employer’s purview, is, in most cases, not eligible for pre-tax premium payment. By contrast, health insurance purchased through an employer’s benefit program can be purchased with pre-tax dollars.
- The provision of a competitive health insurance program remains a very effective means of attracting and retaining employees while at the same time facilitating employee health, wellness, and productivity.
Rather than dropping coverage, employers are more likely to tailor their health insurance offerings over time to ensure that their plan complies with the “minimum essential coverage” requirements of the law while keeping a careful eye on employee contribution amounts in the plan, which will be required by law to be less than or equal to 9.5 percent of the employee’s annual income. Interestingly, the fact that the affordability calculation is based on the employee-only coverage tier will likely result in a reduction of the number of employers contributing towards dependent and family coverage.
As a result, the cost for individuals to insure their dependents and families under their employer’s plan is likely to increase substantially over time as employer subsidies are reduced over time. Although employers are not poised for a mass exodus of the benefit market, there is no question that health care reform will result in significant changes to the way employers design, fund, and communicate their benefit offering to employees. Employers of all sizes will be wise to ensure that their benefit strategies meet the letter of the law while at the same time leveraging every available opportunity to meet employee needs and corporate objectives.
David Bottoms is Senior Vice President of The Bottoms Group and a Principal of TBX Benefit Partners.