Before making decisions on how to comply with the myriad new requirements that the Patient Protection and Affordable Care Act (PPACA) places on health care benefits, employers should stand back and evaluate what they want to achieve through their pay and benefits package, advised benefits expert Gary Kushner, SPHR, president and CEO of Kushner & Co., an advisory firm based in Portage, Mich. Kushner spoke at SHRM’s 2013 Employment Law & Legislative Conference, held March 11-13 in Washington, D.C.
"Health care reform is a once-in-a-lifetime opportunity to rethink health care benefits delivery," Kushner said during his session, "Decision Time: Your Path for Offering Health Care Benefits—or Not—Under PPACA."
Strategic questions employers should be asking, he said, include:
- What is our overarching organization strategy?
- How is HR strategy aligned with the organization’s strategy?
- What is our total rewards strategy?
- How do health care benefits fit in to the above strategic considerations?
"Everything you do regarding health care ought to be linked to the broader HR strategy for talent acquisition/retention, development and engagement, and the HR strategy should fit into the organization’s broader mission and goals," Kushner said. "Think about why you offer benefits. That’s a discussion organizations haven’t had for 50 years. Now is a good time to start."
For example, to determine the strategic implications of offering a group plan or sending employees to purchase individual coverage through the government-run exchanges that are set to launch in 2014, Kushner recommended looking at how the decision would affect recruitment and retention. "The answer is going to be different for different types of organizations, even within the same industry," he said. "The expectation of retaining personnel will be different at a high-turnover fast-food outlet compared to a high-end restaurant."
If the organization’s strategy requires recruiting and retaining high performers and those with in-demand skills, then benefits will play a different role, he noted. "What happens if you lose key talent? Unemployment is still high overall, but unemployment for high performers is low."
To Play or to Pay, That’s the (Initial) Question
The key decision of whether to offer or continue offering a group health plan requires employers to understand the penalties they would confront. But it also requires an analysis of how not offering group coverage would affect organizational, HR and total rewards strategies.
First, the penalties, for which Kushner offered this summary:
Employers with 50 or more full-time equivalents that either fail to offer coverage or offer coverage that does not meet qualifying value and affordability standards will be subject to a penalty if at least one full-time employee gets a premium tax subsidy through a public exchange.
The penalty for providing no coverage is $2,000 per year per the number of full-time employees (less the first 30 full-time employees). If the employer provides coverage, but it doesn’t meet standards, the penalty is the lesser of $3,000 per year per full-time employees receiving a subsidy through a public exchange or $2,000 per year per the number of full-time employees (less the first 30 full-time employees).
If that were all an employer needed to consider, "the issue might be a no-brainer," Kushner said. "It would almost always be cheaper to pay the penalty than to provide coverage."
But even though the exchanges alter the benefits landscape by, presumably, making it easier for individuals to purchase their own coverage, there is a reason why employers have been providing group coverage before health care reform, and that, again, leads back to workforce strategy.
To put these issues in perspective, Kushner offered this hypothetical:
Jungle Corp. has 100 full-time employees and is a leader in its market, using a talent differentiation strategy. Jungle’s family coverage costs $15,000, of which employees pay $3,000. Bob Smith, a highly skilled worker with a strong performance record, earns $50,000 and has family coverage through Jungle’s plan.
On Jan. 1, 2014, Jungle Corp. announces it is dropping its group health plan coverage and will instead pay the $2,000-per-full-time-employee penalty. On Jan. 2, Bob walks into HR and asks about receiving replacement compensation for the $12,000 that the business had been paying toward his family coverage.
Wanting to retain Bob in accordance with its strategy of maintaining market leadership with an experienced workforce, Jungle offers him another $12,000. But clever Bob points out that his share of Social Security and Medicare payroll (FICA) taxes will take a bite out of that $12,000, as will federal and state income taxes, so the HR manager agrees to make good on those amounts as well. Of course, the company will also have to pay its share of FICA taxes on Bob's additional compensation. As a result, instead of paying $12,000 toward Bob’s family coverage using pre-tax dollars, Jungle Corp. now finds itself paying an additional:
- Bob's salary adjustment: $14,500
- Employer's share of FICA taxes: $1,109
- Excise tax (penalty): $2,000
- Total: $17,609
(versus $12,000 currently)
Similar per-employee costs will be reflected across the company's workforce. "For a move that seemed like a no-brainer, the consequences could make you look like you have no brains," Kushner said.
SHRM Video: Doing the Math
Eliminating health care is not a simple decision, says Gary Kushner, CEO of Kushner & Co. To prove his point, he walks viewers through a scenario that presents potentially unanticipated costs for employers.
The above example is broadly presented, but it represents the kind of trade-offs employers should take into consideration even after deciding to maintain group coverage.
There will still be any number of ways to design benefits that fulfill PPACA’s requirements. Some consideration include:
SHOPping around. Small employers (generally those with fewer than 100 full-time employees, although some states have reduced that number to 50) can use the public exchanges to purchase small group plans under an exchange’s SHOP (Small Business Health Options Program) section, which will offer Bronze, Silver and Gold plans with different actuarial values—all compliant with PPACA minimums.
Incentivizing wellness. Another strategic consideration is wellness program incentives, of which the limits have increased under the PPACA from 20 percent to 30 percent of the total cost of individual coverage (both employer and employee contributions), with incentives of up to 50 percent of individual coverage costs allowed to encourage smoking cessation. For goals that trigger incentive payments, "reasonable alternatives" must be offered to those for whom it would be unreasonably difficult or medically inadvisable to satisfy the standard due to a medical condition.
Promoting consumerism. Another decision involves plan deductible limits under the PPACA, such as the $2,000 individual / $4,000 family deductible limits on small, fully insured nongrandfathered plans. However, affected employers can provide plans with higher deductibles if they offset those higher amounts with contributions to employees’ health savings accounts (HSAs) or health reimbursement arrangements (HRAs) integrated with group coverage. This provides organizations with more flexibility to promote health care consumerism—giving employees a greater incentive to make cost-conscious decisions when purchasing health care services—while still remaining compliant with the law.
Each of these—and many other strategic plan-design decisions—necessitates "understanding the value proposition behind health benefits in relation to overall strategy, especially relating to talent acquisition and development, employee engagement and the organization’s mission," concluded Kushner. "This is an opportunity for HR to show its strategic value by demonstrating how benefits align with organization goals. Now is the time to develop an implementation plan for health care reform and to develop an employee communications plan that lays out the value proposition behind your total rewards package."
Stephen Miller, CEBS, is an online editor/manager for SHRM.
Related SHRM Articles:
Levers of Change: Employers Respond to Shifting Landscape, SHRM Online Benefits, March 2013
Newly Eligible May Forgo Health Benefits in 2014, SHRM Online Benefits, March 2013
The Mandate and Beyond, HR Magazine, March 2013
Making the ‘Play or Pay’ Decision, SHRM Online Benefits, February 2013
HHS Issues Final Rule for State-Run Health Exchanges, SHRM Online Benefits, August 2012
SHRM Online Benefits page
SHRM Online Health Care Reform Resource Page