Now It's Employers' Turn

The health care reform law will reshape your benefits agenda, starting this year.

By Gary B. Kushner, SPHR June 1, 2010

0610cover.gifComprehensive reform of the U.S. health care system was a priority for at least eight presidents and countless lawmakers and policy experts for a hundred years. Washington may have taken its time addressing changes to health care—but employers can’t afford to.

Now that lawmakers are done with health care reform—at least for now—employers have to go to work.

They need to study the new law, find the provisions that apply to them, learn how they will be affected and decide what to do about the health coverage choices they’ll face in the next few years.

The Patient Protection and Affordable Care Act, signed by President Barack Obama March 23, is the most significant change to the U.S. health care system since the enactment of Medicare and Medicaid in 1965. It will take time for employers to discover all of the details and get answers for all of their questions.

For example, plans in existence on the date of enactment are considered “grandfathered,” and their employer options are different from those for plans established after March 23, 2010. Similarly, group health plans subject to collective bargaining have separate effective dates for various provisions of the new law.

Further, the health care reform legislation was enacted with broad strokes, establishing the need for comprehensive regulatory guidance. Those regulations largely remain to be written.

One question addressed early on by regulators: the definition of a grandfathered plan. If the employer amends a plan after March 23 or changes insurance carriers, is the plan still grandfathered?

By 2018, when all of the law’s coverage provisions will have been phased in, it’s expected that about 95 percent of all Americans will have health insurance, either through their employers, or as individuals in the marketplace, or through expanded government programs such as Medicaid and Medicare.

To facilitate coverage—initially, for employees of small organizations and for individuals in 2014, and for employees of any size organization by 2017—the states are given the opportunity to create state-run health insurance exchanges, also known as small business health option plans, or SHOPs.

Modeled after Massachusetts’ experimental Health Connector agency, an exchange would offer privately insured plans that must provide “minimum essential coverage” under the health care reform law. If a state decides not to create an exchange, the federal government would do so for the residents of that state.

Exchanges would create coverage-level options, and then private insurers could offer their versions of the options. For individuals with adjusted gross income up to 400 percent of the federal poverty line—up to $43,200 for an individual or $88,000 for a family of four this year—a federal tax credit will be available to spend at an exchange.

Strategic Questions

Although such major provisions are important for employers to consider, perhaps the first questions they should ask themselves are strategic:

  • What is our overarching total rewards strategy, and what forms of total rewards help us meet our HR and organizational goals and objectives?
  • Are health benefits part of that total rewards mix?
  • If business leaders have decided—as many small employers have—not to offer health benefits, or if they discontinue health plans before most of the law’s provisions take effect in 2014, could the organization attract and retain the talent necessary to achieve its mission? If so, at what cost?
  • If business leaders choose to start or continue health benefits as part of a total rewards strategy, would they be better off?
  • Does the health care reform law level the health-benefits playing field for attracting top talent? Does it create a competitive advantage for my organization?
  • Last, do any of these answers change if unemployment levels begin to decline to historically normal levels of 6 percent and employees begin feeling more comfortable leaving a job?

The Play-or-Pay Decision

Nothing in the health care reform law says an employer must offer any health coverage to employees. Nonetheless, the law imposes penalties under certain circumstances on employers that do not offer coverage:

  • An organization with more than 50 employees and with no health coverage will be fined $2,000 per full-time employee per year if any full-time employee receives a premium tax credit from the federal government for use in a state exchange. When counting full-time employees, the first 30 are subtracted.
  • An employer that has more than 50 employees, offers health benefits and has at least one full-time employee receiving a premium tax credit from the federal government will be fined either $3,000 for each employee receiving a credit or $2,000 for each full-time employee, whichever fine is smaller.
  • For employers with no more than 50 employees, there is no penalty for not offering health coverage.
When calculating how part-time employees increase the number of full-time employees for the health care reform law’s purposes, employers must aggregate the number of hours of service of employees who are not full-time and divide by 2,080.

In addition to its disincentives for not providing coverage, the reform law offers employers many incentives to offer qualified health benefits plans.

For example, an employer with 25 or fewer full-time employees and an average annual wage of $50,000 or less can receive a subsidy starting this year of up to 35 percent of the cost of eligible coverage if the company pays at least 50 percent of the premium cost. The subsidy rises to 50 percent for an additional two years, starting in 2014.

Qualified health benefits receive an employer tax deduction, and there are no payroll taxes to be paid on qualified health benefit plans. These deductions are of limited value to governmental and other tax-exempt entities—except for the payroll tax deductions—but of significant value to for-profit organizations.

In addition, plan participants realize two tax advantages. First, the costs of coverage are tax-free. This applies to the employer-paid portion in all instances as well as any employee-paid portion if offered through an IRS Section 125 cafeteria plan. Second, any medical utilization benefits—amounts the insurer pays for the employee’s medical expenses—received through the plan are also tax-exempt to the employee.

Equity for Small Business?

Tax incentives can make a significant difference for small organizations, says Paula A. Calimafde, chair of the Small Business Council of America: “Given that small employers typically pay 35 percent to 45 percent more for the same plans as larger employers, providing a tax incentive for small businesses to begin to offer or continue to offer health coverage will enable many to now purchase coverage for their employees. Whether it will be enough of an incentive to get small businesses into the health care delivery system remains to be seen, but if it works, it will enable the small business to attract and retain talent in order to better compete with larger entities.”

Employers with relatively few workers—historically less likely than large employers to offer coverage—have another incentive to consider in decision-making. Starting in 2011, new, so-called simple cafeteria plans will enable an employer with 100 or fewer employees to bypass all applicable nondiscrimination rules if it is willing to meet certain eligibility and contribution requirements.

Although the health care reform bill “didn’t rectify all of the disparity between small and large cafeteria plans, it certainly was a good first step towards parity,” Calimafde says. “Now if only Congress would allow small business owners to participate in their own cafeteria plans, we’d be almost all the way there.”

Certain employers—including sole proprietors, partnerships, and owners of 2 percent or more of the shares of an S corporation—are ineligible to participate in an IRS Section 125 plan because the IRS does not consider them employees, no matter how many hours they work in the organization.

The Big Question

Employers with more than 50 employees are already asking whether they should continue to offer health coverage after 2014, or just pay the penalty. After all, with the average employer currently paying almost $10,000 per employee per year in health care costs, why not just pay the $2,000 per employee penalty, instead? It doesn’t require rocket science to make that calculation. But it’s not as easy as it may seem.

While low- and middle-income employees would receive a subsidy to purchase coverage, the subsidy phases out as income rises, and it disappears completely after $88,000 in family income. Thus, an employee and spouse each earning $50,000, for example, might have to pay about $15,000 to purchase coverage through an exchange.

Presumably, there would be significant pressure on employers not offering health benefits to increase employees’ direct compensation to pay for that coverage. If paid as direct compensation, it is subject to payroll taxes and workers’ compensation costs.

In addition, any other benefit predicated on compensation, such as retirement plan contributions, life insurance or disability coverage, would proportionately increase. And after all of that, the employer still has to pay the $2,000 penalty.

Last, the employer would now lose the ability to influence employees’ health through prevention and wellness programs. That lost opportunity could result in a less healthy, less productive workforce.

Ups and Downs

The law contains some financial help for organizations offering retiree health coverage. Starting June 21, a temporary federal reinsurance program will reimburse employers for 80 percent of annual health benefit claims—including medical, surgical, hospital and prescription drug costs—from $15,000 to $90,000 for each early retiree in the age bracket of 55 to 64. The reinsurance program will run through 2013 or will end sooner if the $5 billion allocation runs out.

This reinsurance will provide employers yet another opportunity to consider whether and how to offer health benefits to early retirees, and the program may encourage some employers to consider early-out incentives in connection with downsizing initiatives.

On the down side, organizations that maintain a prescription drug program for retirees 65 and older will lose a tax break. They now receive a subsidy of 28 percent of drug costs under the Medicare Part D prescription drug program. The subsidy is tax free and can be a tax deduction on an employer’s federal return. That tax deduction will expire in 2013, however, and any organization claiming it must account for that change beginning in 2010. For AT&T, that meant announcing in March a $1 billion charge to its noncash accounts. Ford Motor Co., on the other hand, will be unaffected by this tax and accounting change because of the agreement whereby its United Auto Workers retiree health benefit liabilities were transferred to the union’s voluntary employee beneficiary association trust.

The loss of the tax deduction may cause some employers to revisit whether they wish to continue offering prescription drug coverage to retirees 65 and older, who are eligible for Medicare and its prescription drug program.

Prevention and Wellness

Starting with plan years beginning on or after Sept. 23, all health plans not “grandfathered” will have to provide full coverage with no deductibles, co-payments or co-insurance for a list of preventive services, including those items rated A or B by the U.S. Preventive Services Task Force. Among them are recommended immunizations; preventive care for infants, children and adolescents; and additional preventive care and screenings for women.

Starting in 2014, an employer may adopt wellness initiatives providing an employee incentive of up to 30 percent of the cost of employee-only coverage, up from the current 20 percent cap. Further, with the approval of various federal agencies, applicable wellness incentives could reach 50 percent of the cost of employee-only coverage. This would give employers a significant tool for encouraging further use of wellness programs.

Both of these measures are expected to increase employers’ efforts at improving the overall health status of their employees and perhaps dependents, leading to reduced health care costs, reduced absenteeism and increased productivity.

Health Accounts

The health care reform law makes significant changes to various types of personal care accounts such as health care flexible spending accounts under Section 125, health reimbursement arrangements and health savings accounts.

Starting in 2011, the costs of nonprescription drugs are ineligible expenses under flexible spending accounts or health reimbursement arrangements, and they are ineligible as a medical expense under health savings accounts.

Employers sponsoring health care flexible spending accounts and health reimbursement arrangements will need to amend their plans before 2011, and they will need to thoroughly communicate changes to all eligible participants before the 2011 open enrollment period.

Also starting in 2011, the penalty for a nonqualified withdrawal from a health savings account will double, to 20 percent from 10 percent.

For employers that already sponsor or are considering whether to sponsor qualifying high-deductible health plans with a health savings account component, health care reform’s legislative history may be troubling and should cause further examination of these plans.

Except for grandfathered plans, all plans must provide minimum essential coverage. Among other criteria, the deductible cannot exceed $2,000 for an individual or $4,000 for a family. Many providers offer high-deductible health plans with much higher deductibles: up to the 2010 limit of $5,950 for individuals or $11,900 for families.

Last, starting in 2013, health care flexible spending accounts will be limited to $2,500 per year, indexed annually. Most employers today have far higher limits. Thus, they will need to amend their plans, and they will have to communicate the new cap during if not before the open enrollment period for 2013.

The ‘Cadillac’ Tax

One of the more contentious issues in the health care reform debate was the attempt by Congress to curb the appetite for high-cost health plans. Because of the tax incentives—current and future under the reform law—many commentators argued that high-cost health plans were unwittingly driving overall health care costs even higher.

The solution was a 40 percent tax on “Cadillac” health plans starting in 2018. Cadillac plans were defined as those with individual aggregate values of $10,200 or family aggregate values of $27,500 or more per year, with dollar values to be indexed annually starting in 2019.

“Aggregate value” includes a health plan’s premium and employer and employee contributions to a health care flexible spending account and employer contributions to a health reimbursement arrangement or a health savings account. Dental and vision coverage costs are not included.

From the language of the law, it might appear that the tax would not impact employers because it would be collected from insurers for their group health plans. In reality, insurers would probably pass the tax on to employers in the form of higher premiums. And for self-funded plans, the tax would apply to plan administrators, typically, employers.

Since the law sets relatively high aggregate-value limits, it would seem that few employers would be affected initially. Average health plan costs for a large majority of employers are significantly below these levels today. However, two factors may cause employers concern in 10 to 15 years. First, the indexing mechanism on the aggregate values does not use medical cost increases, but rather the regular Consumer Price Index.

Second, in some plans subject to collective bargaining, richer health benefits have historically been negotiated in exchange for lesser increases in direct compensation. It was for this reason that many in organized labor opposed the Cadillac tax.

Employers with participants in plans subject to collective bargaining will need to work with union officials to determine if perhaps a trade-off of health benefits in exchange for more taxable forms of compensation might make financial sense for employers and employees.

The Longer View

All employers will have to examine the components of the health care reform law and determine how they should proceed. Many will find they are actually re-examining their overall total rewards strategies. For some, in fact, it may be the first opportunity in a long time to ask themselves such strategic questions.

Although proponents of health care reform did not set out to motivate strategic reviews within organizations, that could prove to be a valuable unintended consequence.

The author is president and chief executive officer of Kushner & Company in Portage, Mich., and will lead workshops on health care reform at the Society for Human Resource Management’s 62nd Annual Conference & Exposition in San Diego June 27-30.

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