‘Pay or Play’ — The Employer Dilemma

Tom Kane
Senior vice president, Stephens Insurance

The Patient Protection & Affordable Care Act (PPACA) enacted on March 23, 2010, has brought many changes to the health insurance industry. We have seen some of these changes already take effect with the removal of lifetime limits, expanded dependent eligibility and the prohibition on pre-existing limitations for children under 19, to name a few. However, the major provisions of PPACA will not become reality until 2014 when the individual and employer mandates and state insurance exchanges become effective.

In June of this year the Supreme Court maintained that the individual mandate was constitutional and therefore starting in 2014 American citizens and legal residents will have to carry “qualified” health insurance or face penalties. Penalties for violators will be the higher of a fixed dollar amount or a percentage of income. The fixed dollar amount phases in at $95 per person in 2014, $325 per person in 2015, and $695 per person in 2016. The percentage of income phases in at 1 percent in 2014, 2 percent in 2015, and 2.5 percent in 2016. Families will pay half the amount for children, with a cap of $2,250 for the entire family.

Beginning in 2014, employers with 50 or more “full-time equivalent employees” will either offer health insurance that is both “qualified and affordable” or opt out and pay fines to the government. A “qualified” plan is one that is expected to pay at least 60 percent of allowed charges and meet minimum benefit standards. An “affordable” plan is one where employee contributions on self-only coverage do not exceed 9.5 percent of employee’s household income. Employers with less than 50 “full-time equivalent employees” are exempt from the mandate but will still need to make a business decision on whether to offer employer sponsored health insurance as a benefit of employment. “Full-time equivalent employees” are the number of regular full-time employees (30 or more hours a week) plus the number of part-time hours for the month divided by 120.

If an employer with more than 50 “full-time equivalent employees” opts out, they will pay an annual penalty of $2,000 per full-time employee (FTE) less the first 30 FTEs. For example, an employer with 150 FTEs would pay $240,000 in annual penalties for opting out ((150-30) x $2,000). (Note: The employer penalty is not a tax-deductible business expense.) If an employer chooses to offer coverage but it is not “qualified and/or affordable” for an employee who qualifies for a subsidy in the exchange (see below), the employer will be fined $3,000 annually for each employee who goes to the exchange for coverage and receives a subsidy.

In order to facilitate the process of obtaining insurance, states or the feds will form “exchanges” where individuals and families can shop for coverage. “Exchanges” will offer multiple levels of coverage providing “essential benefits” (think Travelocity for insurance). Many Americans will qualify for subsidies to offset the cost of the insurance based on their household income as a percentage of the federal poverty level per the table above:

For example, a family of four with a household income of $44,100 can purchase coverage through the exchange with a maximum monthly cost of $231.53. The Federal government will subsidize the premium in excess of $231.53.

All employers regardless of size will have to decide if they will offer group health insurance or not by 2014. Many employers will opt out and let their employees default to the exchanges for coverage. Some employers with over 50 “full-time equivalent employees” will view the fines as less costly than continuing employer contributions. For employers with a low-income workforce this may be an acceptable strategy because many of their employees will qualify for subsidies in the exchange.

However, most employers will need to carefully weigh the decision to “pay or play” due to many factors including:

1. Many employees will not qualify for subsidies or the subsidy will not replace the employer’s contri bution forcing the employee to pay more for the same or less coverage through the exchange with post-tax dollars.

2. Employee morale and engagement levels could be negatively impacted. How will employees perceive the decision to opt out?

3. Employers who opt out could be at risk of losing key talent to competitors who decide to play and offer health insurance.

4. Finally, will employers who opt out become further disconnected from the health of their workforce? Most experts today agree that employers who have implemented wellness strategies in their workforce will have a significant advantage over their competi- tors who choose not to in the future.

Although the major provisions of PPACA will not become effective until 2014, employers should begin planning today to address the dilemma, “pay or play.”

Low Income Premium Subsidy Tax Credit Table