In June, giant consulting firm McKinsey & Co. released a report declaring 30 percent of employers are likely to drop their health coverage in 2014 as a result of health care reform. After receiving backlash, McKinsey quickly stated that the survey was not meant as a predictive economic analysis but rather as a measure of current employer attitudes.
In other words, they tried to capture the emotional state of employers a couple years before the employer and individual mandates go into effect. Of course, most employers won't end up making a knee-jerk emotional decision; instead, like most business decisions, it will come down to money. Before we do the math, it's important to point out that there is no requirement to offer health insurance to employees today, but a lot of employers find this to be a good business decision. Why? Simple: Because employees want benefits.
Many employees value their health coverage as much as they do their paychecks, so offering a comprehensive employee benefits package is a great recruitment and retention tool for employers. That won't change in 2014. On the contrary, more employees will appreciate their benefits at that time because their employer will be helping them avoid the penalties they would pay if they chose not to purchase health coverage.
To quickly review the rules: Most Americans will be required to purchase health insurance coverage in 2014 or they will pay a penalty. Small employers with fewer than 50 employees are not required to offer health insurance at all – there is no penalty for failing to do so. Large employers with 50 or more employees are required to offer coverage in 2014.
If they don't, and if even one of their employees purchases a subsidized plan through the exchange, the employer will pay a penalty of $2,000 per year for each of their employees with the first 30 excluded. So what's the break-even point? This is what employers will need to determine when making the decision whether or not to drop their coverage.
Here's a quick example: ABC Company has 100 full-time employees and the majority earn an excess of $9 per hour, or $1,560 per month. To keep employees from automatically qualifying for a subsidized plan through the exchange, the employee portion of the premium needs to be less than 9.8 percent of this amount, or $153 per month.
But the company doesn't want to lose money in the process, so they need to determine what they would pay in penalties if they didn't offer coverage at all. That amount is $140,000 ($2,000 penalty x 70 employees), so spread out among the 100 employees, ABC can contribute $140. Since most carriers require a minimum contribution of 50 percent, and because some employees will waive coverage, freeing up money for the others, we can ballpark this at a $300 monthly premium to be split 50/50 between the employer and the employees.
If the company can find a bronze-level plan – probably an HSA-compatible option – in this price range, they're actually better off continuing to offer coverage, regardless of what McKinsey says. For premiums above this amount, it gets a little more complicated.
The employer will need to factor in the tax-deductibility of the premiums but not the penalty and try to determine how many employees would actually enroll in the health plan, how many would pay their portion of a subsidized plan, and how many will qualify for Medicaid now that it will be increased to 133 percent of the federal poverty level.
The math can get complicated, but the important point is that this is a financial, not an emotional decision, and brokers who are able to help their clients with this analysis will be in high demand.
Eric Johnson can be reached at 817-366-7536 or [email protected]
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