Short Takes On News & Events

Can Employers Dump Workers To Health Exchanges? Yes, For A Price

By Jay Hancock

May 28th, 2014, 5:00 AM

How to expand Americans’ health insurance choices under the Affordable Care Act without sabotaging employer coverage? The Obama administration is still working to get the balance right.

The latest tweak from the Internal Revenue Service essentially prohibits employers from giving workers tax-free dollars to buy policies in the online public marketplaces created by the health law. The New York Times first reported the rule. But the Times’s headline, “I.R.S. Bars Employers From Dumping Workers Into Health Exchanges,” overstates the case.

Nothing stops employers from canceling company plans and leaving workers to buy individual policies sold through the exchanges — as long as they pay the relevant taxes and penalties, said Christopher Condeluci, a Venable lawyer specializing in benefits and taxes. Those will vary according to a company’s size and circumstances.

If an employer has fewer than 50 workers, there is no penalty under the health law for dropping coverage or never offering it. Larger companies that don’t offer coverage may be liable for fines of $2,000 and $3,000 per worker starting next year. (The employer mandate doesn’t kick in for firms with 50 to 99 workers until 2016.)

Nor is there anything stopping companies from giving workers raises to buy individual policies on the exchanges as long as the money is taxed as income.

“If an employer wanted to give additional taxable cash to employees, without regard as to whether the employee used the money to buy coverage on the exchange or not, the IRS doesn’t seem to care,” said Edward Fensholt, director of compliance for the Lockton Companies, a large broker and benefits consultant.

The IRS statement reinforces a ruling last year essentially prohibiting income-tax breaks for money used to buy health insurance that isn’t routed through a conventional company plan, lawyers said. It doesn’t affect the fast-growing “private exchanges,” in which employers give workers tax-free money to shop a variety of plans on a company web site.

Whether the health law would prompt employers to move workers to the ACA’s exchanges has been much discussed. Analysts expect large employers to maintain health benefits for a long time, although many are shrinking coverage for spouses. Even small employers, needing to offer competitive benefits to attract good workers, will tend to keep offering coverage, some believe.

But some employers are contemplating moving their sickest and most expensive workers to the health law’s online marketplaces.

12 Responses to “Can Employers Dump Workers To Health Exchanges? Yes, For A Price”

  1. Michael says:

    Congressional employees must use the health exchanges, their employer pays part of the premium as a benefit, yet is it not considered earned or taxable income. What allows them to do that when the IRS ruling specifically disallows it?

  2. stan says:

    More evidence that single-payer is unavoidable.

  3. stan says:

    If employers dump workers to the health exchange, then they should pay a heavy tax to support that decision. If the consumer must pay more, then employers must pay more.

  4. Ray says:

    Being able to dump employees to the exchange “As long as they pay the relevant taxes and penalties” is like saying “you can murder anyone you like, as long as you’re willing to face the penalty”.

    The penalty for sending employees to get individual coverage, and the company paying for that coverage (doing the “right thing” as far as they know, because who happened to read all that guidance?) is 5-10x more than paying for a full fledged policy. Capped at half a million per year, per company, but only if they can prove they didn’t mean to break the law. That can DESTROY small businesses that tried to save a few dollars while keeping employees insured.

    The worse part? Chances are, they don’t have an accountant/lawyer/broker on staff to warn them. They’ll run through the whole year oblivious, and face almost 40 grand per employee in taxes, in addition to premium.

  5. Johnathan says:

    Ray, the whole point is that if companies really want to send employees to the exchange, they will need to simply give them more taxable income (if they wish to contribute toward the cost of coverage) and then pay the $2,000/$3,000 annual per worker fine. However, that might still be cheaper, particularly for smaller businesses or those whose workers have a very high average annual amount of medical claims, to do that rather than self-insure these workers, or even to pay the premiums themselves.

    The intent is merely to let employers know they cannot offer tax free money to employees for individual exchange plans. That’s because the individual exchange already offers tax credits for the purchase of insurance. Wouldn’t it really be double dipping if we allowed people to both get tax free money from an employer plus a tax credit from the federal government for their health insurance? (There used to be, courtesy of Sen. Ron Wyden, an Employee Free Choice Voucher that would have allowed employees to take tax free money from their employer to the exchange and buy a policy, however those using the voucher would not have been eligible for the tax credit. However, that’s not in the current law any longer.)

    In lower wage industries that involve a lot of physical labor (and one would suppose the employees need more medical treatment than average) – this might actually be cheaper. Even if employers pay the $2k/$3k per year per full time equivalent, that’s probably less than they pay now in many cases, and it’s probably going to be a lot cheaper down the road as health costs grow over time. If most of the employees who are sent to the exchange are lower or moderate income, they will probably receive tax credits that are at least as generous as the employer contribution they used to receive, if not more generous, thanks to the combination of Advance Premium Tax Credit with Cost Sharing Reductions. Over time, yes, this does represent a transfer of costs from the employer to the federal government and/or the employee, but compared to almost all other First World countries, the USA is the only one that currently asks employers to shoulder so much of the cost of health care. It may well help American business to give them options to reduce those costs by distributing them across more funding sources, so that the entire cost of health care need not come out of the business’ own bottom line. I bet there are some employers who would also like to be free of the administrative burden of dealing with health plans. By moving staff to the exchange, the employer no longer faces a lot of direct questions about doctor networks, copays, deductibles, etc. Additionally, this will reduce job lock, because once insurance starts to belong to the individual, he or she is free to change jobs at will without loss of insurance. The federal subsidies (APTC & CSR) will adjust according to income, and can be adjusted throughout the year as jobs are lost and gained.

  6. Jerry says:

    All this was pushed through on a LIE! I’m all for giving people who need it health insurance but this “law” is a disaster and is really about government control. I want to choose my plan, I want to have the Doctor I want!

  7. This is big government involvement. To even suggest that the federal government can dictate when and where and how much I shall spend is unlawful. Obamacare cannot stand, it will not last. No one will live under the thorn. I am not going to live like this. Hoping my employer can keep me employed. Hoping that Obama doesn’t dictate the life completely out of the economy. His hope is bunk. I don’t want anymore of his kind of help. Only free market solutions will fix this insurance mess. Unfortunately he is not a free market kind of guy.

  8. Fred says:

    Free market solutions? Free market solutions, by definition, create competition. Competition, by definition, creates winners and losers. Free market solutions may work very well when you are competing to sell sirloin steaks or automobiles because the winers get to eat a good steak and drive nice automobiles while the losers eat hamburger and take public transportation. With healthcare, it’s not that easy. With competition in healthcare, the winners get to see a private doctor and enjoy being healthy. The losers, the uninsured, simply get sick and visit the emergency room. Who pays? Not the uninsured! Meanwhile, hospitals are going broke paying for the uncompensated care of the free-loaders that don’t pay. Free market solutions don’t work when it comes to healthcare. Only a moron believes free market solutions are a rational idea.

  9. Dewaine says:

    Isn’t this news outdated already?

    I just saw the NY Times, WSJ, and other sources stating there is new tax penalty to apply to employers who dump their employees on the exchange: $100/day.

    There was not an indication that this would apply to only larger companies with 50+ employees. But that might be the case. It wasn’t clear from the latest news sources.

    Better check on that before dumping employees’ health insurance.

  10. Lance says:

    “..For 75 years, it was said that Roosevelt’s New Deal saved capitalism. By softening the rough edges of the free market capitalism with reforms such as social security and unemployment insurance, FDR may have prevented adoption of much more radical changes.

    75 years from today it is unlikely that anyone will think Obama saved market-priced medical care. Rather, he only prolonged it, and that will not be thought of as a good thing. In the developed world, market-priced medical care still exists only in the USA. It is only a matter of time until market-priced medical care joins communism, slavery, racial segregation and fascism as systems that no longer exist in developed nations.

    The USA is the last holdout with market-priced medical care not only because of any inherent conservative or free market ideology. Rather, as the wealthiest nation that ever existed we are the last ones who can afford it. Switzerland was one of the last advanced economies to abandon market-priced medical care. It is arguably a greater bastion of conservatism than the USA. Switzerland’s women were not granted the right to vote until 1971..”
    http://seekingalpha.com/article/1647632.

  11. Small group employers are going to face huge rate increase under the ACA. These are going to be companies with less than 20 employees. The majority of these plans will be dropped not just because of rate increases but because the Individual market offers guaranteed issue. We then throw in tax credits for the under 400% FPL and the owners are doing the employees a favor by dropping the group plan. The employees under the 400% can get a plan on the exchange far cheaper than what the employer was able to contribute.

    The ACA has a lot of unintended consequences and the erosion of small group is one of them.

  12. Kathy says:

    PLEASE dump me onto the exchange. PLEASE get my employer out of my healthcare and out of the business of my body! Government PLEASE make it feasible. Yes, employers should pay into funding, just like with social security and L&I payments, and as it is done in many countries. It should never be considered a fine.

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