Risk & Compliance

Why Not Drop Health Insurance and Pay the Penalty?

It’s because the decision is not just a financial one. Here are the other factors to consider.
Benjamin S. LupinJanuary 3, 2013

By now, most companies are aware of the so-called play-or-pay rules under health-care reform that will be in full effect on January 1, 2014. The options for companies are well known: they can “play,” or provide an acceptable level of health insurance at an affordable cost to all employees who work an average of at least 30 hours per week, or they can “pay”; that is, should they not offer such a plan, they must pay the government $2,000 per year per full-time employee (after subtracting 30 employees from the full-time population).

Well, why not just go ahead and pay? After all, it is evident that for virtually all companies, $2,000 per employee will cost less than covering each one with acceptable health insurance. However, the analysis should not end there: it is too important to both the employer and the employee. For most companies, it cannot simply be a financial analysis. Here are a few things to consider.

What about Hourly Workers?
The industry your company is in will have a substantial effect on the play-or-pay analysis. For instance, food-service companies, clothing companies, and others that employ a lot of variable-hour employees (those whose weekly hours regularly fluctuate above and below 30) may not currently be covering those employees, even when their average is above 30 hours. On the other hand, a financial firm, for example, is likely to have fewer variable-hour workers and less likely to deny insurance even to them.

What Is the Competition Doing?
But even financial firms and others that tend to be liberal on coverage could, as an industry, become more restrictive going forward, so companies should monitor the competition. If competitors drop health insurance, then continuing to provide it may help attract talent. Companies willing to keep their current health-plan offerings, or even increase coverage, are likely to have a leg up in the race for talent.

All in the Same Boat
Something not often addressed in the play-or-pay analysis is that “dropping” coverage and paying the government penalty means everyone in the company will no longer be covered by an employer-sponsored health plan. There is no such thing as selectively dropping coverage. The “pay” option means that even executives will be forced to buy insurance through a state, federal, or private exchange.

Pay Loss and Morale
By dropping an employee’s health-insurance coverage, an employer is essentially lowering the employee’s total compensation. How will the company react? Will it increase salaries? Dropping coverage will likely send a message that the company is OK with taking something of value from the employees. That may not present a good scenario for employee relations or overall productivity.

Tax Pro and Con
If an employer chooses to drop insurance and pay the $2,000 per-employee penalty, it should be aware that the Internal Revenue Service will treat the payment as a nondeductible excise tax. On the other hand, the employer cost of providing health insurance is tax deductible. In fact, many companies will find that the cost of providing benefits is about the same as, or even less than, the cost of paying the government penalty.

The State Exchange Wild Card
There is a wild card in the play-or-pay analysis. As of this month, we know that about 20 states will definitely be setting up exchanges, either on their own or by partnering with the federal government. The remaining states have not chosen to set up exchanges, meaning the federal government will be tasked with setting up exchanges that work in each state.

That will not be an easy task, to say the least. Until the employee-benefits community is educated and proficient on the levels of coverage offered under the exchanges, the costs of that coverage, and the on-time availability of the exchanges (open enrollment is set to begin in October), will not yet be a viable option for most employers.

All things considered, the decision on whether to keep coverage is not a simple one. As an added bonus, a company will need to examine this issue every year!

Benjamin S. Lupin, an ERISA attorney, is senior vice president of compliance at Corporate Synergies Group. He can be reached at [email protected]

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