With 2014 looming, businesses of all sizes are scrambling to understand the Affordable Care Act (ACA) and how it will affect their bottom line. How many employers will drop group health insurance coverage in 2014? How will larger employers deal with the employer mandate ("play or pay") decision?
There's been a lot of media coverage on how it will play out; opinions fall on both sides of the aisle, and all over the map. Studies indicate that while employers will drop group health insurance, they still want to provide a health benefit because it's vital for recruiting and retaining top employees.
However, what everyone isn't talking about is that health care reform creates an opportunity for employers to get out of the health insurance business and still offer employees a valuable health benefit through defined contribution.
To summarize, there will be massive premium tax subsidies available to eligible employees through their state health insurance marketplaces. But for an employer and employees to take advantage of these savings, the employer cannot offer traditional health insurance. To take advantage of these savings and continue to offer health benefits, the employer needs to offer a "pure" defined contribution plan.
ACA and Large Employers (50+)
Under the ACA, the so-called employer mandate states that employers with 50 or more full time employees, who do not provide qualified and affordable insurance, may pay a penalty of $2,000 if at least one employee enrolls in a plan through their state health insurance marketplace, and also qualifies for premium subsidies and/or other tax credits from the federal government.
If the employer (with 50+ employees) chooses not to offer traditional group health insurance, then the penalties are based on full-time employees only (not full-time equivalents). When calculating the amount of the penalty, the employer also receives a credit of 30 full-time employees. For example, a company with 50 full-time employees only has to consider 20 full-time employees for purposes of the penalty.
This provision goes into effect in 2015 for employers with 100+ FTEs and in 2016 for employers with 50+ FTEs.
Important note: Employers with less than 50 employees don't need to worry about this. They are not subject to this requirement or to the employer tax penalties.
New Opportunities with ACA and Defined Contribution
What employers with 50+ employees need to consider is that the employer tax penalty is just that... a fee. There is no other government penalty or repercussion for not offering health insurance. Think of it as a contribution to the tax subsidies employees will get through the health insurance marketplace. In light of this, many employers with over 50 employees are choosing to embrace the penalty and offer a pure defined contribution solution.
With a “pure” defined contribution solution, an employer would intentionally:
Choose not to offer a group health insurance plan.
Plan to pay tax penalties (if applicable).
Provide employees a tax-free monthly allowance for healthcare expenses via a Section 105 Healthcare Reimbursement Plan.
Encourage each employee to purchase coverage through their state individual health insurance marketplace and take full advantage of the new tax subsidies. If an employee is eligible, these tax credits will cap the cost of his or her family’s health insurance at 2 - 9.5% of household income.
How can this make sense financially for employers with 50+ employees? To see if it's a financially smart decision, the employer will compare the cost of:
- a qualified, affordable group health insurance plan, vs.
- penalties only, vs.
- a pure defined contribution solution + applicable penalties
For many employers with 50+ employees, a pure defined contribution solution (including applicable penalties) will save the employer and employees on the cost of health care, and also allow the employer to get out of the health insurance business.
For employers with under 50 employees who want to offer health benefits, getting out of the health insurance business and into a pure defined contribution solution is a no-brainer.
What do you think? What strategy will employers adopt with health care reform? Let us know in the comments below.