Paying employees to go to heath care exchanges doesn’t add up to savings

There is growing sentiment among companies that they can save money by not offering health care coverage to employees and instead give them money to go to a health care exchange to buy coverage. Considering all the tax implications, however, this is not a cost-effective alternative.

Smart Business spoke with William F. Hutter, CEO of Sequent, about the implications of dropping health insurance plans and sending employees to exchanges.

What’s the cost difference between providing health insurance and giving employees cash to go to an exchange?

Let’s say a company with 109 employees decides to drop health care coverage for employees and instead gives them cash to go to the federal exchange. In this scenario, the company would redirect an estimated $592,000, a figure that includes the combined premiums and health reimbursement account (HRA) dollars. On the surface, it would seem as if the company is saving money compared with an assumed $653,000 it would be paying in health insurance premiums. There are, however, tax implications under this scenario because of the loss of the pretax deduction.

Employees and the company both pay more in taxes on the $592,000 that ostensibly comes to them in the form of raises — $199,937 by employees and $73,395 by the company. There’s also an Affordable Care Act (ACA) penalty of $114,000 to the employer based on employee eligibility, because the company would no longer be a health plan sponsor. The employees also are paying all of the plan deductible, so that’s another $158,000, assuming a $2,000 deductible.

When considering all of those factors, the total cost is $779,894, or about $57,000 more to not offer health insurance.

Can employers with more than 50 employees use an HRA to help employees buy coverage?

An HRA no longer qualifies as a health plan because the ACA has changed how a company can use them. These accounts cannot be used to reimburse the employee for health care premiums paid for non-group health coverage. An HRA must be paired with enrollment in a group health plan and can only reimburse for qualified medical expenses.

How might self-insured health contracts offer a solution?

Self-insurance plans may be exempt from many ACA requirements, which is why companies have increasingly explored the option. It’s a strange set of rules, but companies can choose to cover or not cover certain things as long as they aren’t considered minimum essential coverage requirements. It can’t, however, be done in a limited way — a company can’t decide to cover autism but only up to $10,000 a year, for example. It has to choose to not cover it or cover it completely.

Self-funding creates more predictability for companies because they purchase a stop-loss policy to limit their liability. Health insurance costs will continue to rise because of an aging demographic. The plan design can help keep increases to 4 to 6 percent annually compared to potential 30 or 40 percent increases, making health care costs more predictable. This option can be available to businesses with fewer than 50 employees, although it’s tough to achieve the same results because they don’t have the numbers to mitigate the risk of large claims.

Self-insurance is a plan design matter. Being self-insured with a specific stop-loss point might work. Companies with 30 employees can have a stop-loss of $10,000 each. Then companies must determine their actuarial funding and reserve that amount to pay for claims and expected losses. When applied to a healthy employee group, it makes financial sense.

Companies with 50 or fewer employees can join a larger health care coverage pool through an aggregation model. In this arrangement, member employees can get access to health care while a service provider handles all ACA compliance tracking, reporting and legal compliance. The approach can give companies transparency into health care cost drivers for their group.

New information regarding ACA regulations continues to surface, and it takes months to rethink a health insurance strategy. This will continue to be difficult for companies to work through for the next few years.

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