Small Employers! Don’t Drop your Group Health Plan Yet. READ THIS FIRST!!

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Under the “pay or play” federal health care reform rules, an “applicable large employer” will be subject to penalties starting in 2014 if it does not provide satisfactory health insurance coverage to full-time employees.  Generally, an applicable large employer is one that had 50 or more full-time employee equivalents during the preceding year.

In some instances, the penalties payable by applicable large employers will be smaller than the amount the employer would pay for its employees’ health insurance coverage.  Consequently, there is speculation that some applicable large employers will choose to pay the penalties instead of continuing to offer group health insurance to employees.

Contrast this with the decision employers are facing in the small group market, i.e., employers with fewer than 50 FTEs.  They may see premium increases in 2014 and thereafter due to other health care reform mandates.  As a result (and because these employers generally will not be subject to the same penalties as applicable large employers), some employers in the small group market are considering whether to drop their group health insurance coverage and, if so whether to compensate former participants in the plan to help pay for insurance in the open market.

Be aware–there is more to the equation than simple arithmetic.  If you are a small employer for PPACA purposes and considering dropping your group health plan and replacing it with additional financial support for your employees, here are some issues you need to consider.

Financial and Legal Considerations:

Income and Payroll Tax Impact.  If you drop group health insurance and choose to increase the pay of applicable employees to make up for the loss of the employer contribution for their health plan coverage.  The increased pay will be subject to federal and state income taxes.  Plus, those extra wages will be subject to Social Security taxes (both the employer and employee shares) up to the Social Security wage base and Medicare taxes (both the employer and employee shares).

–Retirement Plan Contributions.  Another important consideration is that increased pay will likely constitute “compensation” for retirement plan purposes.  Thus, if your company contributes to a retirement plan for employees—such as a matching contribution or profit sharing contribution—your contribution likely will be larger than it would have been without the increases in pay.

–Workers Compensation.  If an employee’s taxable gross earnings increase, the potential disability benefit  the employee could receive in the event of a worker’s compensation injury will increase.  Your worker’s compensation carrier will likely pass these additional risks on to you through premium increases.

Discrimination Claims.  If you offer pay–in the form of increased wages—as a complete substitute for employer-provided health insurance coverage, you could create risks of discrimination claims from employees.  In order to abate this, you may consider calculating the overall savings obtained by not offering employer-sponsored health insurance, divide that savings by the number of employees in the company, and provide this average amount as a pay increase to all employees (or just employees who participated in the discontinued plan) employed at the time of the increase.  This option would seemingly reduce the potential arguments of discrimination with regard to the wage increase, but it may lead to discontent6 in the workforce.

Intangibles—Beyond the Price Tag:

Recruiting and Retention.  Many employers view health insurance as a recruiting tool.  Will elimination of health insurance coverage make it more difficult to recruit employees?  Are your competitors keeping their coverage?

Improving Health & Reducing Absenteeism.  Elimination of health insurance may reduce your ability to affect the health of your employees.  Your ability to combine wellness programs with health benefits will be lost, and the potential for absenteeism resulting from health problems may increase.

More questions about Health Care Reform?  Contact us to attend a free informational seminar.

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