When companies started exploring their options for complying with the Affordable Care Act a few years back, some likely considered not offering coverage at all, and instead sending their employees to the individual health exchanges with pre-tax money to help cover their premiums. Now that option is off the table. A rule the IRS issued last year—and clarified in a Q&A posted online last month—states that using pre-tax funds to subsidize individual plans purchased on or off a public exchange violates the ACA, commonly known as Obamacare. And companies that do so could face fines in the form of a $100-a-day excise tax for each employee they offload onto the health exchanges.
Before explaining the ramifications of this rule, it’s important to clarify which companies will be affected by it. It doesn’t apply to companies that are already offering health coverage and providing pre-tax benefits related to it, such as health savings accounts that allow employees to put aside money tax-free that they can use to pay out-of-pocket expenses. Nor does it apply to companies that have fewer than 50 employees and choose to purchase plans on the federal or state small-business exchanges. That means the IRS rule primarily affects companies that are debating “pay vs. play”—not offering coverage and paying any fines associated with dumping employees onto the exchanges rather than offering an in-house health plan.
One option for companies that want to send their employees out to get their own coverage is to simply give them raises that match the amount of the premiums they’ll be paying. But that may end up being a short-term solution to a long-term problem, warns Paul Foery, manager of insurance services for Houston-based human resources provider Insperity. “What do you do next year, if they’re on a plan that’s $400 a month and all of a sudden it becomes $450?” Foery says. “Are you going to continue giving them raises every year to help with health insurance? And are you going to make employees give you receipts every month, so you can make sure they’re buying health insurance? You need to think it through.”
Beyond those hassles, there could be additional tax burdens associated with giving employees raises to help subsidize individually purchased health plans. Say you increase a worker’s salary by $6,000. Your company will get saddled with an additional annual federal employment tax of about $459, estimates Sheryl Southwick, director of compliance at TriNet, a professional employer organization based in San Leandro, Calif. And depending on where your company is located, you might also face higher state and local employment tax bills. And naturally, your employees’ income taxes will go up, too.
Michael Thompson, a New York-based principal in the global human resources group of PricewaterhouseCoopers says the most feasible option financially for most companies is to offer health coverage rather than sending employees out to buy their own plans. That’s because when you factor in the potential penalties associated with not providing coverage—fines of $2,000 to $3,000 per employee, depending on the circumstances—the option of sending employees to the individual exchanges becomes much less realistic, he says. “It’s hard to make the math work,” Thompson says. He adds that choosing such options such as high-deductible health plans or company plans offered through private exchanges can help employers hold down their healthcare costs.
There are, however, some scenarios where sending employees to the individual market might be feasible. “Companies where the majority of employees are making under 400 percent of the poverty level might find it makes sense financially,” says Tim Finnell of Memphis-based Group Benefits. Companies with a lot of low-wage ex-employees who are covered by COBRA might also find that it’s more economical to switch those people over to individual plans bought either on or off the exchanges, Finnell adds. But you need to act fast: From now until July 1, the U.S. department of Health and Human Services will allow you to switch your COBRA recipients to individual health plans. The next opportunity to make the transition won’t be until the federal open enrollment period begins on November 14.