In January 2014, the health care reform law, Patient Protection and Affordable Care Act (PPACA), will implement a penalty for certain employers who do not offer a “valuable” and “affordable” health plan to their employees. Employers impacted are those that have 50 or more “full time equivalent” employees. The fine is $2,000 per full time employee per year, with the first 30 employees excluded from the calculation.
In addition, for the first time individual policies will be easier to obtain due to new rules that require insurers to accept all applicants regardless of health condition and with no pre-existing condition limitations. Public exchanges will also be available to administer credits and subsidies for the cost of buying an individual plan for those making up to 400% of the Federal Poverty Level (about $90,000 for a family of four) who do not have access to valuable and affordable employer coverage.
While most recent surveys conclude that only a small percentage of employers are seriously considering disbanding their group plans, it is nevertheless a worthwhile exercise to reconsider your options. We recommend that most employers go through a “pay or play” analysis, primarily because it forces them to examine and quantify the impact that PPACA requirements will have on the cost of their plan.
Early reactions from a few large employers who received a lot of print exposure, painted an oversimplified idea of a pay or play analysis. They simply compared the current cost of the employer’s plan to paying the fine. These reactions said if the fine came out to be less, then it must make sense to drop the plan. However, it’s not quite that simple. We have developed 8 easy steps that can help guide you to perform your own pay or play analysis.
First calculate your cost to play:
1. Establish your current cost.
2. Quantify new costs to be incurred due to PPACA requirements.
3. Determine cost mitigation strategies to offset new costs identified in step 2.
4. Establish your “Cost to Play”, otherwise explained as your true post PPACA cost (1+2-3).
Now calculate your cost to pay:
5. Calculate the fine for not having a plan.
6. Determine other costs to be incurred as a result of dropping your plan.
7. Establish your “Cost to Pay” (5+6).
8. Compare the “Cost to Pay” to the “Cost to Play” (note this is a tax adjusted comparison, as fines are not tax deductible but costs of providing a health plan are).
Here is a short explanation for each step:
1. Current cost: net employer cost of your current plan, after subtracting any employee contributions.
2. New PPACA costs: Many PPACA requirements could force an employer to change how they are currently providing benefits, resulting in an additional cost. A few are:
- Must offer benefits to those working 30 or more hours per week
- Waiting periods cannot exceed 90 days
- Affordability requirements may cause the employer to have to increase their subsidy
- The new Individual Mandate may cause some who presently choose to go uninsured to now join the plan to avoid individual fines
- Impact to your rates due to new PPACA requirements on what plans must look like and fees embedded in premiums
Your benefit advisory firm can help you to identify and quantify the actual impact these requirements will have on your plan. We use different sophisticated modeling tools to do this depending on the complexity of the analysis.
3. Determine cost mitigation strategies: In most cases, after seeing the cost impact of new requirements, employers will seek to implement strategies to help them offset these new costs. Most will scale back on areas where they currently exceed the minimum standards. For many employers this will mean scaling back their plan design (higher deductibles, coinsurance, out of pocket maximums) or increasing employee contributions. Others may seek to manage hours worked so as to minimize the number of employees working 30 or more hours.
4. Cost to Play: This is nothing more than arithmetic as follows: 1+2-3= Cost to Play (Keep in mind these are tax deductible expenses).
5. Calculate the Fine: Follow the example below:
Number of Full Time Employees (working 30 or more hrs/wk) 150
Subtract 30 (set by the government) from that number -30
Remainder is number for which fines will be applied 120
Multiple by $2,000 to determine annual fine $240,000
6. Other costs of not having a plan: If an employer drops their health coverage they will likely be faced with some new costs as a result of that decision. Some might be more easily quantified than others. Once an employer removes the health plan, which is part of an employee’s compensation package, they may be forced to make some or a portion of their staff “whole” by increasing their wages, since employees must now go buy their own plan. In addition, they might have more difficulty filling key positions, have higher turnover, or be forced to offer higher salaries to attract new hires as they compete in a market where most of their competitors will offer health coverage to employees.
7. Cost to Pay: Again this is simple arithmetic as follows: 5+6= Cost to Pay.
8. Cost to Play versus Cost to Pay: once you have these two numbers to compare, in order to make it a fair comparison, you must take into account that the fines paid are not a tax deductible business expense. However the costs of providing a plan are a tax deductible business expense. Thus, you will need to make an upward adjustment to your “Cost to Pay” number based on the tax bracket of your business, in order to make it an apples-to-apples comparison with the “Cost to Play” number. This will often make the results of this comparison look very different.
PSA has performed hundreds of these analyses for our clients and in the overwhelming majority of cases, the results show it makes more sense to maintain the employer plan. Meaning, it is usually more expensive to not have a plan than to have a plan. Most employers also conclude that if they will have to pay $2,000 in non-tax deductible fines, they would much rather invest it in their employees. Plus, the current tax law makes benefits an extremely tax efficient way of compensating employees. Given this, my opinion concurs with almost all recently conducted major surveys in that only a very small percentage of employers will choose to disband their plans over the next few years as the new PPACA world takes shape. I should remind you that we currently operate in a system where employers over 50 are not required to have a plan yet the vast majority do. I do not see PPACA changing that.
In closing, the Pay or Play analysis is a valuable exercise, even if you have no intention of dropping your plan, because it brings critical information to light that will help you better design and manage the cost of your plan.
If you have any questions with regards to conducting a pay or play analysis, please contact me at khuber@psafinancial.com.
