Pre and Post Tax Health Insurance Reimbursements

Recently the IRS released guidance on the practice of employers reimbursing employees for health insurance premiums. It is not surprising that the IRS ruled that pre-tax programs are no longer allowed (see guidance about transition relief). 

What was surprising is that employers cannot reimburse employees for health insurance premiums with post-tax dollars. Post tax dollars means exactly that, the IRS has already gotten its share of taxes.   

Why would the IRS care where money is spent after it has been taxed?

Large Employers without a Group Health Plan

This year the Employer Mandate went into effect.  
The Employer Mandate is a $2,000 tax per employee per year on large employers that do not provide a group health plan. 

In 2015 a large employer is one that has 100 or more employees - get help calculating your employee count- and in 2016 that number drops to 50 employees.

Is Oregon’s Health Insurance Exchange in Jeopardy?

Recently the United States Supreme Court heard arguments on King v. Burwell. This case is focused on the legality of subsidies in states that did not set up their own exchange. 


In the Patient Protection and Affordable Care Act (more commonly known as the ACA or Obamacare) the law allowed states to decide if they wanted to set up an exchange. If states decline then the Federal government establishes an exchange. The exchange sets up a mechanism for individuals to compare, buy and importantly for this lawsuit, obtain a subsidy (a reduced price) for their coverage by way of means testing. The controversy is over the language in the ACA over states that do not have an exchange.

2015 Health Insurance Rates Released

A recent headline reads, “Average health insurance rates lower in 2015." In aggregate this is great news for all Oregonians that utilize the health insurance exchange, CoverOregon.  One year is not a trend but after years of double digit increases Oregon businesses would welcome rates stabilizing like workers’ compensation did in the 1990s. Oregon is still benefiting from those changes.

A closer examination of the approved rates shows some insurers with increases but others with double digit decreases.  This is counter to what I had expected.  The coverage from the health insurance exchange began in 2014.  The following logic was put forth that insurers would have to submit rate changes in the first half of 2014, thus they would not have actuary data to base rate changes.  Unless insurers were able to approximate changes based on the available data another explanation may be a push to gain market share or decrease exposure (decrease market share).  Moda is an interesting example.  They had some of the lowest prices in 2014 but in 2015 there will be significant increases in premium.  Another large carrier, Providence, had similar large decreases.  Overall pricing seems to be converging into a narrower band.

ACA Strategies

If you have 100 Full Time employees and Full Time Equivalents in 2015 or 50 Full Time employees and Full Time Equivalents in 2016 you will be subject to the $2000 tax/penalty under the Affordable Care Act (ACA) if you do not provide health insurance.  Often the option to pay a tax or provide health insurance is framed as two options-pay or play.  Either you pay the $2000 tax or provide health insurance to your employees.  And many large employers are doing just that, crunching numbers and watching competitors to decide which of the two options they should take.

An employer that has 150 employees resulting in a yearly $200,000 tax there is considerable incentive to minimize their tax. We will look at some of the other options that have been proposed as alternatives to pay or play to reduce or eliminate taxes under the ACA.  At this point I should note that I am not intending to provide legal or tax advice.  These strategies have not been tested and you should really obtain advice from someone that is ‘certified smart’ like a CPA or an attorney.  Nor am I responsible for any bad PR should you implement any of these strategies unsuccessfully.

Independent Contractors – Turning your employees into independent contractors. This option comes up every time there is a new cost of having an employee.  An independent contractor does not just avoid the ACA tax but also other costs like workers’ compensation or unemployment taxes.    The problem with this option is that the test of the status of an independent contractor is not clear cut and even varies within different government agencies.  Having dealt with some litigation on this matter I would highly recommend getting legal advice before making any of your employees independent contractors.  I would also note that once an “independent contractor’s” services are no longer needed they often file for unemployment.  The process of obtaining unemployment benefits often begins to unravel the independent contractor status of that firm’s outsourced help.

Outsourcing – Speaking of redeploying your workforce and processes, this is one area that may gain some traction.  Employers that want to stay below an arbitrary number, say 50 employees, can outsource some functions.  Examples include payroll, HR or recruitment.  This can provide flexibility for employers that offer increased pay in lieu of health insurance so employees can obtain subsidies for themselves and family on the exchange (link to article).

Employee Only Health Insurance – Anecdotally this option is very popular.  Just like the example in the previous paragraph, the availability of health insurance from the employer restricts the ability for the dependents to obtain a subsidy in the health insurance exchange.  And employers generally do not pay for a spouse or children. If the employer restricts the plan to only employees then the rest of the family can apply for a subsidy on the exchange.  

Splitting up the Business – When the ACA was first passed I heard talk about splitting up businesses into units smaller than 50 employees.  There are rules on what is called combinability in the ACA and reportedly this is very difficult to do.  When I was asked about this option I referred the employer to an attorney and have yet to see anyone to do this.

 

30 Hour Work Weeks – You may have heard of this possibility in the news.  An employer makes nearly all of their employees part time and thus avoids the $2000 tax. If you offer shifts of less than six hours it has the added benefit of not requiring a lunch break.  On the other hand it is an administrative nightmare by nearly doubling of the number of employees when restricting employees to five 5-hour shifts.  Management would have to monitor employee’s hours to ensure employees do not become full time employees and thus have to offer benefits or pay a penalty. Plus recruitment and retention is negatively affected.  The question employers should ask themselves is if this option is really worth saving about $1.50 per hour on labor?  I have not seen it widely adopted and I suspect that the more likely scenario is that full time employee’s hours will be maximized while part time employees are not allowed to pick up additional shifts.  

Minimal Essential Coverage Insurance Plan – To avoid the $2000 tax a large employer has to offer a health insurance plan that provides minimal essential coverage.  That does not mean that the coverage meets the definition of health insurance that is offered on the health insurance exchange.  In fact these plans generally cover considerably less and thus cost considerably less.   The employer pays a significant portion of that plan (which is still much cheaper than providing exchange level health insurance) to ensure that there is at least an initial 70% participation rate.  In order to meet the eventual requirement of a 95% participation rate the employer may have to pay for the entire cost of the premium.  Employees that sign up will not be subject to the individual mandate penalty.   Additionally the employer offers a separate plan that meets the definition of minimal value (coverage levels equivalent to the health insurance exchange) and costs less than 9.5% of employee income.  The employer is counting on fewer employees signing up for the more expensive plan.  The downside to this plan is that employees will not be able to obtain a subsidy in the health insurance exchange as they are being offered an employer plan.  This could create some ill will towards the employer.  On the other hand there are reports of employees specifically requesting this minimal coverage and employers doing so to retain staff.

Arin J. Carmack

Risk Management

Cardinal Services

Medium Sized Employers and the ACA

As we get closer to 2015 employers that are close to 100 employees (or those in 2016 that are close to 50 employees) should to decide if they want to be a large or small employer under the Affordable Care Act.

If you already offer health insurance many parts of this article will not apply to you.  You should however check to be sure that your plan meets the definition of health insurance (ask your agent).

Delay in the Employer Mandate

Once again there is a change in one of the key provisions of the Affordable Care Act (ACA). 

The employer mandate requires all large employers to either provide health insurance to their employees or pay a penalty/tax of $2000 per employee per year (the first 30 are tax exempt).  

A large employer is defined as having 50 or more employees (IRS determination of a full time employee). Originally the employer mandate was to take place in 2014 but was delayed until January 1^st, 2015. The employer mandate is still scheduled to take place in 2015 but for penalty/ tax purposes the definition of a large employer will temporarily be changed to 100 or more employees until 2016.  

Stay tuned as there have been several changes as we move closer into full implementation of the ACA.

Should Your Small Business Offer Health Insurance in 2014

For a good part of 2013 I have been speaking to small businesses about the Affordable Care Act (ACA).  At those speaking engagements employers have expressed concern about what should they do in 2014.  Should they provide health insurance, can they afford it or is it better to just wait and see what happens in the latter part of 2013 before making a decision?  There is no easy answer.

The answers to these questions vary depending on each small business owner’s situation.  In creating the ACA there was no stick to entice small business owners into offering health insurance but there is a carrot. 

Navigating the Exchange for Small Business Owners and Employees

Many small employers do not offer health insurance and are wondering what to do for themselves and their employees before January 1^st, 2014 rolls around.  Small businesses (fewer than 50 employees) are not subject to the employer mandate and thus do not receive a penalty for not offering health insurance.  However small businesses owners and employees are considered individuals and thus are subject to the individual mandate (see my article on this topic in the first link below).  If either of the aforementioned individuals do not obtain health insurance the following penalties apply.

Replace Oregon Workers’ Compensation with a single payer health insurance system?

I remember when the Affordable Care Act (ACA) became law and one of the questions that came up was, ‘Would the ACA replace workers’ compensation?’ 

The logic behind the question was if everyone has health insurance, then they really do not need medical benefits from workers’ compensation.  Similar logic was raised in a version of a recent bill in Oregon’s last legislative session, HB 2922.  The bill states, “SECTION 26.  { + (1) The Affordable Health Care for All Oregon Plan shall be the primary payer of reimbursement for health services provided through the plan, including but not limited to compensable medical expenses covered by workers' compensation insurance.”  This bill did not pass but a study was funded by HB 3260 to see if a single payer system is advisable for Oregon. (see links to these bills below)

Will the Affordable Care Act raise or lower workers’ compensation rates?

While doing research for the Affordable Care Act (ACA) I stumbled upon an article about workers’ compensation.  As a Risk Manager my first love is naturally workers’ compensation so I eagerly dived into the Rand Corporation’s study entitled, The Impact of Health Care Reform on Workers’ Compensation Medical Care.  In my experience, conventional wisdom among my peers in Risk Management is that employees with health insurance have lower workers’ compensation claim losses.  I share this preconception which is often reinforced when I see employees that do not have health insurance file workers’ compensation claims that probably did not happen on the job.  One of the many examples that come to mind is a hernia with a highly suspect set of facts.  The worker with the hernia also had a wife and newborn but did not yet have health insurance.  It was certainly within the realm of possibilities that a workers’ compensation claim was a way this employee could get treatment and keep his new job.

Health Insurance Exchange Notices – Who is enforcing their distribution?

By October 1^st, 2013 health exchange notices are required by law to have been distributed to all employees.  These notices to employees either explain the health insurance the employer provides or, if the employer does not offer coverage, refers employees to their state’s health insurance exchange to purchase insurance.  Examples of employee notices are available via the first link at the bottom.  (If you are a Cardinal client we will be assisting with this requirement.)

Health Insurance Rates have been released

Oregon’s health insurance exchange is moving forward and appears to be on track to keep their original timeline.  Individual and small group plans should go on sale in October 2013.  In July 2013 the exchange started approving health insurance rates that had been submitted in April by participating health insurance carriers.  A number of rates filings have been approved during the first two weeks of July.  You can see a sample of the approved rates at: http://www.oregonhealthrates.org/?pg=approved_rates.html 

ACA Employer Mandate Delayed

A delay in implementing the Affordable Care Act was announced yesterday.  The mandate for businesses who employ 50 or more workers to provide health insurance has been delayed until 2015.  The delay is to provide more time to comply with the new rules and reporting requirements.

The individual and small business exchanges are still on track to open for enrollment on October 1.

Labor Trends – Affordable Care Act

Working at Cardinal has afforded me the opportunity to interact with business owners all over Oregon. In the last few months I have noticed some trends related to the upcoming employer mandate requirements under the Patient Protection and Affordable Care Act. To provide some background the employer mandate is a $2000 penalty per full time employee per year (note the first 30 are tax exempt) which only affects large businesses, those with 50 or more full-time employees or their equivalents. Small businesses, defined as having fewer than 50 full-time employees, do not face a penalty.

Among small employers that clearly have fewer than 50 full time employees there is an increased awareness that health insurance is an upcoming concern.  As I note in my recent Affordable Care Act presentations, many of these small business owners are waiting for

Employer Mandate vs. Individual Mandate

Over the past couple months I have been privileged to travel around Oregon to discuss the Affordable Care Act.   During the question section of my presentation I have been asked, ‘If the employer is required to pay a $2000 tax/penalty is it possible that the employee will have to pay a separate penalty as well?’  The short answer is yes, it is possible for both the employer as well as an employee to pay a penalty. Both the employer mandate penalty and individual mandate penalty are independent of one another.

Cover Oregon – Health Insurance Exchange Update

Last week the Oregon Insurance Division released a sample of proposed health insurance rates for the upcoming health insurance exchange.  These are suggested rates only and it is not clear if or how much they may change.  When reviewing the web page from the first link below note that in all three coverage levels each carrier is offering the same amount of coverage.  Next take a look at the pricing for each of the three levels as there are significant price differences between carriers.  In the second link you will see a summary of benefits for each plan.  

Is Your Compass Set?

Navigating Your Business through the Affordable Care Act 

Coming soon to a Chamber of Commerce near you!
 

Join us with your local Chamber of Commerce for an informational session on ACA for the small business owner.  "Navigating Your Business through the Affordable Care Act" will focus on the rules, tax benefits currently available, and resources for the future.   

Cover Oregon

Oregon's Health Insurance Exchange 

Once small business owners realize that the Affordable Care Act (ACA) tax/penalty does not apply to companies with fewer than 50 employees their next questions are usually focused on the individual mandate and the cost of health care coverage. It goes without saying that cost is foremost on the minds of most employers, especially for those companies where coverage is not offered and that outlay is not currently built into their business model.

The ACA will require anyone who does not obtain health insurance from work to buy it from their state exchange (or if there is no state exchange they will be directed to a federal exchange).  Each exchange will determine the available plans and rates for small employers (initially less than 50 employees) and individuals.  In Oregon our exchange is called Cover Oregon (www.http://coveroregon.com/). On the exchange's website there is a cost estimate for individual plans but this is based on data from the Congressional Budget Office.  The Cover Oregon website is estimating an individual plan at about $300 per month. 

Cover Oregon began taking insurance provider applications to offer health care plans on the exchange as of November 30, 2012. In the application they note that health insurance rates would need to be turned into the insurance division by March 31, 2013.  Final rates would be approved July 1, 2013 and insurance plans go on sale October 1st of the same year.  However on the draft from an Oregon Insurance Division meeting on February 26, 2013 the new deadline for turning in rates is on April 30, 2013.  It is unclear if the remaining dates will need to be changed as well.  

I should note that our health insurance exchange is ahead of the game compared to other states. Governor John Kitzhaber is a former emergency room doctor who helped craft the Oregon Health Plan.  It is hoped that Oregon will remain ahead of the game with the best possible plan for all stakeholders.

Arin J. Carmack

Health Insurance Strategies

Beginning in 2014 the principal part of the Patient Protection and Affordable Care Act, the health insurance requirement, will go into effect.  On January 1st of next year Americans will be required to obtain health insurance from an employer provided plan, or from an exchange or pay a tax/penalty.  Business owners with more than 50 employees will be faced with a similar question; to either provide health insurance or facing a $2000.00 penalty/tax per employee.  (For help in determining your full time equivalent employees as defined under the Affordable Care Act click here). 

Small Business Tax Credit

When deciding if you should offer health insurance there are a variety of things to consider.  Some companies have decided to get out of the health insurance game altogether.  Beginning 2014 these employers will offer a stipend allowing employees to go out and choose their own level of coverage.   The idea is that employees are better consumers and will choose better individual solutions for themselves while companies can limit their exposure to unpredictable swings in health insurance costs.  Another thing to consider is the recruiting and retention of employees.  In many professions offering health insurance coverage is a given while in others it is almost non-existent.  When formulating a strategy for 2014 keep in mind what your competitors are doing. 

Employers Under 50 Employees:

If you have determined that you will be under 50 employees and therefore not subject to the tax/penalty there are still a few things to consider.  Take a look at your employee count.  If you have fewer than 25 employees you may qualify for a tax credit.  Estimate the costs of providing health insurance, any tax credits and other factors to estimate your costs with each scenario.  Keep in mind your personal cost of non- compliance under the individual mandate. 

Employers close to 50 Employees:

For those just under 50 employees there will be the temptation to remain below that number. Remember that just because you are subject to the overall tax the first 30 employees still remain tax exempt.  The marginal cost of the 51^st employee is $42,000 not $102,000.

Over 50 Employees:

For employers that do not offer health insurance with a significant number of employees over 50 the coming year is causing increasing trepidation.  Many business owners are looking to see if their competitors will be passing on costs to consumers or trying one of the many strategies to lowers their costs under the Affordable Care Act.  Temporary employees are being considered more frequently as the temporary employees are counted under the temporary employer’s number of employees for the tax/penalty.  Another strategy has been to increase the number of employees and cut hours per employee.  For example a large restaurant chain signaled that they were planning on making as many of their part time employees truly part time as defined by the ACA.  Reclassifying employees as part time was accomplished by restricting the number of hours a part time employee can work to fewer than 30 hours per week.  Another time honored route to avoid payroll taxes, workers’ compensation and the like is to try and turn employees into independent contractors.  The Affordable Care Act is another reason some businesses will be looking at classifying people as 1099 independent contractors.   Enclosed is a link to the State of Oregon’s rules on independent contractors. http://www.oregon.gov/IC/pages/05-qanda02.aspx  If you go this route review your plan with someone like a CPA or attorney as there are a variety of pitfalls.  For example, the Internal Revenue Service, Oregon Employment Department and the Oregon Department of Revenue do not completely agree on the definition of an independent contractor. Other businesses are looking at breaking up their entities into groups smaller than 50 employees.   The Affordable Care Act has provisions to treat multiple businesses as one entity.  Structuring your businesses in such a manner that will not be considered as combinable is something you should review with an expert in this arena.  If you are considering this option here are links to the IRS website on controlled groups for you and your attorney and/or CPA to review.

Applicability to the PPACA - http://www.irs.gov/pub/irs-drop/n-11-36.pdf

Guidance on controlled groups-  http://www.irs.gov/pub/irs-tege/epchd704.pdf 

 A twist on independent contractors and non-combinable entities is outsourcing employees to another organization to keep your number of core employees closer to 50. Outsourcing non-core functions – from HR to accounting to shipping is easier than ever.

The Affordable Care Act is a complicated piece of legislation.  Review your options.  Put estimated price tags on each option. Evaluate what other are doing or ask your trade association. Doing so now will help avoid a scramble in the final quarter of 2013.

Arin J. Carmack

VP of Risk Management