A New Way of Thinking about Employer-Sponsored Health Care Coverage Strategies

Journal of Financial Planning: July 2013

 

Executive Summary

• This article addresses the impact the Affordable Care Act or “health care reform” has on employer-sponsored health care coverage. It explains why health care premiums are rising, the opportunity for employers to offer coverage through the Affordable Care Act’s exchanges, and why the “play or pay” tax of ACA is making employers reevaluate their employer-sponsored plans. 
• The factors above create the need for planners and advisers to understand the alternative strategies available to employers regarding health care reform. \
• This paper also evaluates and explains what these alternative strategies are. It specifically addresses the following strategies: (1) continue offering current coverage “as is;” (2) decrease employer contributions to coverage; (3) switch to a cheaper plan (a plan that has a lower actuarial value); (4) drop coverage and pay the penalty under the “Play or Pay” tax; (5) drop coverage, pay the penalty, and increase employee salaries; (6) drop coverage, pay the penalty, increase employee salaries, and offer voluntary benefits; (7) offer coverage through an exchange (if eligible); (8) self-fund a plan to avoid essential health benefits mandate; and (9) switch to a defined contribution plan.

Arthur Tacchino, J.D., is an assistant professor of health insurance at The American College, where he is responsible for the Chartered Healthcare Consultant (ChHC) designation. He has given presentations for several national associations, including FPA and NAIFA, and has worked on several projects with corporate clients of The American College. (arthur.tacchino@theamericancollege.edu)

Editor's note: Since this paper was written and published, the provision in the Affordable Care Act requiring employers to provide their employees with health care insurance or pay fines has been delayed for one year. See CNN for details and updates. 

The Affordable Care Act or “health care reform” was signed into law March 23, 2010. As of this writing, we have now entered the fourth year of implementation of this complex and comprehensive law. It is truly a massive overhaul of the health care system that affects all levels of the economy. Employers especially are greatly affected by the new law in a variety of ways. Advisers and planners need to understand the impact that the Affordable Care Act is having on employer-sponsored coverage and the various strategies employers can implement to help deal with the many issues arising out of the law.

This paper addresses why the cost of premiums for health care coverage continues to rise because of the Affordable Care Act, how the “play or pay” tax and the creation of Affordable Insurance Exchanges are bringing employers to a decision point, and the various strategies employers have available to them that will allow them to effectively deal with the financial impact health care reform has on their employer-sponsored health care coverage.

Rising Premiums

The Towers Watson/National Business Group on Health Employer Survey on Purchasing Value in Health Care forecasted that from 2011 to 2012 the national average cost of health care premiums would increase by 5.9 percent.¹ The increase in premiums in some areas of the country rose by much more than that. The question many employers are asking is, “Why are health care premiums on the rise?” The answer is that many provisions of the Affordable Care Act effectively remove cost-containment strategies that have helped stabilize premiums for several decades. These cost-containment strategies have been designed and developed by insurers to help control the amount of risk they will have to cover. By controlling this risk, insurers can also better control the premiums they will charge for the coverage they offer. To a certain extent, the Affordable Care Act removes the ability to control risk by implementing the following provisions:

• Prohibition on pre-existing ­condition exclusions (effective 2014)²
• Elimination of lifetime maximum limits on essential health benefits (effective 2010)³
• Elimination of annual maximum limits on essential health benefits (effective 2014)⁴
• Prohibition on cost-sharing for preventive care services (effective 2010)⁵
• Guaranteed availability (effective 2014)⁶
• Guaranteed renewability (effective 2014)⁷
• Dependent coverage age extension (effective 2010)⁸
• Nondiscrimination based on health status related factors (elimination of medical underwriting) (effective 2014)⁹
• Medical loss ratio regulations (effective 2011)¹⁰
• Comprehensive coverage requirements (essential health benefits) (effective 2014)¹¹
• Patient protections of ACA (effective 2010)¹²

Many of the stated provisions have already taken effect while several other significant provisions take effect in 2014. Some of these provisions will have a greater impact on the cost of premiums than others; however, the collective effect of these provisions will be a continuing increase in premiums.

Because of these provisions of the Affordable Care Act, insurers now must take on additional risk, so naturally they will charge higher premiums to cover that additional risk. It is clear that the market trend is one of rising premiums, which means the cost of covering employees is going up for employers who offer employer-sponsored health care coverage. This alone is a cause for concern for employers. However, there are other pieces of health care reform that exacerbate this issue and are bringing employers to a decision point.

Play or Pay Tax

In 2014, the Employer Shared Responsibility Tax or “play or pay” tax also takes effect. This is a requirement that “applicable large employers” offer the opportunity to at least 95 percent of their full-time employees and their dependents to enroll in minimum essential coverage. Firms that do not may face a penalty tax.¹³ This penalty may apply to employers if they either do not offer minimum essential coverage to their full-time employees and their dependents, or if they offer what is considered “unaffordable” coverage to their full-time employees and their dependents.

Applicable Large Employer Defined

The “play or pay” tax applies to “applicable large employers.”¹⁴ This is defined as an employer that employed 50 or more full-time equivalent employees in the preceding year. Staffing decisions made by employers throughout 2013 can affect whether they will be subject to this new tax in 2014.

The calculation of full-time equivalent employees, which is done on a monthly basis, has been spelled out by Internal Revenue Service regulations. An employer will start by determining which employees are full-time during the month. The IRS defines a full-time employee as anyone who works 30 or more hours a week or 130 or more hours a month.¹⁵

After this determination is made, the employer will aggregate all hours of service worked throughout the month for all non-full-time employees. Note that the hours of service worked by seasonal workers will only be counted if they work 120 or more days out of the year. Also note that no more than 120 hours of service shall be attributed to a non-full-time employee for any month.
Once the employer has aggregated the hours of service worked by all non-full-time employees, they will divide that number by 120, which will provide the number of equivalent employees. This number should then be added to the number of full-time employees for that month, and the employer is left with the number of full-time equivalent employees employed during that month.¹⁶

The following example illustrates the calculation:

Example: ABC Inc. employs 45 full-time employees in January 2013. They have 15 part-time workers who work 25 hours a week throughout the month. They aggregate the hours of service worked by all non-full-time employees and it comes to a total of 1,500 hours ((15 part-timers × 25 hours per week) × 4 weeks). They divide the 1,500 aggregate hours of service worked by 120 (1,500/120) for a total number of 12.5 equivalent employees. The most recent regulations indicate that when there is a fraction left in the calculation, the employer simply drops the fraction. This means that the employer employed 12 equivalent employees in January 2013. They then add the 12 equivalent employees to the 45 full-time employees, for a total of 57 full-time equivalent employees. ABC Inc. would then do this same calculation each month throughout the year, and average the results. If the average number of full-time equivalent employees was 50 or greater, then ABC Inc. would be considered an “applicable large employer” that may be subject to the tax.

Advisers and planners can help employers with this calculation throughout 2013. Note that it will be fairly obvious that larger employers will be subject to the tax. The calculation may only need to be done when dealing with an employer that may be on the cusp of 50 or more full-time equivalent employees. In that situation, an employer may wish to limit the number of full-time employees they employ each month, or limit the hours of service worked by all non-full-time-employees to avoid being an applicable large employer.

How the Tax Is Triggered for an Employer Not Offering Coverage

It was noted earlier that the tax may apply to an applicable large employer that does not offer coverage at all, as well as to an employer that offers “unaffordable coverage.” The following discussion looks at how the tax is triggered and calculated for an employer that does not offer coverage in 2014.

Beginning in 2014, the tax will be triggered in any month for an applicable large employer when:

1. the employer does not offer the opportunity for at least 95 percent of its full-time employees and their dependents to enroll in minimum essential coverage,¹⁷ and
2. at least one full-time employee receives subsidized coverage through an exchange.¹⁸ 

Note that the tax is assessed on a monthly cycle, but will only be collected annually. This means the penalty may vary month to month, depending on the number of full-time employees employed each month. Also, note that only a full-time employee can trigger the tax. There will be no penalty triggered if a part-time employee goes to an exchange and receives subsidized coverage. 

Calculating the Tax for an Employer Not Offering Coverage

Assuming that the tax is triggered in a given month, the penalty is calculated as follows for an employer not offering coverage:

The penalty is equal to the “applicable penalty amount,” multiplied by the number of full-time employees, minus the first 30 full-time employees. The monthly “applicable penalty amount” for an employer not offering coverage in 2014 is $166.67 multiplied by the number of full-time employees minus the first 30 full-time employees.¹⁹

Example: ABC Inc. employs 100 full-time employees in January 2014. They do not offer minimum essential coverage to their full-time employees and their dependents. One full-time employee goes to the exchange where he receives subsidized coverage. The tax is triggered. The following are the steps to calculate the tax:

1. 100 full-time employees minus the first 30 = 70 full-time employees
2. 70 full-time employees multiplied by $166.67 [applicable penalty amount] = $11,666.90
3. Monthly tax liability for ABC Inc. = $11,666.90

Assuming the same number of full-time employees throughout the year, and assuming that at least one full-time employee receives subsidized coverage through the exchange each month, ABC Inc. could face an annual penalty of $140,002.80 ($11,666.90 × 12 months).

It is important to note that the penalty amount is not deductible to an employer.

How the Tax Is Triggered for an Employer Offering “Unaffordable” Coverage

As noted earlier, an employer may still face a penalty tax if they offer “unaffordable” coverage. Beginning in 2014, the tax will be triggered in any month where an applicable large employer:

1. offers the opportunity to at least 95 percent of full-time employees and their dependents to enroll in minimum essential coverage, and
2. at least one full-time employee receives subsidized coverage through an exchange because of the employer-sponsored coverage being “unaffordable.”²⁰

The general rule is that if an individual is offered employer-sponsored coverage, he or she will not be eligible for a cost-sharing subsidy through an exchange. The exception is that an ­individual may be eligible for a cost-sharing subsidy through the exchange if the employer-sponsored coverage offered is ­“unaffordable.”

Employer-sponsored coverage will be considered “unaffordable” for one of two reasons—first, if the employer-sponsored coverage does not meet the “minimum essential coverage” requirement, which means it is not designed to cover at least 60 percent of plan costs. And second, if the required employee contribution for the lowest cost employee-only coverage is more than 9.5 percent of the employee’s compensation.^{21, 22}

Advisers and planners can help an employer immunize their plan from any tax liability by making sure that the plan meets the minimum essential coverage requirement, and that the required employee contribution for the lowest-cost employee-only plan does not exceed 9.5 percent of any full-time employees’ compensation. If the employer meets these criteria, then they will be immune to any tax liability. However, if an individual can verify with the exchange that either of these two conditions is not met, then they can receive an “affordability” waiver, and so long as they meet the exchange subsidy eligibility requirements, they can receive subsidized coverage through the exchange, upon which they would trigger tax liability for their employer.

Calculating the Tax for an Employer Offering “Unaffordable” Coverage

Assuming the tax is triggered in any given month, the penalty is calculated as follows:
The employer will pay the “applicable penalty amount” for every full-time employee who is actually receiving subsidized coverage through the exchange. Note that the “applicable penalty amount” for an employer offering “unaffordable” coverage is $250 per employee who is receiving subsidized coverage through an exchange.²³

Example: XYZ Co. offers coverage to all full-time employees in January 2014. However, five of their full-time employees would be required to contribute more than 9.5 percent of their ­compensation for employee-only coverage. All five of these full-time employees go to the exchange and receive an affordability waiver, after verifying the unaffordability of the employer-sponsored plan with the exchange. All five full-time employees meet the eligibility requirements for an exchange subsidy. They all enroll in a qualified health plan, and receive their subsidy. The following are the steps to calculate the penalty:

1. $250 [applicable penalty amount] × 5 [full-time employees receiving subsidized coverage through an exchange] = $1,250
2. Total monthly penalty for XYZ Co. = $1,250

The penalty is calculated differently for an employer that offers unaffordable coverage than for an employer that does not offer coverage. Also note that the total amount of penalty that an employer offering coverage will be responsible for is capped at the total amount of penalty the employer would have had to pay if they did not offer coverage at all.²⁴ Now, assuming the same number of full-time employees triggering the tax throughout the year, XYZ Co. would be facing an annual tax penalty of $15,000 ($1,250 × 12 months).

This penalty would be in addition to the actual cost of offering coverage the employer incurs.
The “play or pay” tax of health care reform is forcing employers to reevaluate not only the plans that they are offering to their employees, but whether they should continue to make such plans available, especially as they are dealing with rising health care premiums.

Affordable Insurance Exchanges

Another piece to the health care reform puzzle is the Affordable Insurance Exchanges of health care reform. Under the law, states are required to establish a state-based exchange for both the individual market and the small group market, in which individuals and small businesses can purchase health care coverage.

If a state chooses not to establish an exchange, the federal government will be responsible for establishing a Federally Facilitated Exchange (FFE). States can also choose to partner with the federal government and create a state-partnership exchange.²⁵ Regardless of who is technically running the exchange (state, federal government, or a partnership between the two), there will be a new marketplace for individuals and small businesses to purchase health care coverage beginning in 2014. Advisers and planners must be aware of this new marketplace and understand why this may be a good option for their clients.

Qualified Health Plans

In the individual and small group market exchanges, qualified health plans will be made available to consumers.²⁶ Qualified health plans will go through a certification process to ensure that the carrier offering the plan has met certain requirements, as well as the plan itself meeting certain qualifications. Qualified health plans will be composed of an “essential health benefits package,” which means they will meet all of the following elements:

• The plan will offer essential health benefits as required by the Affordable Care Act.
• The plan will have an out-of-pocket maximum expense limit.
• The plan will have a maximum annual deductible (applicable for the small group only). 
• The plan will be offered at one of four different tiers of coverage.

These elements of a qualified health plan will apply to plans being offered through the exchange and plans outside the exchange as well.

Essential Health Benefits

States have been tasked with choosing a “benchmark plan” from one of four options of coverage being offered within their state. The benchmark plan options include: (1) the largest plan by enrollment in any of the three largest products by enrollment in the state’s small group market; (2) any of the largest three state employee health benefit plan options by enrollment; (3) any of the largest three national Federal Employees Health Benefits Program (FEHBP) plan options by enrollment; or (4) the HMO plan with the largest insured commercial non-Medicaid enrollment in the state.²⁷ If a state chooses not to pick a benchmark plan, the federal government will choose from the previously mentioned four options.

Regardless who chooses the benchmark plan, all plans must cover the following 10 categories of care and the items and services within those categories of care:

• Ambulatory patient services
• Emergency services
• Hospitalization
• Maternity and newborn care
• Mental health and substance use disorder services, including behavioral health treatment
• Prescription drugs
• Rehabilitative and habilitative services and devices
• Laboratory services
• Preventive and wellness services and chronic disease management
• Pediatric services, including oral and vision care²⁸

These 10 categories of care are the core of essential health benefits that all plans must cover beginning in 2014. There may be slight deviations between plans depending on what benchmark plan is chosen, but overall the country will see a much more uniform set of benefits covered under qualified health plans. The essential health benefits requirement creates a more robust array of benefits that must be covered, which also is contributing to the rising costs of premiums. Self-funded plans are not required to cover essential health benefits. Therefore, many employers are considering transitioning to self-funding to avoid having to cover such a robust array of benefits.

Out-of-Pocket Maximum Expense Limits

All group health plans will be required to comply with an out-of-pocket maximum expense limit beginning in 2014.²⁹ The limit amount will be the same amount associated with HSA-compatible high deductible health plans. Currently, these limits are $6,250 for self-only coverage and $12,500 for all other coverage. These limits will protect consumers from catastrophic medical bills. This requirement will also affect plan design, and carriers and plans must adjust their plans accordingly in 2014 to reflect the law.

Maximum Annual Deductible

It was recently clarified in regulations that the maximum annual deductible requirement of health care reform will only apply to the small group market.³⁰ The maximum annual deductible amounts have been set at $2,000 for self-only coverage and $4,000 for any other coverage. This maximum annual deductible will be built into the out-of-pocket maximum expense limit.

Four Tiers of Coverage

In 2014, all plans will be offered at one of four tiers of coverage:

• Bronze, designed to cover 60 percent of all plan costs
• Silver, designed to cover 70 percent of all plan costs
• Gold, designed to cover 80 percent of all plan costs
• Platinum, designed to cover 90 percent of all plan costs³¹

Each tier is designed to provide a defined actuarial value or cover a certain percentage of plan costs. The enrollee or plan participant will be responsible for the remaining percentage of costs, and pay them through deductibles, copayments, and coinsurance. Note that the “minimum essential coverage” requirement found in the “play or pay” tax mirrors the same requirement of the “bronze” tier of coverage.

Understanding the various elements of an “essential health benefits package” will help advisers and planners better understand plan requirements and plan design in 2014. It is also important to understand other important elements of the exchanges, as described below.

Exchange Cost-Sharing Subsidies

In addition to qualified health plans, in the individual exchange, individuals will be eligible to receive cost-sharing subsidies if they meet certain financial criteria. An eligible individual for a cost-sharing subsidy is anyone whose household income is between 100 percent and 400 percent of the federal poverty level.³² This is the same subsidy that would cause a tax event for an employer under the “play or pay” tax if an employee enrolls in a qualified health plan and receives this subsidy. The subsidies are on a sliding scale, meaning that the lower the household income, the greater the subsidy available to the individual; the greater the income, the lower the subsidy. It is important to note that there are no cost-sharing subsidies for individuals in the small group market exchange. If an employer is making coverage available to its employees through the exchange, the individual subsidies do not apply.

Small Business Health Care Tax Credit

Also beginning in 2014, the Small Business Health Care Tax Credit, which has been available to eligible small employers since 2010, will only be available to employers if they offer coverage to their employees through the exchanges.33 This is a new requirement in 2014, and it is in addition to the requirements that the employer employ 25 or fewer full-time equivalent employees whose average annual incomes are $50,000 or less. This is another reason that employers may wish to offer coverage to their employees through the exchanges.

The exchanges are an opportunity for employers to make coverage available to their employees in two ways. One approach would be for the employer to offer coverage through the small business exchange to their employees. The second way would be for the employer to drop coverage and send their employees to the individual exchange where they may be eligible for cost-sharing subsidies. Either way, the exchanges are another reason why employer health care options are expanding and becoming more complex.

Analysis

It is clear that employers will have tough decisions to make about their employer-sponsored health care coverage. The “play or pay” tax poses the following question for employers: “Should we continue to offer coverage or simply pay the penalty tax?” The exchanges offer a new way to provide coverage, and the provisions of the Affordable Care Act that are removing cost-containment strategies pose an additional question for employers: “What do we do about rising costs?” These complex issues combined will leave employers turning to advisers and planners for help and answers.

An adviser’s knowledge of the “play or pay” tax, the exchanges, and other provisions of the Affordable Care Act is a starting point in helping an employer tackle health care reform’s impact on their employer-sponsored coverage. Advisers and planners also must be prepared to offer alternative solutions when it comes to employer-sponsored health care coverage. It will be important that advisers and planners factor in the employer’s recruitment, retention, morale, and productivity initiatives and goals because the employer’s benefits strategy will directly affect those human resources concerns.

The following are potential alternative solutions to help employers deal with ACA’s impact:

• Continue offering current coverage “as is”
• Decrease employer contributions to coverage
• Switch to a cheaper plan (a plan that has a lower actuarial value)
• Drop coverage and pay the penalty under the “play or pay” tax
• Drop coverage, pay the penalty amount, and increase employee salaries
• Drop coverage, pay the penalty amount, increase employee salaries, and offer voluntary benefits
• Offer coverage through an exchange (if eligible)
• Self-fund a plan to avoid essential health benefits mandate
• Switch to a defined contribution plan

Each employer’s circumstances will differ, and not every option may be available; however, these are some basic options that may be available to employers. It will be the adviser’s job to help the employer identify the strategy that best fits their needs. The discussion that follows takes a more in-depth look at each strategy.

Continue offering current coverage “as is.” Employers have the option of continuing to offer coverage the way they are currently doing so. Obviously, if they are an applicable large employer for purposes of the “play or pay” tax, they must evaluate their plan to make sure it meets the affordability and minimum value requirement discussed earlier. This, however, may be an unappealing option to an employer, because if they maintain their current employer contributions they will be paying more in the coming years for the exact same coverage as premiums for the plan continue to rise. Some employers may choose to adopt this option if they believe their plan effectively meets the human resource goals of the organization.

Decrease employer contributions to coverage. A more appealing option for some employers may be to simply decrease the contribution they make to their employer-sponsored health care plan. In doing so, they must make sure they meet minimum contribution requirements (as required by state law), as well as meet the minimum value and “affordability” requirements of the “play or pay” tax. This option could ultimately help out the employer’s bottom line. A decreased employer contribution would effectively shift some of the rising health care costs to employees. Employers may be concerned about adopting this strategy if they feel that it is inconsistent with other human resource initiatives or goals, such as employee recruitment and retention.

Switch to a cheaper plan with a lower actuarial value. Employers may wish to find a less robust plan that may be available at a cheaper premium level. Under this scenario, they could either maintain their current contribution levels or decide to reevaluate contributions as a way to save money. Generally speaking, HMOs and PPOs offer a very high level of coverage, and therefore have higher premiums. Employers may seek a plan with a lower level of coverage and choose to make that available to their employee population.

Employers must be careful to assure that the new, lower level plan still meets the minimum essential value requirement of the “play or pay” tax, and that their employer contributions will satisfy the affordability requirements. If the plan and employer contributions satisfy these requirements, then the employer may save money by implementing this strategy. Note that adopting this option could have a negative impact on employee morale, productivity, recruitment, and turnover. These possible outcomes may have additional costs associated with them that could offset savings the employer receives by adopting this strategy.

Drop coverage and pay the tax liability. Another option is simply to drop coverage altogether and pay any potential “play or pay” tax liability that might be assessed. In some cases, the cost of the penalty may be much less than the cost of offering coverage. However, employers should take caution when considering this option because the cost of employee turnover, productivity, morale, and recruitment may be extremely high when taking away coverage from a population of employees familiar with these benefits.

There is a situation in which this could be a “win-win” for an employer and employees. Imagine a scenario in which an employer has a very low-income population of employees. It may actually benefit the employees if the employer drops their coverage and sends them to the exchanges where they may be eligible for substantial cost-sharing subsidies. The employer would save money by not offering coverage; the employees would receive less expensive coverage through the exchanges, and everyone involved in the transaction wins. If this is the case, then communication with employees will be crucial in effectively implementing this strategy.

Drop coverage, pay the penalty amount, and increase employee salaries. Taking the analysis a step further, employers may also consider dropping coverage, paying the potential tax liability, and increasing employee salaries to make up for lost benefits. When considering this strategy it will be important to do cost modeling for an employer. What the employer might find is that by simply paying the tax liability, increasing employee salaries, and paying for additional employee turnover related to dropping coverage, they may end up paying more than if they simply continued offering coverage or implemented one of the other strategies discussed in this paper.

Drop coverage, pay the penalty amount, increase employee salaries, and offer voluntary benefits. This option continues to build on the previous two alternatives. Here an employer would drop coverage, pay the potential tax liability, increase employee salaries, and offer voluntary benefits. Employers may wish to make a small contribution to the voluntary benefits they make available to their employees, or simply make them available at no cost to the employee. Voluntary benefits can act as good gap fillers to major medical coverage that the employee is receiving elsewhere, and could offset employee turnover, or any lull in employee morale and productivity resulting from dropping coverage. With this option, the same concerns remain. An employer could end up paying more to implement this strategy than they would have paid if they had continued to offer coverage or implement a different strategy.

Offer coverage through an exchange (if eligible). Employers may consider offering coverage to their employees through the exchanges in 2014. First, the employer must be eligible to participate in the exchange, which means they must meet the requirements for qualifying in the “small group market.” The default definition of the “small group market” under the Affordable Care Act is an employer that employed 100 or fewer employees in the preceding year. Again, in 2013 staffing choices will affect the alternatives available to employers in 2014.

Also, under the law, states are permitted to adopt an alternate definition of the term “small group market.” The alternate definition is defined as an employer that employed 50 or fewer full-time employees throughout the preceding year. Advisers and planners must determine which definition is being applied in their state so they can determine whether this is a viable option for their client.

Assuming that the employer is eligible for the exchange, they can choose a tier or tiers of coverage they would like to make available to their employees, and define the contribution they will make toward the cost of the plan. The employees would then be able to choose between all plans offered at the tier of coverage that the employer is making available. This allows for greater employee choice and could potentially increase employee morale, recruitment, and productivity.

The biggest unknown about this strategy is the cost of the exchange plans. At this point, the only projections available come from the Congressional Budget Office, but many speculate that plan costs will be very high because of new rating limitations taking effect in 2014. As more information regarding the exchanges and plan costs are released, it will be easier for advisers, planners, and consultants to determine whether this is a financially feasible option for their clients.

Self-funding. The main advantage to self-funding is that self-insured plans are not required to offer the 10 categories of care required under the Affordable Care Act. The ability to avoid covering such a comprehensive array of essential health benefits may permit an employer to design and structure their benefits in a way that is financially prudent for them. In other words, the employer can decide not to cover high-cost benefits that would otherwise be covered if they were using an insured plan that was subject to the essential health benefits requirement. The disadvantage to self-funding is that it may not be a feasible option for small to mid-size employers. Also, self-funding brings along with it very complex ERISA regulations. Helping a client self-fund could be a very powerful and cost-efficient strategy moving forward, if the adviser has this skill set.

Switch to a defined contribution plan. Employers also may consider switching to a defined contribution plan to help control their health care costs. They can do this through the use of any consumer-driven health plan, whether it is a cafeteria plan, flexible spending account (FSA), or health reimbursement arrangement (HRA).

However, simply offering employees access to a consumer-driven health plan, and even making a contribution to the plan, will not satisfy the minimum essential value requirement of the “play or pay” tax. For example, an employer offering an FSA to their employees and contributing an annual $500 to that FSA would not satisfy the 60 percent actuarial value requirement, and therefore the employer would be responsible for the “play or pay” tax liability associated with an employer not offering coverage. The employer must evaluate whether the cost of the tax penalty, the cost of the defined contribution, and any additional cost associated with this strategy would be greater than the other strategies discussed in this paper, as well as whether this strategy aligns with their human resource goals.

Conclusion

As discussed in this paper, several strategies and solutions are available to employers that will allow them to tackle issues related to health care reform. Advisers and planners must understand what the available options are for their client. This starts with a comprehensive and thorough knowledge of health care reform’s “play or pay” tax, the exchanges, and other Affordable Care Act provisions.
Planners must discuss with their clients the various cost and compliance obstacles they now face because of health care reform. In addition, they must discuss how each strategy aligns with their overall business goals. Not every strategy or solution will align with a client’s overall goals, and in some cases these options may not be available to the client. However, competent advisers and planners must possess a comprehensive knowledge of the various issues and possible solutions available. A thorough understanding of health care reform and what to do now will enhance a planner’s value in the eyes of a client.

Citation

Tacchino, Arthur. 2013. “A New Way of Thinking about Employer-Sponsored Health Care Coverage Strategies.” Journal of Financial Planning 27 (7): 48–55.

Endnotes

1. www.changehealthcare.com/downloads/industry/Towers-Watson-NBGH-2012.pdf.
2. PHSA § 2704(a), as amended by PPACA, Pub. L. No. 111-148, § 1201 (preexisting condition exclusion) and § 1255 (effective date) (2010). Parallel provisions for changes made to the PHSA were incorporated by reference in the Code (Code § 9815, as added by PPACA § 1563(f)) (formerly PPACA § 1562(f)) and in ERISA (ERISA § 715, as added by PPACA § 1563(e)) (formerly PPACA § 1562(e)).
3. PHSA § 2711, as added by PPACA, Pub. L. No. 111-148, §§ 1001(5) and 10101(a) (2010).
4. PHSA § 2711, as added by PPACA, Pub. L. No. 111-148, §§ 1001(5) and 10101(a) (2010).
5. PHSA § 2713, as added by PPACA, Pub. L. No. 111-148 (2010). Section 1001 of PPACA amends the PHSA by adding a new § 2713 (previous § 2713 of the PHSA relating to disclosure of information was redesignated by PPACA as § 2733 of PHSA and then again redesignated by PPACA as § 2709 of PHSA). Conforming amendments under PPACA provide for application of these same rules to group health plans under ERISA and the Code. ERISA § 715 was added by PPACA, Pub. L. No. 111-148, § 1562(e) (2010) and Code § 9815 was added by Pub. L. No. 111-148, § 1562(f), each providing that the provisions of Part A of Title XXVII of the PHSA “shall apply to group health plans” as if they were included in Part 7 of ERISA and in Subchapter C of Chapter 100 of the Code, respectively.
6. PHSA § 2711(a), prior to amendment by PPACA.
7. PHSA § 2712, prior to amendment by PPACA, Pub. L. No. 111-148, § 1563(c)(9)(D) (2010); PHSA § 2703, as amended by PPACA, Pub. L. No. 111-148 (2010).
8. PHSA § 2714, as added by the Patient Protection and Affordable Care Act, Pub. L. No. 111-148 (2010) (PPACA), as amended by the Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152 (2010) (HCERA). Parallel provisions for changes made to the PHSA were incorporated by reference in the Code (Code § 9815, as added by PPACA § 1563(f)) (formerly PPACA § 1562(f)) and in ERISA (ERISA § 715, as added by PPACA § 1563(e)) (formerly PPACA § 1562(e)).
9. Code § 9802; ERISA § 702; PHSA § 2705. PHSA § 2705 was added by PPACA, Pub. L. No. 111-148, § 1201(4) (2010).
10. PHSA § 2718, as added by PPACA, Pub. L. No. 111-148, §§ 1001(5) and 10101(f) (2010).
11. PHSA § 2707(a), as amended by PPACA, Pub. L. No. 111-148, § 1201 (2010). The effective date for this provision is found at PPACA, Pub. L. No. 111-148, § 1255 (formerly PPACA § 1253) (2010).
12. PHSA § 2719A(a), as added by the Patient Protection and Affordable Care Act, Pub. L. No. 111-148 (2010) (PPACA); Treas. Reg. § 54.9815-2719AT(a)(1)(i); DOL Reg. § 2590.715-2719A(a)(1)(i); HHS Reg. § 147.138(a)(1)(i).
13. Code § 4980H(a), which is effective for months beginning after December 31, 2013, was created by the Patient Protection and Affordable Care Act, Pub. L. No. 111-148 (2010) (PPACA) and amended by the Health Care and Education Reconciliation Act, Pub. L. No. 111-152 (2010) (HCERA). 
14. Code § 4980H(c)(2)(A).
15. IRS Notice 2011-36, 2011-21 I.R.B. 792, § III.C.
16. See IRS Notice 2011-36, 2011-21 I.R.B. 792, § IV.C.
17. “Minimum essential coverage” is a standard within the Affordable Care Act that requires the plan to have a 60 percent or greater actuarial value. If a plan is designed to have a lower actuarial value than 60 percent the employer would be thought of as “not offering” coverage.
18. Code § 4980H(a). Health coverage assistance includes a premium tax credit under Code § 36B, any cost-sharing reduction under PPACA, Pub. L. No. 111-148, § 1402 (2010), and any advance payment of the credit or reduction under PPACA, Pub. L. No. 111-148, § 1412 (2010). Code § 4980H.
19. Code § 4980H(a).
20. Code § 4980H(b)(1).
21. Code § 36B(c)(2)(C).
22. The most recent IRS regulations clarified that affordability is based on the required employee contribution to the lowest cost employee-only plan. Coverage will be considered unaffordable if the required employee contribution is greater than 9.5 percent of the employee’s household income. The language remains the same in the regulations; however the IRS does acknowledge that it would be impractical for employers to determine their employee’s household income, so they created a safe harbor that allows employers to determine affordability on the employee’s compensation, rather than household income. 
23. Code § 4980H(b)(1).
24. Code § 4980H(b)(2).
25. Patient Protection and Affordable Care Act, Pub. L. No. 111-148, § 1311(b)(1) (2010) (PPACA). “State” means the 50 states of the U.S., the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, and the Northern Mariana Islands. PPACA, Pub. L. No. 111-148, § 1551 (2010) (confirming that the definitions in PHSA § 2791 apply); PHSA § 2791(d)(14).
26. PPACA, Pub. L. No. 111-148, § 1311(d) (2010).
27. Prop. HHS Reg. § 156.100(a).
28. PPACA, Pub. L. No. 111-148, § 1302(b) (2010).
29. PPACA, Pub. L. No. 111-148, § 1302(c)(1)(A) (2010). See also Code § 223(c)(2)(A)(ii).
30. PPACA, Pub. L. No. 111-148, § 1302(c)(2)(A) (2010).
31. PPACA, Pub. L. No. 111-148, § 1302(d)(1) (2010)
32. 45 CFR § 155.305(f).
33. Code § 45R(d)(4).