Play or Pay With Obamacare? 7 Reasons Why “Pay” Is Not the Easy Answer

Barack Obama

With every day that goes by, the nation’s employers move a step closer to having to make a decision: Do I play or pay?

Employers now have just a little more than one year to prepare themselves and their workforces for the arrival of the core of the Patient Protection and Affordable Care Act (PPACA), which requires employers with 50 or more full-time employees to offer medical coverage or pay a penalty.

Although a year might seem like ample time, the decision isn’t an easy one, and it’s fraught with financial, legal and competitive implications.

Some employers assert that the play-or-pay mandate will raise their costs and force them to make workforce cutbacks. As a result, a number are considering eliminating their health care coverage altogether and instead paying the penalty on their full-time employees.

7 key issues employers need to consider

While the “pay” option might be worth considering, there are strong reasons why employers should look carefully at all of their options and do their best to calculate the actual outcomes of each.

Here are some of the issues employers should factor into their decision-making process:

  1. Lost tax advantages — Employers that eliminate health care coverage or opt not to offer it to full-time employees will be missing out on tax breaks (as will their employees). Employer contributions for health care coverage are not considered taxable income to the employee (and are deductible by the employer). Employee premiums that are paid through a Section 125 plan reduce the employee’s taxable income, which reduces both the employer’s and the employee’s FICA tax.
  2. Reporting burdens remain — Employers that don’t offer health care coverage will still face federal reporting requirements, in part so the penalty amount can be determined. In addition, employees who are not offered coverage are likely to go to the exchanges for coverage. These exchanges will require a variety of employee data from employers, particularly for employees who may be eligible for the premium tax credit, which means employers may have to deal with a significant number of inquiries from exchanges (staff time, effort, costs).
  3. Recruitment and retention challenges — Employers who opt not to offer health care coverage could be doing long-term damage to their employment brands, making it difficult to attract top talent in the future. Even worse, they could lose current employees to organizations that do provide coverage. And the damage to the brand could be even greater for employers that once offered coverage but elect to eliminate it in favor of paying penalties. Not offering coverage could tarnish the employment brand and disrupt business in another way: Employees who are forced to use exchanges — especially untested or insufficiently staffed exchanges — could feel undervalued or abandoned by their employers.
  4. Counting employees can be complex — What constitutes a full-time employee? Answering this question can be tricky; in late August the IRS issued 18 pages of rules that only partly answer the question. Employers that believe they won’t face penalties for dropping or not offering coverage because they have fewer than 50 employees may have calculated incorrectly. If that happens, the results could be costly. Be certain you know how to count full-time and full-time equivalent employees and what your obligations are.
  5. The cost of coverage can be adjusted — While employers may have to cover more people, they do have options for reducing the costs of this coverage. For example, employers could reduce their lowest-cost coverage to stay just above the 60 percent minimum value threshold; they could reduce workers’ hours below the “full-time employee” level; and they could consider paying targeted penalties (e.g., not providing “affordable coverage” to certain segments of their workforce).
  6. Other financial implications — Employees may demand additional compensation from employers that elect to drop coverage to cover the cost of health care they must now purchase with their own, after-tax dollars. Employers who haven’t properly budgeted for nondeductible penalties may compound their financial burdens, especially if they don’t make long-term plans for penalty increases.
  7. Carriers will address plan designs — Insurance carriers will become experts on coverage requirements out of sheer necessity, so the myriad of plan design criteria won’t likely be a burden on many employers. In addition, carriers will implement a variety of tools to communicate with employees, helping to keep business disruptions to a minimum.

These play-or-pay decisions actually represent just one aspect of the Affordable Care Act, and there are obligations and implications attached to both sides of the argument. Again, employers would do well to consider all of their options and calculate the outcomes as accurately as possible.

  • Steve Gifford

    I would add that the penalty amounts are far from set in stone. Today it may be cheaper to take the penalty than to pay for insurance, but that doesn’t mean that lawmakers can’t increase the penalty in the future!

    • Thomas Mangan

      Agreed. There has been some speculation that the penalties will have to go up to fund the programs, but there is nothing in the existing law that says the penalties will jump in the future.

    • Thomas Mangan

      Agreed. There has been some speculation that the penalties will have to go up to fund the programs, but there is nothing in the existing law that says the penalties will jump in the future.

  • Kim

    What do you mean by this? – “they could consider paying targeted penalties (e.g., not providing “affordable coverage” to certain segments of their workforce” – If one employee goes on the exchange, then there is a penalty. Please explain further.

  • Kim

    I still have not received a response from below.

    • Thomas Mangan

      There are 2 possible penalties under PPACA. One is for not offering coverage to virtually all full-time employees and dependent children. This “no-offer” penalty is $2,000/full-time employee and is triggered if even one employee receives a premium subsidy. The second possible penalty applies if coverage is offered, but it either doesn’t provide minimum value or it is not affordable. This penalty only applies to employees who actually receive subsidies. The subsidies are significant for lower-paid people. A person can only get a subsidy if their employer-offered coverage is not affordable or not minimum value. So, if, for example, the employee’s share of the premium is 15% of the cost, the employee could buy coverage through the exchange with a significant subsidy, so his cost might be less. The employer would pay the $3,000 penalty on the employee. The penalty is not deductible, but probably less than the amount the employer is paying now for coverage. Depending on the employer’s demographics, this approach might or might not make sense.

      • Ross

        Very good, except in your example, the EE would be eligible for the subsidy in the exchange if the EE’s contributory cost to the ER sponsored plan exceeds 9.5% of his household income, or EE only income as there is a safe harbor for ERs for this provision. We would need to know the EE’s income in order to know if the 15% premium contribution exceeded 9.5% of household income.