Latest IRS Rule Outlaws Decades-Old Benefits, But Will Not Stop Employers Dumping Workers into ObamaCare’s Broken Exchanges
The New York Times‘ Robert Pear has covered an IRS rule that he interprets as barring employers from dumping workers into ObamaCare health insurance exchanges. Although this is the goal of the IRS rule, it is unlikely to have a significant effect on employers’ executing such changes.
Pear’s article covers a Q&A just released by the IRS that summarizes a decision it made back in September (Notice 2013-54). That notice laid down rules for Health Reimbursement Accounts (HRAs), Flexible Spending Accounts (FSAs), and Employer Payment Plans (EPPs). Employers have made pre-tax contributions to these plans for many years.
The notice clarifies that HRAs and FSAs must be “integrated” with employers’ group health plans to count towards ObamaCare’s minimum essential coverage. EPPs are a little known method for employers to contribute non-taxable dollars to workers’ premiums for individual insurance, and were defined by the IRS way back in 1961. Unfortunately, I can find no estimate of how many workers have such arrangements, although one expert source suggests they are “not as common” as HRAs and FSAs. My contacts confirm that benefits advisors have also proposed to employers that they fund HRAs and FSAs for workers, as long as those workers have individual policies. The contributions don’t necessarily fund premiums directly, but the money is considered fungible by workers who pay premiums out of their wages.
These arrangements are now outlawed. According to one lawyer in Pear’s article: “For decades,” Mr. Biebl said, “employers have been assisting employees by reimbursing them for health insurance premiums and out-of-pocket costs. The new federal ruling eliminates many of those arrangements by imposing an unusually punitive penalty.” Another expert source confirms that “Employer Payment Plans are not viable for plan years on or after Jan. 1, 2014“. Any employer who continues such an arrangement will be subject to fines of $100 per worker, per day, up to $36,500 per year.
So, notwithstanding its effect on participation in ObamaCare’s exchanges, the rule has destroyed arrangements that some employers and workers have had “for decades”. However, employers’ motives to dump workers into ObamaCare exchanges is not primarily driven by the ability to bribe workers with pre-tax dollars to do so. ObamaCare is so good at socializing benefits costs that post-tax dollars work just fine.
NCPA has just published a series of booklets on living with ObamaCare, available to members. In the booklet for employees, we give an example of how an employer could decide to drop health benefits and dump employees into ObamaCare exchanges. It has nothing to do with HRAs, FSAs, or EPPs:
Half of all employees work for an employer who is self-insured. This means the company pays the medical bills and hires an insurance company to administer the plan. A self-insured company can avoid the $2,000 fine per full-time employee with a health plan that only covers the cost of preventive care, with no annual or lifetime limit. But since this insurance will not satisfy the full requirements of the new law, you may go to the exchange and get subsidized insurance. If you do, your employer will be liable for a $3,000 fine per employee. Your employer could avoid that fine by offering to “top up” the limited benefits by requiring you to pay up to 9.5 percent of your annual wage in premiums, and the full cost for your spouse and children.
The table (“Calculating Affordable Coverage”) shows an example of a $50,000-a-year employee who is asked to pay 9.5 percent of his or her annual gross wage for individual coverage ($4,720) and the full cost of coverage for the family ($10,000). Under the law, this is deemed “affordable,” and satisfies the employer mandate, even though few workers would willingly spend nearly half of their take-home pay on health insurance — unless they expect some whopping medical bills. If the family turns down this offer, and signs up for coverage through a health insurance exchange, they will not be entitled to subsidies for the policy they purchase.
There are much less catastrophic possibilities, including offering small taxable wage increases to employees whose household incomes make them eligible for subsidies in ObamaCare’s exchanges. For high-income employees, the tax exclusion of health benefits may be worth 50 percent of the benefit, so they would demand a huge hike in salary in exchange for being dumped in the exchange without subsidies. However, for low-income employees, the tax exclusion may be worth little or nothing, especially when compared to tax credits available in exchanges. Even after paying fines, many employers will conclude that this is a good decision.