Health Care Reform Reward Strategy and Workforce Planning

8/3/2019 Health Care Reform Reward Strategy and Workforce Planning

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Health Care Reform, Reward Strategy andWorkforce Planning

Melissa B. Rasman, Hay Group *

The Patient Protection and

A�ordable Care Act (PPACA),

which President Obama signed

into law on March 23, 2010, will

a�ect almost all public and pri-

vate employers in the United

States. Employers that sponsor

health plans are experiencing

the most immediate e�ects now,

as they face the challenge of

understanding and implement-

ing the new health plan cover-

age, design and administration

requirements that apply in 2011

or sooner. PPACA’s employer

and individual responsibility

provisions that go into e�ect in

2014, along with the anticipated

opening of the health insurance

e x ch a ng e s, w i ll p r es e nt a

greater challenge still, but also

an important opportunity for

employers to rethink how health

care coverage �ts into their

rewa rd a nd wo rk for c e

strategies. This article focuses

on the implications of these

2014 changes for employers.

Employers in 2014 will have

a choice of whether to o�er

health plan coverage or not, just

as they do today. Just like to-

day, many will choose to o�er

coverage because they feel

they need to do so in order to

compete for workers. But there

will be less real need to o�er

coverage as part of the reward

bargain. Most employees will be

able to purchase, through the

n ew h ea l th i ns ur an ce e x-

changes, health insurance that

covers essential bene�ts; does

not exclude coverage for pre-

existing conditions or impose

annual or lifetime limits on ben-

e�ts; l imits deductibles and

maximum out-of-pocket expen-

ditures; and is not priced based

on individual health factors or

denied them on account of

those factors. Federal subsidies

will help some employees pay

for this insurance and reduce

their out-of-pocket costs.

In deciding whether to o�er

health care in 2014 and be-yond, and who should be of-

fered health care, employers

with 50 or more employees

n ee d t o t ak e i nt o a cc ou nt

PPACA's “pay o r pla y”

provisions. They will owe sub-

stantial penalty taxes if they do

not o�er health care coverage

to their full-time employees, or

do not o�er coverage to sub-

stantial segments of their em-

ployee population at prices they

can a�ord. Although the penalty

tax bill would be far smaller

than the cost of coverage, once

the potential penalty taxes are

factored in, employers with

health plans that already cover

most of their employees may

well �nd that health plan ben-

e�ts are a highly cost e�ective

form of compensation. Because

of how the penalty tax provi-

sions operate, other employers

will �nd the choice between

paying (the penalty tax) and

playing (providing health care

coverage) more di�cult.

Although understanding the

impact of “pay or play” on com-pensation cost is a necessary

starting point for an employer

considering how health care

*MELISSA B. RASMAN, ESQ. is a Senior Principal in Hay Group's Philadelphia office and has headed the Research Group for Hay Group's U.S. Benefits Practice for more than 15 years. She regularly helps clients to understand and address the key statutory and regulatory requirements that affect their employee benefit and reward programs.

Journal of Compensation and Bene�ts E November/December 2010© 2010 Thomson Reuters

20



reform may a�ect its total re-

ward strategy, it is only a start-

ing point. Currently, bene�ts

represent about 30% of overall

total compensation costs. If an

employer drops health care

coverage, what will replace

health care in the total reward

package? Will the employer

increase cash pay or provide

other bene�ts? If an employer

continues to sponsor a health

care plan, which employees will

be covered and how much will

it cost them? Can di�erent

classes of employees be of-

fered di�erent health plans?How will health care reform af-

fect an employer's employment

practices?

HOW THE PAY OR PLAYPROVISIONS WORK

To make a wise choice be-

tween paying or playing, em-

ployers �rst need to understand

how the penalty provisions work

to determine the real costs on

each side of the equation. The

penalty provisions generally ap-

ply on a monthly basis to em-

ployers that employed 50 or

more “full-time equivalent” em-

ployees on at least 120 days in

the preceding calendar year.1

Employers that are treated as a

single employer for other em-

ployee bene�t purposes aretreated as a single employer for

purposes of applying the 50

employee threshold, so an em-

ployer cannot reorganize into a

group of small related employ-

ers to avoid penalties.

PPACA de�nes “full-time” as

working, on average, at least 30

hours a week during a month,

so employers that classify em-

ployees who work any more

than 30 hours a week as part-

time will need to change their

part-time classi�cation. The

hours of employees who work

less than 30 hours per week

are added together to determine

the number of full-time equiva-

lent employees, so that each

120 hours worked by part-

timers in a month equals a full-

time equivalent employee. For

example, an employer with 40full-time workers, and 15 part-

time workers who each average

80 hours of service per month

(i.e., 10 full-time equivalent em-

ployees) would meet the 50

employee threshold, and be

subject to the penalty provi-

sions, but only with respect to

its full-time employees.

An employer that meets the50 employee threshold will be

subject to penalties if at least

one full-time employee pur-

chases coverage on an ex-

change and quali�es for a fed-

eral subsidy. Qualifying for a

federal subsidy is not that hard.

Individuals who earn too much

to qualify for Medicaid but not

more than 400% of the FederalPoverty Level (FPL) qualify for

subsidies if they do not have

a cce ss t o a n a �o rd ab le

employer-sponsored health

plan or the employer's plan

does not pay out at least 60%

of the total cost of covered

bene�ts. In 2010 400% of the

FPL for a single employee is

$43,320 and for a family of four

is $88,200. Employer coverage

is considered a�ordable only ifi t c osts 9.5% or less of the

employee's household income.

Most employer health plans

meet the 60% test, although

some high deductible health

plans may not.

The potential penalties di�er

depending on whether or not

the employer o�ers health care

coverage to its full-time em-ployees (and their dependents).2

If the employer does not o�er

health care coverage, the em-

ployer may be subject to a

monthly penalty for each full-

time employee in excess of 30.

In 2014, the monthly penalty tax

will be $166.67 per employee,

or $2,000 on an annualized

basis, reduced by the �rst 30employees.3 If the employer of-

fers coverage, the monthly pen-

alty in 2014 will be $250 for

each employee who declines

coverage, and purchases and

quali�es for subsidized cover-

age on the exchange, or $3,000

on an annualized basis. The

total penalty for an employer

that o�ers a health plan cannever exceed the penalty that

would be paid if the employer

did not o�er coverage. These

dollar amounts will be adjusted

after 2014 to re�ect increases

in average per capita premiums

Health Care Reform, Reward Strategy and Workforce Planning


21



for health insurance coverage

in the United States.

P PA CA l ea ve s o pe n t he

question of how the pay or play

provisions apply if an employer

o�ers health care coverage tosome “full-time” employees, but

not to others. It may be some

time before the Department of

the Treasury, which is charged

with implementing pay or play,

provides a de�nitive answer.

However, employers with health

plans that do not cover all full-

time employees, or who have

“part-time” employees that

work full-time hours without

bene�ts, should prepare for the

possibility that they will owe the

$166.67 monthly/$2,000 an-

nual penalty for every full-time

employee (and every-part-timer

who works a full time schedule)

in excess of 30, including those

who have health plan coverage.

EVALUATING THE COSTOF PAYING OR PLAYING

An employer that does not

o�er a health care plan to its

employees will spend far less

money in penalty taxes than it

would spend to maintain a plan,

and pay a substantial portion of

t he c os t o f e mpl oy ees '

coverage. But the true cost dif-

ferential between paying andplaying is less than it appears.

To determine that di�erential,

an employer that is considering

dropping its health plan has to

factor in the impact of losing the

tax bene�ts associated with

employer-provided health care

and the need to provide em-

ployees with additional cash or

bene�ts instead of health plan

coverage.

To make a valid cost com-parison, an employer �rst needs

to estimate the likely cost of

providing health care coverage.

In addition to predicting health

care cost trends and the size

and shape of its workforce,

employers need to consider

other factors, including:

E H ow m an y e mp lo y ee s

would ac tually c hoose

coverage under the em-

ployer's plan, if one is of-

fered? PPACA’s automatic

e n r o ll m e n t p r o v i si o n s ,

which require employers

to enroll new employees in

their health plans and con-

tinue the enrollment elec-

tions of their current em-

p lo ye es , u nl es s t heemployee opts out of cov-

erage, likely will increase

the number of employees

who choose coverage. But

depending on how gener-

ous the employer's plan is,

some employees will waive

coverage in favor of cover-

age under a spouse's or a

parent's employer's plan.

For an employee younger

than age 26, the plan of-

fered by a parent's em-

ployer may be a better

option.

E How will employee enroll-

ment be allocated among

single and family cover-

age? According to the

2010 Hay Group Benefits

Report, an average em-

ployer plan costs about

$5,250/year for single

coverage and $15,000/

year for family coverage. If

health plan premiums in-

c re as e 1 0% p er y ea r,

these costs will increase

t o a bo ut $ 7, 70 0 a nd

$22,000, respectively, in

2014.

E How much of the cost of

coverage will an employee

pay for? According to the

2010 Hay Group Benefits

Report , employees typi-

cally pay 20% of the cost

of single coverage (about

$1,050/year in 2010 and

$1,540/year in 2014) and

25% of the cost of family

coverage (about $3,750/

year in 2010 and $5,500/

year in 2014). Nothing in

PPACA requires an em-

ployer to maintain cover-

age at current levels, or

even to pay anything to-

wards coverage, although

increasing required em-

ployee contribution levels

may have some adverse

consequences.4

Once these factors are taken

into account, and the employer

has a reasonable idea of how

much it will cost to o�er health

care coverage to all full-time

Journal of Compensation and Bene�ts


22



employees, costs have to be

adjusted to re�ect the fact that

an employer may not deduct

penalty taxes in calculating its

taxable income, but the cost of

providing health care bene�ts

to its employees is a deductible

compensation expense. Ex-

ample 1, which re�ects average

health plan costs in 2010, pro-

jected to 2014, and typical em-

ployee cost-sharing percent-

ages for 2010, illustrates how

the federal tax laws5 might af-

fect costs for Corporation X, a

for-pro�t employer that employs

2,530 full-time employees in2014.

Example 1: Corporation X

employs 2,530 full-time em-

ployees and o�ers employees

health care coverage to its em-

ployees that costs $7,700 for

single coverage and $22,000

for family coverage. Employees

pay 20% of the cost of single

coverage ($1,540) and 25% of

the cost of family coverage

($5,500). 1,000 employees

choose single coverage, 1,000

choose family coverage, 530 do

not take employer coverage,

and 100 of these 530 employ-

ees purchase insurance on an

e xc ha ng e a nd q ua l if y f or

subsidies. Corporation X pays

federal income tax at a 35%

rate and pays FICA tax for all

covered employees at a rate of

7.65%.

After taking into account fed-

eral income and FICA tax, the

employer spends $12,996,000

on providing health care cover-

age, instead of $5,000,000 in

penalties ($2,000 X 2,500 em-

ployees) and $538,560 in ad-

ditional FICA tax. The employer

spends $3,533 for each em-

ployee who chooses single cov-

erage ($3,533,000), $9,463 for

each employee who chooses

family coverage ($9,463,000),

and pays $300,000 in penalty

taxes for the 100 employees

who purchase insurance on an

e xc ha ng e a nd q ua l if y f or

subsidies. The employer does

not spend $538,560 in FICA taxon the premiums paid by em-

ployees for their share of health

plan coverage ($117,810 for

employees choosing single cov-

erage and $420,750 for em-

p lo ye es c ho os in g f am il y

coverage).

The employer in Example 1

spends $7,457,440 more to of-

fer health plan coverage to2,500 employees in 2014 than

it would spend in penalty taxes

and additional FICA tax, if it

dropped its health plan and did

not replace it with additional

cash or bene�ts. While this is a

great deal of money, the ad-

ditional cost per employee av-

erages only $2,983 (in 2014

dollars). An employer probablywould have to spend substan-

tially more than $2,983 per em-

ployee to provide employees

with cash or bene�ts worth

nearly as muc h to them. Of

course, per employee cost

would be higher for an employer

with a more expensive plan.

The �nancial considerations

di�er for small employers, gov-

ernmental employers and not-

for-pro�t employers, from thosethat apply to medium-sized and

large for-pro�t employers. Gov-

ernmental and not-for pro�t

employers do not get the bene-

�t of a tax deduction that re-

d u ce s t h ei r o u t -o f - po c k et

costs, so their true cost of pro-

viding coverage will be much

higher. Small employers are not

subject to the penalty tax, so

they will not save that cost by

providing their employees with

health plan coverage, but some

may get the bene�t of tax cred-

its to help o�set the cost of

coverage for a few years. In ad-

dition, employers with 100 or

fewer total employees will be

able to permit employees to use

pre-tax dollars to purchase

health insurance through anexchange, which large employ-

ers will not be able to do until

at least 2017.

THE VALUE OFEMPLOYER-PROVIDEDHEALTH CARE TOEMPLOYEES

T h e e m pl o y er ' s � n an c ia l

costs, of course, are not theonly factor that enters the deci-

sion to o�er employees health

plan bene�ts. Employers would

not provide health care as part

of the total reward package if

employees did not value it, and



23



if they did not believe that pro-

viding health care coverage was

an important part of competing

for employees. PPACA is not

likely to change the high value

placed on employer-provided

health bene�ts by many em-

ployees, as long as employers

continue to subsidize the cost

of coverage.

Employees may place even

greater value on employer-

provided health plan coverage,

as a result of PPACA. In 2014,

most employees will face their

own pay (penalties) or play

(obtain health insurance cover-

age) decisions. Even sooner,

beginning with the 2011 tax

year, employees will see the

cost of their tax-free health plan

b en e �t s r e po r te d o n t h ei r

W-2's; many will be surprised

by the cost and value the ben-

e�ts more as a result. Starting

in 2013, employers will be re-

quired to give a written noticeto employees, which tells them

about the exchanges, the avail-

ability of federal subsidies and

cost-sharing reductions for cer-

tain employees (if applicable),

a nd t ha t, i f t he e mp lo ye e

chooses to purchase coverage

on an exchange, the employee

will lose the value of the em-

ployer's contribution towards

employer-provided coverage, if

any, and the tax exclusion for

that bene�t (unless the em-

ployee quali�es for a free choice

voucher6).

Some employees may value

employer-provided health insur-

ance less as a result of PPACA,

particularly those employees

who qualify for subsidies and

cost-sharing reductions to pur-

chase co verage on an

exchange. The exchanges will

also free employees with health

issues to look for other jobs, or

start their own businesses, or

retire early, so employers may

need to emphasize other types

of rewards to recruit and retain

workers. On the other hand,

fewer employees will remain in

jobs they don't like to keep their

health insurance, and employ-ers may be left with a more

motivated workforce.

HOW PAY OR PLAY MAYAFFECT WORKFORCECOMPOSITION

Whether or not to o�er health

plan coverage to employees is

likely to be a relatively straigt-

forward decision under PPACAfor employers that currently

provide that coverage for most

of their full-time workers. As

Example 1 illustrates it would

be di�cult for these employers

to �nd a more cost-e�ective or

valuable bene�t to replac e

health plan coverage in the total

remuneration package, assum-

ing their health plan costs arewithin a normal range. Employ-

ers could increase employee

cost-sharing to reduce their

own c osts, and the bene�t

w ou ld s ti ll b e v al ua bl e t o

employees.

The considerations are more

challenging for employers that

do not o�er standard health

plan coverage to some or all

their full-time employees or

employ a lot of “part-timers”

who do not get bene�ts and

sometimes work full-time hours.

For example, employers in the

retail sector often provide stan-

dard health plan coverage to

headquarters sta� and manage-

ment, but not to �el d

employees. Retail �eld employ-

ees may be o�ered the option

to buy “mini-med” plans that

provide $5,000-$10,000 in an-nual bene�ts, but PPACA's pro-

hibition against imposing annual

limits on essential bene�ts will

eliminate these plans.

As noted above, in “How the

Pay or Play Provisions Work,”

an employer that o�ers a health

plan to some, but not all, of its

full-time employees (or has

part-time employees who don't

get bene�ts and work full-time

hours some months), may be

required to pay penalties at the

same level as an employer that

does not o�er any health plan

bene�ts. But they will be in a

much worse position, because

they wil l also be paying for

health care bene�ts, as Ex-

ample 2 illustrates.

Example 2: Corporation Y is

identical to Corporation X in

Example 1, except that it fails

to o�er 100 of its 2,530 full-

time employees health care



24



coverage. After taking into ac-

count federal income and FICA

tax, Corporation X spends

$12,996,000 to provide health

care coverage to 2,000 em-

ployees, and $5,000,000 in

penalties, rather than $300,000

in penalties for the employees

who qualify for subsidies on the

exchange.

In Example 2, Corporation Y

spends the same amount for its

health plans and $4,700,000

more in penalties than Corpora-

tion X, because 100 full-time

employees were not o�ered

bene�ts under an employer-

sponsored health plan. Note

that it is not certain that the IRS

will interpret the penalty provi-

sions to impose the maximum

penalty on an employer that

excludes a relatively small num-

ber of full-time employees from

its coverage o�er, but it is likely,

and employers who may be af-

fected need to plan accordingly.

Employers that risk �nding

themselves in the same position

as Corporation Y have a num-

ber of options. They can drop

coverage altogether, but they

will have to �nd some way to

compensate the employees

who were receiving health care

coverage for the loss of a highlytax-e�ective bene�t. Alterna-

tively, they can expand cover-

age to all their full-time employ-

e es , b ut r ed uc e c os ts b y

increasing cost-sharing for

everyone. To some extent, they

can o�er di�erent cost-sharing

a r r an g em e nt s t o d i � er e nt

classes of employees. For ex-

ample, an employer who cannot

realistically ensure that part-

time workers will never workfull-time schedules could pro-

vide health plan coverage to

part-time employees, if they pay

its full cost. Employers who can

successfully l imit part-time

schedules could replace full-

time workers with part-time

workers, but only if doing so

would not disrupt business

operations.

Whether an employer can of-

fer di�erent health plan options

to di�erent classi�cations of

full-time employees (including

long-term temporary workers)

to limit exposure to penalties

and limit health plan costs will

depend upon how many em-

ployees there are in each clas-

si�cation and the proportion ofhigh-paid employees in clas-

si�cations that receive richer

health plan bene�ts. Restricting

employer-paid health plan cov-

erage to the highest-paid work-

ers is not a realistic option.

Under PPACA, if an insured

health plan discriminates in

favor of the top-paid 25% of

employees, the employer willowe an excise tax of $100 a

day per a�ected employee.

Highly-paid employees who

participate in a discriminatory

self-insured plan are taxed on

the value of the bene�ts pro-

vided under longstanding in-

come tax rules.

CONCLUSION

T he f ul l i mp l ic at io ns o f

PPACA for employer-providedhealth care will unfold over the

course of the next 4-8 years as

the government issues regula-

tory guidance, and employers

readjust their plans, their re-

ward strategies, and, in some

cases, their workforces, in

response. This article primarily

considers how the availability of

the exchanges and the pay or

play penalties may a�ect an

employer's decision to o�er

h ea lt h c ar e c ov er ag e t o

employees. Other PPACA pro-

visions, like the so-called Cadil-

lac tax that imposes a 40%

excise tax on premium costs

that exceed certain thresholds

(generally, $10,200 for single

coverage and $27,500 for fam-

ily coverage) starting in 2018,

will increase health plan costs

for many employers and there-

fore may alter the outcome of

the cost-bene�t analysis.

Whether to o�er health care

coverage or not will depend on

how the true cost of o�ering

coverage stacks up against the

potential penalties, and that willdepend on employer size and

demographics, culture, business

and people strategy, and, to

some extent, what the competi-

tion is doing. There is no right

answer that �ts all employers.



25



Many large employers that al-

ready o�er health care cover-

age to most of their full-time

employees will �nd that health

care bene�ts are a very cost ef-

fective part of their total reward

packages, particularly in view

of the penalty provisions. Small

employers may be able to en-

hance their total reward pack-

ages by o�ering their employ-

ees the opportunity to purchase

health insurance through an

exchange on a pre-tax basis.

Employers that are subject to

the penalty provisions and do

not o�er health care coverageto some of their full-time em-

ployees will need to consider

how much employees value

their coverage, and the potential

impact of dropping coverage on

their ability to retain valuable

employees; the additional �nan-

cial cost required to extend

coverage to all full-time employ-

ees; whether di�erent groups

of employees can be o�ered

di�erent health plan bene�ts

without violating nondiscrimina-

tion rules; and whether replac-

ing full-time employees with

part-time workers would meet

their business needs.

NOTES:1The pay or play provisions also

apply to new employers that expect toemploy at least 50 full-time employeesin the current year.

2The penalty provisions seem torequire an employer to o�er coverageto employees and their dependents toavoid or minimize penalties, but it pos-sible that the provision may be inter-preted so that dependents do not haveto b e o�e re d c over ag e. See IRC§§ 4980H(a)(1), 4980H(b)(1).

3If an employer is part of a con-

trolled group of employers, the 30-employee reduction that applies incalculating the penalty for not o�eringcoverage ($166.67/month or $2,000/year per full-time employee) is al-located among all members of thegroup based upon how many full-timeworkers each employs.

4Increasing employee premiumcontribution levels and other employeecost-sharing may increase the numberof employees who waive employer-provided coverage and purchase cov-erage on the exchange. An employeewhose household income is 400% ofFPL or less would qualify for a federalsubsidy if the employer's coveragewould cost more than 9.5% of his orher household income or the employ-

er's plan pays less than 60% of the

total allowed cost of bene�ts, resulting

in a $3,000 penalty; if the employee's

cost of coverage is between 8% - 9.8%

of the employee's household income,

the employee would qualify for a free

choice voucher equal in value to what

the employer would have contributed

to coverage. Decreasing employercontribution rates more than 5% would

cause a health plan that was in place

on March 23, 2010, to lose its grand-

fathered plan status, which would

require the plan to comply with ad-

ditional plan design, reporting and

administration requirements. Since

virtually all employers will have aban-

doned grandfather plan status for their

plans by 2014 in favor of increasing

employee cost-sharing or changing in-

surance carriers, this should be a non-

issue.

5The example is for illustrationpurposes only and does not take into

account the complexities of the corpo-

rate Income Tax Code, the fact that

some employees will have earnings inexcess of the Social Security tax wagebase, or the impact of state and localtaxes.

6Employers that o�er health plancoverage and subsidize the cost mustprovide a free choice voucher, equal invalue to what the employer would havecontributed to coverage under its ownhealth plan, to any employee whopurchases coverage on an exchange,if the employee's required contributionto participate in the employer's planwould cost 8% - 9.8% of his or herhousehold income.



26

Documents

Health Care Reform Reward Strategy and Workforce Planning