Many employers, as well as employees not covered by an employer plan, are looking at ways to curtail the cost of medical coverage. This post will briefly mention two cost-reduction plan ideas that some companies may be exploring. As such, this posting will also be of interest to those employees affected by such employer cost-cutting strategies. These two strategies that affect employees’ health care costs are . . .
Dumping Employees: As companies look at the economics of the Affordable Care Act (ACA or Obamacare), some companies were headed in the direction of discontinuing health care coverage for their employees and to “reimburse” them for their health care coverage by providing them with a fixed allowance. The thought process was that the employees’ receipt of a health care allowance would be tax free to the employee under current tax law, the employee chooses a health plan that best meets the needs of that employee’s family, and the employer can control the cost of the health care benefits it pays its employees. Some have referred to this as a “dumping” strategy in that the employer is dumping its employees onto the health care exchanges. Companies who were contemplating this strategy had obviously concluded that it would be cheaper to provide each employee with a lump-sum payment to buy insurance on an exchange rather than to pay the cost of employer-provided medical coverage.
Due to concerns of the White House that employer-provided insurance may be terminated by employers, the IRS posted Questions and Answers (Q&As) on its website that address the consequences of an employer reimbursing its employees for the premiums they pay for health insurance, i.e., health insurance through a qualified health plan in the health insurance exchange or outside the exchange, rather than providing a health insurance plan for its employees. The New York Times reported on May 25, 2014 that such an arrangement will not satisfy the ACA and that employers may be subject to a tax penalty of $100 a day, or $36,500 a year, for each employee who goes into the individual health care marketplace.
From both an employer and employee perspective, the key element in this Q&A ruling is the “tax-free reimbursement” of such an arrangement. If the employer provides a reimbursement for the employees’ health care costs and includes that reimbursement as taxable compensation, such an arrangement apparently will not run afoul of this new Q&A and the ACA. Now employers who were planning to dump their employee medical coverage have another economic factor to consider when reviewing the employer cost of providing medical care. Whether the employer provides a tax-free allowance or a taxable allowance, the cost to the employer of the paid allowance is the same. However, the employer will now have to pay the employer’s one-half share of payroll taxes (FICA & Medicare). The employer will need to also consider the additional cost to the employee, which would the income taxes due on the now taxable medical care allowance and the employee’s one-half share of the payroll taxes.
Cobra: A second strategy some employers may utilize is to cut back on the hours of their employees. Since the ACA defines full-time employees as someone who works at least 30 hours per week, employers may be inclined to cut back the employee’s hours to less than 30 hours per week to avoid covering those employees under the employer’s health care plan.
For employers considering this strategy, they should first consult with their health care provider and legal counsel. If the cut-back of the number of hours means that an employee loses his health care benefit, what are the employer’s notification requirements under COBRA? What happens if the employer failed to provide a timely Cobra notice?
When it comes to the ACA and how employers should best proceed, employers should work closely with their health care insurance broker, legal counsel, human resource consultant, and accounting professional to ensure compliance with the ACA, affect on employee morale and hiring, and the after-tax cost of the various options the employer is considering.
If you are working with a tax professional who merely prepares tax returns, you are missing one of the advantages of using an experienced tax professional for tax preparation and tax planning services which is to maximize your after-tax cash flows.
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