How can an employer make the decision whether or not to offer healthcare benefits versus paying the penalty for not doing so? This conundrum is referred to as “pay or play” when discussing the new healthcare reform law. However, the decision of whether or not to provide coverage is not simple and requires much more than just comparing the cost of the penalties versus the costs of providing coverage. There are many other factors at play.
The first step is to assess the current situation. Here are questions to ask:
- Are you already offering healthcare benefits to all full-time employees? If not, what it will cost to offer coverage to full-time employees?
- Will the coverage you offer meet the minimum legal requirements in terms of affordability and providing minimum value? If not, then determine what it will cost to provide affordable and minimum value coverage.
Armed with this information – the costs of compliance – employers can begin to look at the big picture and their choices. This will begin to put the “pay or play” decision into perspective.
If the employer does not currently offer insurance to all full-time employees, then the cost of doing so will be weighed against the penalty for not doing so. If the employer is not providing adequate coverage (in terms of the minimum value or affordability), then the cost of doing so needs to be compared against the penalty for not doing so as well. (These two penalty amounts differ).
Beyond Pay or Play: What Other Factors Should be Considered?
However, the calculations don’t stop there. “In order to know which approach you need to take – especially dropping coverage – you have to ask yourself why do we offer coverage today at all? What’s even the reason for this?” Ashley Gillihan advised in a recent BLR webinar. There are many reasons that employers offer healthcare benefits. Many employers have business reasons for wanting their employees to be insured, such as:
- Company cultural imperatives.If you believe it is important for employees to have coverage, yet you drop coverage, will the employee get their own? And what’s the impact on the workplace if they don’t?
- Keeping a high-value workforce. Is it important to your workforce to have the insurance you offer? If you don’t have coverage, will employees require for more money to stay?
Those are just two of the many business reasons employers offer healthcare benefits. The list is certainly not comprehensive, but illustrates the fact that there are more factors than a simple cost comparison.
That said, there are also more components that go into the cost comparison too. When looking at the cost of pay or play, employers should go for a big-picture view of the real costs of dropping insurance. Look at the big picture, beyond just the penalty cost versus the insurance cost. Here are some examples of cost considerations if coverage is dropped:
- The penalty paid for not having insurance is not a deductible expense. Compare this to healthcare benefits, which are deductible. This brings the two sides of the equation closer together.
- There will be pressure to increase taxable wages to retain employees. While these are deductible, they are also taxable. This closes the gap a bit more.
- Without employer-sponsored healthcare coverage, there will be uncertainty as to whether coverage will be purchased by employees. This not only might go against your company values, but it could also affect productivity. Employees are likely to not get coverage, and then may have an increased incidence of problems keeping them out of the workplace later.
“If you’d stopped at $2,000 [penalty per employee of not providing coverage] you’d miss out on this part of the analysis. Now at the end of the day, [an employer] may not ever fully close the gap, and it may be cheaper to drop that coverage, and that may be indeed what they do. But for many it won’t.” Gillihan told us.
Employers also need to consider the benefits of keeping coverage. For example, there may be a potential competitive advantage of offering better/lower cost coverage than other employers. Additionally, while there may be increasing costs to provide coverage, the employer does not have to view this as all-or-nothing. The employer could opt to keep coverage, but pass along more costs to the employees.
This might deem the healthcare benefit they provide “unaffordable” under the law and thus make the employer subject to a smaller penalty—but that still may be a better option than dropping coverage altogether.
For more information on how the new healthcare reform laws impact employers and whether you’re subject to the pay or play, order the webinar recording of “Play or Pay Under the Affordable Care Act: Short-Term Obligations and Long-Term Strategy.” To register for a future webinar, visit http://catalog.blr.com/audio.
Attorney Ashley Gillihan is counsel in the Atlanta office of Alston & Bird. He focuses his practice exclusively on health and welfare employee benefit compliance and litigation issues for employers, health plan administrators, and other health and welfare benefit plan service providers.