Tax loophole closes, but for many employers, the individual market opportunity is still open

This week the New York Times published an article with a very compelling headline – “I.R.S. Bars Employers From Dumping Workers Into Health Exchanges”. Unfortunately, this isn’t the full story, but it was enough to create some drama. As the exchanges have started to settle in and the debate over the future of ACA starts to recede, there seems to be a bit of reduction in political grandstanding and implementation blunders, so this ruling has been sensationalized to fill the void.

The article summarizes a recent IRS ruling that prohibits an employer from providing employees tax-free dollars to purchase individual health insurance plans. What the ruling is intended to do is to prevent employers from gaming the system, and to make sure tax treatment between group and individual coverage for employers is crystal clear. Employers may still choose to send their employers to the exchange for coverage, and even increase their pay to help them afford it. This ruling simply confirms that any funds provided will be taxable.

The ruling was not unexpected and does not change the nature of the employer mandate in the law, which requires that large employers over 100 employees (50 in 2016) pay a $2K per employee tax if they do not offer a health plan that meets minimum benefit standards or is deemed unaffordable.

The IRS provided initial guidance on this issue well over a year ago in their FAQ 11 and further guidance in their FAQ in September of last year (2013-54). This weeks ruling contained no surprises, despite the drama implied by the NYT article’s headline.

The fact remains that employers should be considering whether to offer group health benefits now and into the future. Some don’t offer coverage today and need to decide whether to implement a plan or pay the tax. Others have faced double digit increases in their group plan, coupled with additional complexity in administering the plan and staying in compliance with the law, and are considering alternatives.

The simple fact is that for many Americans making working and middle class wages, estimated to be 70% of us, access to tax credits would provide a significant impact to their health and financial well-being, but if their employers offer a health plan that meets the guidelines under ACA, they are not eligible for those credits, and neither are their dependents.

Milliman released their annual medical index May 21st, revealing the cost of coverage for an average family covered by an employer sponsored PPO at $23,215 per year. Employers are picking up 58% of the tab, leaving a $9,750 of expense for the family. This number has doubled in the past decade, and wages have certainly not followed suit, especially for the average working class employee.

Many employers with employee populations that lean toward this demographic profile, such as non-profit organizations, call-centers, retail, food service, etc., have moved to contribution approaches that pay between 75-100% for employees, but little to nothing toward dependents. As premiums have risen sharply, employers have had to pass on more premium cost to the employees, and have reduced benefit levels, increasing out of pocket expenses. Cost shifting generally erodes participation in the benefit plan, and far fewer employees and dependents are covered, signaling that the employer plan isn’t meeting the needs of many of the employees, but remains a significant expense for the employer.

For these employers, there is an argument that their benefit program is doing more harm than good. And many offer benefits because they want to take care of their employees and believe it is the right thing to do. But for many, that was true before healthcare reform provided a viable alternative: an alternative that allows the employer to choose to pay a tax toward the expense of covering individuals instead of sponsoring a plan. An alternative that guarantees employees and their families can find coverage without medical underwriting, just as their group plan does. An alternative that just might get more of their employees and their families covered by insurance they can afford, which is really what they’ve been trying to do all along.

The reality is that the system has created this opportunity for employers, and they can take advantage of it in a compliant way by choosing to pay the employer mandate, and if they choose, also provide additional, taxable compensation to employees who may need a bump in pay to be able to make their insurance payments. This strategy won’t be right for all employers, but the recent IRS ruling shouldn’t scare those who see this opportunity from taking advantage of it. The Affordable Care Act is providing new alternatives that aim to provide more Americans with health insurance, and this is just one of the emerging options.

In the end, it’s all about taxes, and as one of the only two certainties in life, you can rest assured that the IRS is paying attention. But that shouldn’t deter employers from doing the math for themselves, and considering the goals of their benefit program.