By David Keller
Senior Vice President
IHC Specialty Benefits
One of the more enduring stories of baseball lore comes from the 1925 New York Yankees. Wally Pipp, who had been the Yankees regular first baseman since 1915, came to the ballpark on June 2, 1925, and asked for a day off because he had a headache. Pipp was replaced in the lineup by Lou Gehrig that day. Gehrig did not give up his spot for 2,130 games, until he retired 14 years later. The term “you got pipped” has come to refer to someone who has lost his place because he failed to do something that he was expected to do. In the wake of PPACA, the analogy is very applicable to any producer who does not take the opportunity to engage with his small-business clients about the health insurance options that are available to them. Assuming that your clients will simply stay with you because you have been their agent for years is as dangerous as Pipp assuming that Lou Gehrig would return to the bench.
While businesses with fewer than 50 full-time-equivalent (FTE) employees are not subject to a penalty for not offering insurance benefits to their employees, various factors may encourage them to continue to offer benefits:
Thanks to PPACA, employers now have more options for providing health benefits for their employees. An increasingly popular method, especially for businesses with fewer than 10 employees, is to not renew group coverage and instead encourage employees to purchase coverage on the Federal Marketplace, through a state-run or private health insurance exchange, or of-exchange. While employers will readily see the advantages of getting out of the employee benefit business, doing so requires careful analysis and expert advice from tax, accounting and insurance broker professionals.
On May 13, the IRS released FAQs that outlined how an employer can pay for the individual policies purchased by employees (Notice 2013-54). While this article is not designed to provide legal or tax advice and should in no way be considered a substitute for professional advice, some of the highlights of the FAQs include:
Notice 2103-54 indicates that employers may make an after-tax contribution to employees to purchase health insurance as long as the employee is free to take that money and use it as he would any compensation.
If the employer is using pre-tax money to help employees purchase an individual plan, it may be opening himself up to a penalty by using an employer payment plan to purchase individual medical policies. Even though the employer cannot make pre-tax contributions to its employees’ health insurance, there are still many compelling reasons for an employer to shift employees to the individual market instead of offering a group medical plan.
First, the employer will eliminate the cost of medical insurance from its benefits budget, which will automatically improve its bottom line. The employer may elect to redirect some or all of this net income into salary increases for employees or wellness initiatives to improve the health and wellbeing of its employees. This will enhance the employer’s competitive position for retaining and hiring employees, and employees may choose to allocate some or all of this increase in compensation toward the purchase of individual major medical.
However, it is important to point out that post-tax compensation to employees will have implications for FICA and other payroll taxes, as well as the employee’s eligibility for a subsidy.
Another advantage for the employer is that its medical plan will no longer be tied to medical inflation. Employers have become increasingly frustrated that their bottom lines are subject to increases in health plan costs that are beyond their control. In addition, employers with a greater number of lower-compensated employees might be able to lower their cost of doing business, and thereby improve the competitiveness of their products, while knowing that their employees will still be able to get affordable medical coverage through accessing subsidies available on a HIX. Employers and employees in this situation can both benefit if the employee purchases a qualified HSA-eligible plan on a HIX and the employer establishes and contributes to the employee’s HSA. Tis would not impact the employee’s eligibility for a subsidy as long as it follows IRS guidelines.
Finally, employers with a greater number of higher-compensated employees could increase their wages on a post-tax basis and, if the employees so elected, they could purchase individual coverage that best fits their individual needs. Often, in the micro-group market especially, the group purchases a plan that meets the needs of the decision maker, but not always everyone in the group. By allowing employees to choose their own plan, each person can get the plan that is best for him.
Business owners are going to be looking to brokers to bring them the tools that will educate their employees on their options, while making the transition as easy as possible. Technology has made it possible for even the smallest business to have a privately branded HIX, which allows employees to choose among multiple carriers and to quickly add ancillary benefits such as gap plans, dental and even pet insurance. Brokers who can provide access to technology, backed with the expertise to help employees purchase plans on or of a HIX, can help a business owner determine if ending a group plan is the right decision for his situation. Done correctly, it may be possible for a business owner to avoid the expense associated with providing group coverage while still offering the reasons it offered it in the first place—i.e., being able to attract skilled workers by offerings higher wages, providing tools branded to the employer that assist the employee in obtaining individual coverage, and remaining involved in the health and wellness of its employees.
Wally Pipp took a day off from the Yankees betting on the fact that he would not lose his job because he had performed so well in the past; he ended up losing his position and ultimately his paycheck. If you are a benefit broker in the micro-group arena, make sure that you are showing up every day with the latest tools and trends so you don’t find yourself getting pipped.