Play Time or Pay Day?

There's no time like the present for employers to start thinking about whether to offer health-care insurance after 2014.

Now that most companies have implemented the initial effective provisions of the Patient Protection and Affordable Care Act, it may soon be time to start thinking about a key element of the health-care reform law that’s not slated to take effect until 2014.

That year, under a provision known colloquially as pay or play, employers must decide whether to offer health insurance to their workers or pay a penalty that, for most, will be $2,000 per full-time employee and equivalent, over and above 30 full-timers. If the wrong decision were made, it could outweigh the combined costs of all the other factors associated with reform, health-care experts say.

But is there any reason to be looking at the issue so far in advance? Yes, some say. While procrastination is a common trait of people and organizations alike, as usual there is a risk in waiting too long.

“With all the stuff you get lost in while running and growing a business, you might think, ‘Hey, this thing is years away. I’ll worry about it in the fall of 2013,’” says Kevin O’Shaughnessy, CFO of Service Repair Solutions, a provider of automotive-repair information. “But you really can’t. It’s better to be proactive and have a plan than to get caught flat-footed and have to be reactive.”

While 2014 is three years away, negotiations with health-care providers for plan years starting then likely will take place in 2013. Also, the pay-or-play decision may have implications beyond health care for the design of “total rewards” programs that incorporate anything used to attract, motivate, and retain employees.

“Depending on the strategic pathway pursued, it could take two or more years to effectively implement the decision,” says Ron Fontanetta, leader of the health and group benefits practice at Towers Watson. Companies are well served to begin the dialogue and planning by the end of this year, he adds.

Some companies are already doing some preliminary financial modeling to get an early idea of whether they will come out ahead or behind by continuing to offer health benefits, says Ed Bray, director of compliance for Burnham Benefits Insurance Services. But he’ll be surprised if many employers opt to drop health-care coverage, because the modeling, done correctly, should take into account more than just the raw costs of providing health insurance and the per-employee penalty for not providing it.

For example, employers that opt to “pay” will lose the tax deduction allowed for the employer-paid portion of health-care program costs. Also, they will owe more to the government for FICA taxes and workers’ compensation. Why? Because without health-insurance premiums deducted pretax from their paychecks, employees will have greater taxable income. That means their FICA and workers’ comp obligations will increase, and so will those of the employer, which must match each employee’s payments.

“Over the past year I’ve talked to many CFOs about pay or play, and more often than not they’ve said that the annual penalty is less than what they’re paying now,” Bray says. “But when you do all the math, those numbers can get very close — certainly close enough so you’ll want to look long and hard at the potential ramifications, like taking a competitive hit to your work force, before deciding not to offer health insurance.”

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