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“Paying ACA Penalties Probably Isn’t Your Most Cost-Effective Option”

Written by Trevor Kupfer

“Paying ACA Penalties Probably Isn’t Your Most Cost Effective Option”

Like you, I’ve exposed myself to information overload when it comes “Paying ACA Penalties Probably Isn’t Your Most Cost Effective Option”to Affordable Care Act. I’ve read countless articles, waded through loads of comments, attempted to comprehend the technical documents, and sat through some workshops/lectures. Now I feel like I’ve come out the other end of a meat grinder. And, even worse, I’m still confused.

But unlike you, I’m not a business owner. So if I had to put myself in your shoes, I’d be thinking about blocking time with an attorney and insurance agent to help me wade through it all. But I’m not a business “Paying ACA Penalties Probably Isn’t Your Most Cost Effective Option”owner. I’m the editor of a staffing news site, so as such I did the best thing I could. I interviewed three insurance agent experts about ACA.

The Q&A below took place between me and Mark Lam, John Rutledge, and Kurt Murray of Assurance. Though the information they provided is about as accessible as ACA can be, it does run on the lengthy side. So for the abridged version, just see this fantastic quote from Kurt:

“We all here get frustrated with the misinformation and doom and “Paying ACA Penalties Probably Isn’t Your Most Cost Effective Option”gloom being perpetuated throughout the whole industry by uninformed insurance brokers, insurance carriers, and media outlets,” he wrote in an email. “… It paints the picture that there are few options and some should pay the penalty. The only time we’ve seen that as a viable option is in the smallest of agencies – those under 70 or so temps. We’ve been placing major medical coverage for our staffing clients for years. This can be done, and it’s being done.”

From what I understand, the government is asking employers to do two things with their health insurance: make it “acceptable” and make it “affordable.” Correct so far?
Correct. “Applicable large employers” – those who average 50 or more full-time employees – have a choice to either provide health insurance to their full-time employees or pay an excise tax penalty. In most scenarios, providing coverage actually is the lowest-cost option due to the tax advantages gained by offering coverage. That coverage has to meet a 60% actuarial value target, and be offered on an affordable basis for employees.

Alright, so with “acceptable,” this means offering a major medical plan with at least 60% actuarial value – and actuarial value is how much medical coverage the plan pays for (on average) versus out of the employee’s pocket, correct?
Yes. Most comprehensive group health plans will have no trouble meeting the 60% target. In fact, in some markets, insurance carriers are reporting that they are having a hard time coming up with a 60% plan, as various state and federal mandates for coverage levels effectively require them to provide a higher actuarial value.

I’ve heard that most plans are between 70 “Paying ACA Penalties Probably Isn’t Your Most Cost Effective Option”and 80% (with Pittsburgh averaging upwards of 90%!), so the thinking is that a lot of people should bring their plan down to the 60% range. Would you say that’s true, and would advise a similar strategy?
We suggest every large employer have their broker run the calculation on existing major medical plans to determine the AV and make sure the plan meets the minimum. From there, it’s an individual decision on whether the employer wants to adjust the plan based on the business needs. For example, a staffing company who is primarily or exclusively in the professional fields probably wants to maintain a richer plan than a staffing company that is exclusively or primarily in light industrial space.

OK, so moving on to “affordable.” This means plans cost employees (on average) less than 9.5% of their household income (in the single-person tier only, not dependents), correct?
This is something that is confusing due to the way the law was passed and signed. The statute – the bill that President Obama signed – does indeed state that coverage is affordable if it doesn’t exceed 9.5% of family income, and that is the rule. However, employers typically will never know household income, and wouldn’t find out if their coverage met the affordability guidelines until they were penalized for not meeting it. The IRS provided a safe harbor for employers in which employers will not be held liable for penalties if the amount they charge participants for employee-only coverage does not exceed 9.5% of their Box 1, W-2 wages. As long as that parameter is met, the employer won’t be in violation of the regulation even if the employee eventually qualifies for a subsidy due to the cost not meeting the family income criteria.

As long as your plan satisfies these two things (acceptable and affordable) you won’t be penalized, correct?
Yes, as long as you meet the minimum value and affordability guidelines, you are not subject to a penalty in the event the employee gets subsidized coverage.

If and when employers do this, will they see several employees opting instead for the aggressive federal plan?
We don’t believe we will see a mass movement towards the Exchanges, because coverage offered through the Exchange is NOT the federal employee plan, nor will it be “affordable” if an employer follows the guidelines, as employees in that scenario that opt out of their employer plan lose access to the federal subsidies. Coverage purchased through the Exchanges is also purchased on an after-tax basis. Once employees start seeing the real costs of coverage, and the impact it has on their bottom line, they’ll see that their employer plan is probably the best bet for them.

I’ve heard the thinking behind the federal plan is to drive down healthcare carriers’ costs. Do you believe this to be true?
This is a common misconception. The intent of the ACA is to expand coverage to those people who are currently uninsurable. The net effect of all the protections they had to put in place – which includes, among other things, billions of dollars in new taxes on insurance carriers – to avoid abuse of this system will actually drive costs up. These increases will be mitigated for low-income taxpayers who qualify for taxpayer subsidies, but for people not entitled to those subsidies, they’ll find the cost of coverage to be higher if they purchase it on their own.

A big question among staffers with this is, “OK, this all sounds fine, dandy, and easy, but what if insurance carriers refuse to work with us on this?”
This is a philosophy being promoted in some circles and in some cases due to misinformation. Our agency is already placing major medical insurance for temporary workers and we believe the insurance markets will see this law as an opportunity to grow their “membership” – the number of people they insure. In fact, if an insurer were to refuse to insure an employer, that same insurer could likely be insuring the same people through the exchange(s) using community rating and without being able to apply underwriting. That’s a lose/lose scenario for an insurance company. We have multiple insurance carriers who say they will work with staffing companies and we may even see special products developed to address this area. An accomplished benefits broker who understands both the ACA and the staffing industry should have no trouble finding coverage for staffing companies. The key is choosing the correct benefits advisor.

We’ve talked mostly about the “play” option “Paying ACA Penalties Probably Isn’t Your Most Cost Effective Option”so far. What do you think of the “pay” or penalty option?
Each employer will have different demographics that will affect the answer to this question, but by and large we have found that paying the penalty does not result in any significant savings. There are many factors that weigh on this, such as the tax break on health insurance premiums, employee morale costs (extra turnover, etc.), and more. For example, because the penalty for not offering coverage at all is a non-deductible excise tax of $2,000, the actual impact to a tax paying employer (depending on combined federal and state income tax rates) is likely to be closer to $2800 where a contribution to an insurance plan is tax deductible. Very small staffing firms may actually be better financially by paying the penalty because the penalty for the first 30 full-time employees is “free.” Our proprietary financial modeling computer program has thus far shown the cost for providing insurance to be significantly less than the cost of the penalty is the norm in the vast majority of cases.

What would you say to employers who are looking for loopholes to exploit?
The IRS, HHS, and DOL are all actively looking for employers who try to find and exploit loopholes, and they are already quickly shutting the loopholes down. Once January 1, 2014, rolls around, the government will have much more up-to-date and comprehensive information on employers, their plans and how they are being administered than ever before, which will make abuses of the system much easier to detect.

The hardest part of this seems to be actually calculating your actuarial value (60%) and affordability (<9.5%). Are there places where employers can go to enter info and easily figure this out?
The government has published this actuarial value tool that can be used to determine whether the plan meets the 60% target. Affordability is relatively straightforward, even for minimum wage employees. However, just complying with those two criteria isn’t necessarily going to result in the most cost-effective plan for the employer. Employers need to work with their brokers to develop a strategy that is both in compliance with the ACA and well-positioned for the future. Health insurance coverage, as we know, is in the midst of a transformation, and with all the moving parts to the ACA, it is vital that employers not only get into compliance but lay the seeds for a long-term strategy that will continue to keep them competitive and nimble as the insurance landscape evolves in the coming years.

Is there anywhere else we can point people for more information on this?
We invite people to check out our webinar today (April 11) at noon CST. It’s called Staffing ACA Regulatory Provisions Forum and Mark Lam will be orchestrating it. The first half will talk about staffing-specific concerns with ACA, and the second half will be an open forum for questions and immediate feedback. Otherwise feel free to reach us via email at mlam@assuranceagency.com, jrutledge@assuranceagency.com, or kmurray@assuranceagency.com.

{ 26 comments… read them below or add one }
  1. Mike Freeman

    Maybe a CPA too, otherwise we’ve merely asked the barber if we need a haircut.

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  2. Ray Soll

    Great article and if you have time I would like to speak with you and discuss what my group is “experiencing” from both the customer and staffing side ! Well worth a phone call !

    Ray Soll

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  3. Jay

    Perhaps someone with a higher non-verbal IQ can explain how the safe harbor provides any relief whatsoever for industrial workers? What does it matter if the penalty is assessed on household or w2 income? The plan will in almost all cases cost more than 9.5% of that amount.

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    • Mark Lam

      Hi Jay,

      I’m presuming you’re asking your question from the employer’s perspective? It is true that employers will have to pick up some of the costs, and how that cost increase is handled will be an issue to resolve for each staffing employer. The combination of the 9.5% of individual income safe harbor, and the look back period, however, do help the staffing employer greatly. First, the look back period will greatly limit the number of people for whom you will have to offer coverage (and the requirement is only to offer it – if the employee doesn’t take the coverage you are not penalized). Secondly, the 9.5% safe harbor limits the amount of premium the employer has to subsidize to just the coverage for the employee themselves, not spouses or children.

      Mark

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  4. Tom Landry

    All is true but show me an affordable qualifed plan that has no particiaption clause in it. If you don’t have enough participants you loose your plan and are right back to square one. You have markets like El Paso that people actually earn minimum wage, are you saying that there is a plan that qualifes for them that the buy down from the employer is less than the fine?

    Everyone talks about the plans that are available but no one has shown an actual plan with coverages and premium schedules.

    It’s not just the staffing industry, its’ the restaurant industry, it’s low end manufacturing, any business that pays $7.25 – $12.00/hr.

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  5. Anonymous

    I think it depends on many factors whether paying “Isn’t Your Most Cost-Effective Option”. I’m no subject matter expert on this issue but I do know that for an average premium of say $500 per month and a hourly wage of something in the neighborhood of $13, it makes more sense to pay than to play. Perhaps there are other factors involved that would bring that monthly premium down quite a bit but right now, there aren’t a lot of options out there.

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  6. Matt

    I would like to see some math on this using some sample data from a commercial staffing perspective. I have seen nothing to support this Play not pay advice. I would also love to know which carriers would consider a plan for commercial staffing. I have not found one industry expert that has been able to find a major med carrier that will look at our industry.

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    • Trevor Kupfer

      I would, too! In fact, I’d love to publish an example of the numbers and data concerning a specific staffing firm — maybe, say, using their numbers from last year to see what it would theoretically cost them in ACA for 2014.

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  7. Kevin

    I appreciate the information, but I wouldn’t consider these insurance salesmen a credible source to advise my business on whether or not to buy insurance. Would they like my opinion on whether or not they should be using a staffing company for all of their hiring? I would like to know the look back rule that is going to be applied, as that actually has some merit to whether or not I am going to pay or play. The majority of staffing I do is 90 day temp to perm, so a 12-month look back would mean that the majority of my employees would not qualify as 40 hours a week for 3 months only equates to 10 hours a week in a year. If this is the case I don’t have to offer insurance because my business doesn’t qualify as a large company. We had 100 at one time last year and are now down to less than 50 right now. Any advice on this scenario is welcome.

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    • Brent

      Kevin,
      You and I have similar situations….I honestly do not know what to do. I had a low of 46 employees in 2012 and a high of 128. While I have some employers that leave employees on my payroll for a year, the majority of them are on a temp-to-perm or strictly temp basis. How does it work when a person is between assignments? Do we have to pay our portion of the health insurance? The lack of definite answers to ACA with us small-to-middlin’ size firms is frustrating.

      Brent

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    • Kurt Murray

      Kevin,
      I would hope that you would turn to an insurance professional to help you make an insurance decision. The point of what we are saying above is that offering insurance to your employees will ultimately cost you, the employer, less than paying the penalty. The penalty is not tax deductible, insurance premiums are. You must pay the penalty for all qualified employees, you only need to provide insurance to those employees that choose coverage. Your employees do not share in the cost of the penalty, you can charge your employees up to 9.5% of their wages to cover the insurance expense.

      Derermining whether your agency qualifies as a large employer under ACA is a bit more complicated than simply stating that your have a certain nuber of employees at a specific time.

      You must first determine the number of full time employees you have for each of the last 12 months. Next, you must determine the total number of part time service hours for each of the last 12 months and divide that number by the number of hours that a full time employee would have worked in a particular month (for months with 4 weeks, it would be 120 hours, for months with 5 weeks, it would be 150 hours). That determines your full time equivalents. You must then add the number of full time equivalents to the number to the full time employees for each of the last 12 months, then determine the average number per month emcompassing the prior 12 months. If that number is above 50, then you qualify as a large employer under the act. Now, there are things you can do with plan design and structure to limit the number of employees that would you would have to offer coverage to though. That may ultimately mean you have very few employees that actually use the company sponsored plan. Hope this helps.

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      • Anonymous

        One thing I still don’t get is how they can base the affordability off of W-2 Box 1 wages. This figure can vary widely and be somewhat “manipulated” or impacted by multiple Section 125 elections (i.e. 401k, Flex Spending, Dependent care, etc). If you had a spouse or were in a position of your own to contribute heavily to a 401k or elect multiple Sect 125 deductions; two people making the same gross wage could end up in different affordability situations. I would have thought tying affordability to Gross Wage to be best, or at worst using Medicare Wage would be a more balanced measure.

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        • Mark Lam

          The basing of affordability on the Box 1 wages is in place as a safe harbor for employers. The law states – and the Exchanges/Marketplaces will abide by this – that affordability, and therefore eligibility for taxpayer subsidies, will be measured by household income. Since employers cannot track household income, the IRS came up with the safe harbor of 9.5% of the employee’s Box 1 wages with respect to employee-only coverage. There are two other safe harbors employers can use – 9.5% of the employer’s lowest base rate of pay, and 9.5% of the federal poverty line. Employers can choose to use any of these three, or none of the above. If they choose to not use any of the them however, they won’t know if they’re compliant with the law until after it’s too late – in other words, they won’t know until after the employee gets the subsidy, at which point it will be too late to change what you charged the employee.

          Mark

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      • Kevin

        I appreciate your response, but it still doesn’t answer my question. This might be a better way to ask it. Are they looking at only numbers or actual individuals? Individuals for the most part are on my payroll for 3-5 months working 40-50+ hours per week. This would make them a full-time employee for that time period, but then they are off my payroll and on to the clients payroll after that. If you looked back on it after a year they would not qualify as a full time employee as they only averaged around 480-600 hours out of a total possible of 2080. I may at one time during the year carry more than 50 of these individuals on my payroll, but looking back after a year they are not considered full time employees based upon hours worked. Am I responsible for their coverage for 3-5 months or can the plan be structured so that they must meet 6-9 months of employment before benefits kick in? I also have a mixed bag of clients with different pay rates for employees ranging from $10-$25/hr so can the 9.5% be used as the employee contribution percentage on all employees? These are just some of the questions that aren’t being answered that I have. I know I would rely on an industry professional to look at the numbers, but taking advice on whether or not to pay or play from one is a little absurd. Everyone has an agenda. I look forward to your feedback on this particular situation as I feel I am definitely not the only one.

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  8. Mike C

    Kevin, I think you are correct to assume that with a 90 day temp to perm average, you won’t see many full time employees using the 12 month look back. One correction though; it’s 30 hours not 40. At any rate, I think the math can be pretty simple for some of us. As “Anonymous” pointed out above, if I earned $28,000 per year and pay only 9.5% toward premiums, that’s $2660 per year. As an employer, I would say there is slim chance that I will be able to secure premiums this low. On the contrary, premiums are more likely to be around $5000 to $6000 per year. Simple math indicates it would be cheaper to pay than to play and pick up the difference.

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      • Mark Lam

        Hi Trevor,

        That’s correct – 30 hours of service / week, or 130 hours of service / month – they are both valid criteria to use.

        Mark

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    • Mark Lam

      Hi Mike,

      There are other factors to consider on top of just the dollar amounts of penalties – perhaps the most important one is the tax write-off an employer can take on the cost of insurance provided to the employee, versus paying the penalty on an after-tax basis. There’s more to the analysis than that, and hopefully we can get something put together with Trevor to go into more detail. It’s hard to lay it all out in a comment. :) Suffice it to say, however, that the majority of our staffing clients are finding the option of playing to be the most cost-effective option for them.

      Mark

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  9. Scott Morefield

    The way I understand it now, if you offer a qualified plan that’s not ‘affordable,’ your tax will be $3,000, but only for those who actually get a subsidy. Predicting that is difficult, but many may not because they won’t be able to afford a plan at all, even with the subsidies, or they may have insurance elsewhere.

    However, if you don’t offer a plan at all, the tax is $2,000 for EVERY full-time employee you have (minus 30). MUCH more expensive…

    So the best route may be to offer a plan that’s not ‘affordable.’ That way you avoid having to pay the many thousands per year of employer portions, and also avoid having to pay for EVERY employee on your roster.

    I could be completely wrong, but that’s the way I understand it now… :)

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    • Mike C

      That’s a really good point and is the way I understand it as well (at least at this point). The only part that is troublesome is the statement “only for those who actually get a subsidy”. True, it’s hard to predict, but for a company like ours which places many industrial candidates, there’s a good chance the numbers will be high. So high, in fact, that the $2000 penalty doesn’t seem to be “MUCH” more expensive.

      I guess, in the end, it’s going to require all of us to sit down with some sharp pencils and figure it out. I just hope that there are some decent plans available to work the scenarios.

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      • Scott Morefield

        Possibly… However, even with the subsidies, most lower income people probably won’t be able to afford the ‘exchange’ insurance. In fact, in the end most of us probably won’t be able to afford insurance at all. I don’t think any of us understand just how devastating the explosion is going to be when this thing crashes and burns.

        I know it’s difficult (and possibly wrong) to speak to motives, but it’s hard to imagine the sick people who wrote this bill had anything in mind but the complete destruction of the American economy.

        (OK, getting off my soap-box now…) :)

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  10. Anonymous

    I think what we really need to figure out is How our industry going to pass on these extra costs to clients regardless of the path we take? Tracking, billing and trying to collect on a pro-rata share billing for penalties/coverage is going to be very difficult and harmful to client relationships. Can we afford to let individual clients have opionions on what direction we deem best for our companies over all? Our margin’s can’t support the extra costs, so we have to push some through. In a commercial setting, most of us should have less than 30% of our workforce that qualify. If we average it out, we could most likely get by with $.35 to $.50 bump per hour which would help cover the costs as well as the additional administrative burdens.

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    • Kurt Murray

      Depending on the nature of your placements (light industrial/clerical/IT/medical/etc.) the cost per hour may be significantly less than $0.35 to $0.50/hour. That will ultimately be determined by your plan design, cost of your plan and participation rates, etc. We expect to see lower participation rates with light industrial agencies and higher participation rates with IT, medical and professional agencies. Assurance runs financial modeling for all of our clients and we have seen projected costs as low as $0.05/hour and as high as $1.00+/hour.

      The costs must be passed along to your customers as you don’t have the margins to absorb this. We see this however as an opportunity for the staffing industry as your cost burden for providing health insurance and administering the program will likely be less than that for your customers. The best agencies are now using ACA as a sales tool to generate top-line growth. Your ability to pass the costs along to your customers, will determine if bottom line growth will follow.

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