Health Care Reform: To “Pay or Play?”

December 10, 2014 | Article

In 2015, the Patient Protection and Affordable Care Act (PPACA) will require companies who employ more than 50 full-time equivalent employees to provide health insurance coverage; send employees to a marketplace and pay a penalty of $2,000 (Indexed Per Year) per employee per year (excluding the first 30 employees if at least one employee goes to a marketplace and receives subsidized coverage), or adapt their plan to comply with health care reform requirements.

Employers who elect to provide health insurance for their employees will be subject to a $3,000 (Indexed Per Year) penalty for any employee who finds the coverage to be unaffordable and receives a marketplace subsidy. “Unaffordable coverage” is defined as an employee’s “self-only” premium that exceeds 9.5% (Indexed Per Year) of the employee’s wages.

Integral to this reform, is the establishment of the federal and state marketplaces to provide individuals a range of affordable health insurance plans to choose from. Through a marketplace, individuals who meet income guidelines will be eligible for subsidies to pay for premiums.

The dilemma most companies now face is whether or not it makes business sense to extend coverage to all employees, elect not to provide coverage and pay the annual penalty, or develop a hybrid plan. Businesses must consider how their decision will impact their employees, as well as predict how many employees would be eligible for the small and large subsidies offered through a marketplace. This can be complicated.

What Will Others Do? An Unpredictable Future
There have been numerous reports during the last couple of years speculating on whether or not employers will discontinue health insurance coverage en masse. Reports vary, from estimates that up to 30 percent of companies will drop coverage; to quotes from consultants saying that few, if any, large companies will act so quickly. 

Several things remain to be seen:

  • Will a marketplace offer comparable plans?
  • Will marketplace rates truly be lower than what employer-sponsored plans cost now?
  • How effective will the marketplace be?
  • What will the reaction be from employees?

Because of the perceived cost-savings of dropping coverage, it can be tempting for organizations to simply opt for the penalty – without taking the time to determine if, indeed, this is the best business move. 

Calculating the “Pay or Play” Option

Multiple factors must be considered before making the decision to discontinue or retain employer-sponsored health insurance coverage. These include:

  • The current and future cost of health insurance coverage vs. annual mandated penalties
  • The impact dropping health insurance coverage may have on acquisitions and employee retention
  • The Jones’s Factor — what other companies do and how it affects competitive advantage
  • The potential cost savings and how that money can be used in other areas of the business

PPACA Creates a Shift in Responsibility
Before we discuss the economics, it’s important to note that a legitimate concern companies have is over the perception employees and prospective employees—including executive-level talent—will have if they do indeed discontinue providing coverage. How will not offering health plans impact their employees? If a company elects not to provide coverage, but its competitors do—will that affect its ability to attract and retain employees? These are questions that must be carefully thought out by HR and the C-Suite.

Employer-sponsored health insurance plans, along with traditional benefits, have long been a staple in attracting top talent. However, the PPACA also mandates that individuals are legally responsible to be insured under a health plan, signaling a shift in the responsibility from the employer to the individual. If a marketplace operates as effectively as intended for individuals, then health benefits may become less of a factor in hiring and retaining employees as health insurance joins the realm of auto and homeowner’s policies. That remains to be seen, however. For the time being, health insurance – and the penalties and options involved – still require employers and employees to solve this issue together.

Economic Realities
Beyond the HR impact, for many companies cost will be a determining issue – whether or not they make a decision to not provide coverage, or wait it out and plan to decrease or drop coverage at a later date. Determining what makes the best business decision based on cost, is a crucial piece of the puzzle.

Some organizations will find that it just makes sense to extend their current health plans to all employees, but will need to carefully calculate premiums and pay scales to ensure that premiums are not deemed unaffordable. Others, particularly small businesses and those with large numbers of part-time or seasonal workers, may find that the money saved by discontinuing coverage and paying the penalty is worth it.

How to Determine the Cost Factor
In order to help our clients with this important business decision, Eide Bailly has developed Employer Health Reform Analytics—a service that allows us to help businesses with more than 50 full-time equivalent employees or growing companies analyze the economic effect that extending coverage, sending employees to a marketplace and paying the penalty, or adapting their plan will have on their bottom line.

Here’s how it works:
The government subsidies are broken into four categories based on an employee’s income level compared to the federal poverty level (FPL) guidelines. By taking an employer’s W-2 salary information and making calculated estimates (which may or may not include single vs. married employee rates, depending on available data), we can use this information with our Employer Health Reform Analytics tool and determine what category a company’s employees will fall into:

  • Qualifies for Medicaid
  • Qualifies for large subsidy
  • Qualifies for small subsidy
  • Qualifies no subsidy provided

Based on these sliding scales, we can identify how many employees will fit into each category and provide estimated premiums to show what effect discontinuing coverage will have on employees. If an employer is offering health insurance coverage today, we can project it, and show the difference an employer would pay between the cost of coverage then, versus eliminating coverage and paying penalties. By calculating this data we can provide a cost-estimate for various scenarios to analyze which option makes sound business sense for an organization. For those who find that extending coverage makes sense, we can also help them sift through their pay scales to ensure that the policy premiums meet the “affordable” definition.

Act Now to Be Prepared
The PPACA has changed how health care coverage is perceived and provided in the United States.  Businesses continue to have options and responsibilities related to the ACA.  By analyzing available information, you will make an informed business decision limiting your exposure and penalty.

To learn how Eide Bailly can assist you with your business decision, please contact us at 855.220.8634 or

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