The Health Benefits Dilemma: Pay or Play?
Beginning in January 2014, all employers with 50 or more employees must offer adequate, affordable health care benefits to anyone working at least 30 hours per week—or face penalties. The largest fine, $2,000 per worker, will be levied for failing to provide health care benefits to each eligible employee.
“The one issue that employers cannot ignore in 2014 is the Affordable Care Act’s shared responsibility requirement—also known as the employer pay-or-play penalties,” said Michael Thompson, principal and New York-area health care practice leader of the human resources group at PricewaterhouseCoopers. “The potential size of these fees means every employer will need to determine how to play and when to pay. For some companies, the business implications are great and the options complex.”
ACA’s impact on a company’s budget will vary depending on several factors, according to Thompson’s colleague Barbara Gniewek, principal at PwC. To determine how to play and when to pay, she advises companies to consider the specific health benefits offered, the delivery model of benefits (including plan type), potential taxes, penalty costs, and the new administrative requirements to communicate, document and report.
New Workforce Implications
But a company’s biggest cost differential could be the composition of its workforce, says Gniewek. This is particularly important if you have part-timers, high turnover, freelancers, contract workers, seasonal employees or union members.
“Some unions have very rich benefits; others don’t,” she said. While benefits are negotiated between union and management, employers are responsible for ACA compliance. “If the nurses’ union negotiated non-compliant benefits for their members, it’s the hospital that will have to pay any penalty. Maintain good relations with your union.”
ACA’s Effect by Industry
How much will Affordable Care Act’s “shared responsibility” requirement—which goes into effect January 2014 and could include huge financial penalties for noncompliers—affect your benefits packages?
While the impact will vary with each employer’s specific circumstances (including benefit levels, eligibility and workforce composition), the potential impact for most companies in various sectors is as follows, according to PricewaterhouseCoopers.
- Automotive (including manufacturers and suppliers)
- Entertainment, media, communications
- Retail and consumer goods
- Hospitality (especially restaurants, hotels, resorts, casinos)
- Hospitals and providers
- Financial services (banking, real estate, equities, insurance)
- Health care (including medical devices, health plans)
- Legal/professional services
- Public sector (state and local)
- Higher education
- Industrial production
Low-wage earners are another tricky category, especially when they meet the 30-hour minimum. Gniewek and her team conducted an assessment for the potential buyer of a janitorial office-cleaning firm that employed many who worked between 30 and 40 hours. “Their modest medical plan wouldn’t provide adequate coverage under ACA,” said Gniewek. “The employer had to figure out what to do. Offering full benefits to those workers would be incredibly costly.” In the end, the ACA liability deterred the buyer from the acquisition.
Fast food, in particular, employs many young workers who would rather not pay for health benefits. Those under 26 may be eligible for coverage under their parents’ plans, while others may not want to buy their employer’s health benefits in case they qualify for better coverage under ACA’s Medicaid expansions. This is because the Medicaid expansion, determined state by state, will raise its threshold eligibility income from 100% of the federal poverty level to 133% and cover adults without children. Since employers can’t be sure who is Medicaid-eligible (the worker might have a second job or additional family income), Gniewek recommends that employers offer coverage anyway to ensure they comply with the law and explain that, if eligible, the employee should apply for Medicaid because he might get better benefits.
The Department of Labor’s increasing attention to freelance and contract workers in fields like publishing, for example, may soon affect required health benefits as well. “We think that contract employees who work full time but receive no benefits could be a [significant] workforce issue,” said Gniewek.
Another sector of interest is professional sports. Teams typically have a six-month season, with many players under contract or hired for a single “year.” Under ACA, anyone working an average of 30 hours a week, on a monthly basis, is eligible for coverage. “For entertainment and sports, these can be huge issues,” said Gniewek. “They may not be on every employer’s radar.”
Assessing ACA’s workforce implications can raise sensitive hiring and retention questions. “If you change someone’s status to work fewer than 30 hours per week, it could create some unwanted exposure,” said Gniewek. “You might use fewer part-timers and upgrade some to 40-hour weeks. Or, hire more part-timers, as long as they work less than 30 hours.”
But before making workforce changes, consider the impact on turnover and productivity. And don’t forget the potential for discord between full- and part-time staff and how long it will take to get everyone up to full speed. “Hiring more people carries recruiting, training and buried costs,” she said.
Even after ACA is implemented, concerns persist regarding the workforce. The number-one concern for 25% of executives PwC interviewed is the so-called “Cadillac tax.” This excise tax on the value of excess coverage (any premium value over $10,200 per single person or $27,500 per family) begins in 2018. “It doesn’t necessarily mean an employer is providing too much coverage,” said Gniewek, “but simply that their plans cost too much. This could be due to an older workforce, being located in an expensive area or simply choosing to provide excellent benefits.” Not all employers are resistant though. One financial firm told her, “we provide really rich benefits and will just accept the tax.”
To Pay or to Play
Who makes pay-or-play decisions? Gniewek says that it is mostly the CFO, COO, human resources staff, a finance person and “sometimes a risk manager or internal auditor.” ACA brings liability potential and tax/penalty exposure, in addition to the possibility of increased benefit costs and related ACA fees, like reinsurance. Attraction and retention issues may arise with individual employees, depending on the position the company takes. Human resources departments often consider medical benefits an excellent recruiting tool; ACA will definitely increase their workloads.
After meeting with executives in a broad spectrum of businesses for more than three years, Gniewek finds that each firm is doing the math very carefully. So what’s the consensus? “We have not seen a single company decide to just pay the penalty,” she said. However, executives of several firms admitted privately, “We’d be the second company to do it.”