What is Obamacare? Part II: Large Businesses

Joel Anderson |

With the brand-new health insurance exchanges opening next week, the lion’s share of public attention is being paid to how that will affect the 36 million Americans who are currently uninsured and the 10 million or so who purchase their insurance directly from private providers. But that number’s dwarfed by the 55 percent of the population, some 170 million people, who receive insurance through their employer or a family member’s employer. As such, if one truly wants to understand how Obamacare might affect the American economy, it probably makes more sense to focus on what the bill means to large employers. Some 65 percent of America’s workers are employed by a business with 100 or more employees.

The employer mandate

Large businesses will now essentially have to offer insurance to their full-time employees and their child dependents or face steep fines. Or at least, they will starting with the 2015 tax year. The Obama administration decided to delay the implementation of this part of the law for a year (which they may or may not have the constitutional authority to do, but that’s neither here nor there). When it does go into effect, though, businesses with 50 or more full-time employees that don’t offer health coverage will have to pay a fine of $2,000 for every full-time employee excluding the first 30, a provision widely known as the “employer mandate.” That means, if you have 100 full-time employees and don’t offer a health plan, you can expect to pay a tax penalty of $140,000 a year!

Egads! This should have a profound effect on America’s major employers, right? Actually, probably not so much. See, there are plenty of reasons other than avoiding tax penalties for offering health coverage to one’s employees, like the ability to recruit talent more competitively. What’s more, as was explored in last week’s explanation of the exchanges, the ability to use a large employee population to create a bigger risk pool means more competitive pricing for large group plans.

For these reasons and many others, America’s large employers have already been offering health coverage to their employees for the most part. Of those businesses that might trigger this penalty, 95 percent already offer a health plan.

Tough choices for some

However, the 10,000 or so businesses across the country with 50 or more full-time employees that don’t currently offer health coverage could have a tricky decision ahead. The law is somewhat complicated regarding the employer mandate. Okay, that’s an understatement. It’s extremely complicated. For starters, determining which side of the 50-employee threshold you’re on can be difficult. The law defines a full-time employee as anyone who averages 30 hours or more a week, easy enough. But it also defines a full-time equivalent (FTE) as any combination of employees that collectively work 30 hours a week. So if John works 10 hours a week and Carol works 20 hours a week, they’re the equivalent of one full-time employee in the eyes of the law (even if this might feel a little demeaning on some level for John and Carol).

So you might only have 40 employees working 30 hours a week, patting yourself on the back for shrewdly anticipating this issue (conveniently ignoring that your last full-timer was hired in 2002). But if you also have 75 people each working 20 hours a week, you ultimately have 80 total FTEs (that’s the 30 full-timers, and then the 1500 hours worked by your part-timers each week, divided by 30, makes another 50 FTEs). So you’ll qualify for the employer mandate and potentially have to pay penalties.

But it gets trickier. While the part-timers are used to calculate your total FTEs, they don’t count towards the penalties. So you’ll (hypothetically) owe $2,000 for each employee after the first 30, but those part-timers aren’t included this time around. This means you would pay $20,000 for the 10 full-timers after your first 30. Which in turn means that you could (hypothetically) avoid any penalties by simply converting ten of your full-timers to part-timers. If you spread their hours out over the entire part-time work force, you’ll still trigger the penalty, but with exactly 30 full-time employees, your tax penalty would be zero! Sure, your employees will probably be pretty ticked off by your transparent effort to avoid having to shell out for a health plan, but you’re still in the clear! What’s business without the occasional angry strike, right? (It’s worth noting at this point that each individual circumstance is different, business owners should consult their accountants or other tax professionals about how this law could affect them, and that, as a general rule of thumb, basing decisions involving staffing and/or tax penalties solely on something you read on the internet is probably not good business.)

Employee eligibility for subsidies matters

Whew. Does that make your head hurt? It probably should. And it gets worse. The penalties in question are only triggered if one of your employees is eligible for a tax subsidy through the exchanges and decides to use it. So, even if you have 6,000 employees and don’t offer any of them health insurance, if none of them go to the exchange and receive a subsidy, you (hypothetically) won’t be exposed to tax penalties. So, for instance, if your employees are all making enough money that they don’t qualify for subsidies, you can (hypothetically) avoid offering a company health plan. This is, of course, a pretty dicey proposition because if even one employee becomes eligible and opts to use the subsidy, you’re on the hook for the whole penalty. Not to mention, given that eligibility for the subsidies depends on family size and household income, you might need to keep giving people raises every time they have a kid just to cover yourself, which could create a fairly strange set of incentives at your firm.

Also, it’s worth noting that the penalty won’t be triggered by a part-time employee getting subsidies through the exchange. So even if your business employees hundreds of part-timers making minimum wage and using subsidies to buy insurance through the exchange, you’ll (hypothetically) avoid penalties as long as none of your full-time employees are receiving subsidies. So if your health-planless company employs five full-time managers making $5 million a year and 50,000 part-time employees working 25-hours a week for minimum wage (if you’re, you know, building a pyramid or something), you’ll still (hypothetically) avoid paying penalties despite having more than 40,000 FTEs.

And yes, it does need to be good

No, one can’t simply offer a cut-rate plan that only covers rubbing alcohol and castor oil to avoid the penalty. Nor can one offer a plan and require the employees to pay 95 percent of the premiums (at least not most of the time). Any individual who has access to an employer-sponsored health plan can still get a federal subsidy (and potentially expose their employer to tax penalties) if the company health plan either A) requires more total cost-sharing than a Bronze-level plan on the exchange or B) requires the employee to make contributions to premium costs that exceed 9.5 percent of their income.

However, the penalty changes for a company offering a plan. If a business offers a health plan, but a full-time employee still qualifies for a subsidy, the business has a choice to pay the normal penalty ($2,000 for every full-time employee after the first 30) or to pay $3,000 for each employee receiving a subsidy through the exchange, whichever is less. So if you’ve found a solid health plan that youyou’re your employees all really like, but the required premium contribution is more than 10 percent of your lowest paid employee’s income, you would (hypothetically) only be on the hook a $3,000 annual penalty. That’s not peanuts, but it’s also not so much that it would force many businesses to alter their entire health care strategy.

It’s also important to note that the law only penalizes an employer for failing to offer a plan. An employer (hypothetically) won’t have to pay penalties if an employee has access to a plan but opts not to join the coverage, whether it’s because they’re willing to pay for a different plan, have access to a better plan through a family member, or in a cult that believes modern medical science is a method space aliens are using to slowly enslave the entire human race.

Ultimate result remains unclear

This is all very complicated, but it many ways it’s intended to be. Most of the time, employers that are even close to that threshold are likely to find it simpler to just purchase a company health plan, which is probably what the law’s designers were shooting for anyway. And, most of the time, employers that are even close to that threshold already have a health plan. That said, that still leaves a decent sized chunk of American businesses suddenly faced with an extremely complicated decision about their health care strategy. And only time will tell precisely how this will affect the face of the American economy.

Next week, we’ll look at how small businesses (i.e. those that don’t trigger the employer mandate) could be affected (or unaffected) by Obamacare.

Author's note: The following is a broad overview of certain portions Affordable Care Act and should be used only for informational purposes only.

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