My own Obamacare math says small employers will, indeed, drop coverage

January 23, 2014
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Ever since the Affordable Care Act was passed, critics of the law have claimed it would lead to a collapse of employer-sponsored health insurance benefits.
 
The reasoning behind those claims has always been wrong. It went something like this: Since employers spend $6,500 per employee, on average, for health insurance benefits, and Obamacare will only tax them $2,000 for not providing coverage, the better deal is for employers to drop coverage.
 
That was always a silly argument, because the pre-Obamacare situation was even more favorable for dropping coverage: $6,500 vs. $0 for not offering it. And yet 60 percent of all employers nationally offer health benefits, with offer rates near 90 percent among large firms.
 
Yet that hasn’t stopped critics from continuing to make the argument, even at this late stage.
 
Savvier commentators said employers would get out of the business of providing health benefits and just help their employees buy coverage on their own. That's the conclusion of my most recent story in IBJ, in which I talked to two small employers that plan to drop coverage and help their employers buy through the exchange for 2015.
 
Yet even that decision was not a foregone conclusion because of all the taxes that must be paid on compensation that are not paid on money spent on health benefits. I calculated in a previous article that changing health benefits from an untaxed insurance contribution to a taxable income supplement would take a 38 percent bite out of employer contributions, for the average worker.

That's because of all the income-based taxes and benefits that would become due: Social Security, Medicare, unemployment, Worker's Comp and disability insurance.
 
We now know what policies on the exchange cost. And we’re getting a clearer picture on how the cost of group coverage will change under Obamacare’s new rules.
 
That information has led me to conclude, tentatively, that we will see lots of employers with fewer than 50 workers end their group health benefits and instead help their workers buy individual coverage on the exchange.
 
“And that’s not necessarily a bad thing,” noted Matt Kleymeyer, a health benefits consultant for small businesses at Bernard Health in Indianapolis.
 
My own Obamacare math leads me to agree with Matt. (Although, please note, this entire exercise is theoretical; I can't apply for coverage in the Obamacare exchanges so long as IBJ is offering me affordable health benefits.)
 
I’m already paying $560 per month for IBJ’s group family coverage with Anthem Blue Cross and Blue Shield. That’s after my employer’s contribution toward the premiums.
 
But in the Obamacare exchanges, my family of four, on our annual income of $70,000, could buy a similar Anthem plan—with similar deductibles and out-of-pocket maximums—for somewhere between $433 per month and $550 per month. I could get those prices because I would qualify for an Obamacare subsidy of $467 per month.

(If you'd like to check out your own situation, just go to this page on HealthCare.gov and plug in your own numbers. You can quickly see plans that you would qualify for based on your income and the ages of the folks in your household.)

Now, I'd have to spend after-tax money on those premiums. For me, the taxes will make my Obamacare exchange contributions about 27 percent more expensive than in the pre-tax employer benefits plan. I get that 27 percent figure by adding my marginal federal tax bracket (15 percent) plus my share of Social Security and Medicare taxes (7.5 percent), plus the state income tax rate (3.4 percent) plus the Marion County income tax rate (1 percent), which yields a tax rate of 26.9 percent.

So the true comparison is $560 per month now versus Obamacare plans ranging from $593 per month up to $753 per month.

But remember, IBJ hasn't paid anything yet in this equation. IBJ could take its contribution toward my health insurance, which I figure to be about $7,000 a year, and spends that exact same amount of money to help me buy insurance in the Obamacare exchange. (IBJ also contributes $2,700 toward my health savings account, which I'll discuss later.)

IBJ's contribution would be reduced by about 38 percent, because of taxes, to $4,300, or $360 per month. When I received that money I, again, would have to pay income taxes on it, reducing it again by about 27 percent. That would leave me with about $265 per month.

If I reduced my Obamacare insurance bill by $265, I would be paying between $328 and $488 per month for insurance--a savings of 13 percent to 41 percent off  what I'm currently paying.

However, I would take a hit on IBJ's contributions to my health savings account, which would be reduced by taxes from $225 per month to $140 per month. I could, however, use some of my savings on premiums to make up for that loss--and do so tax-free into the health savings account of my new Obamacare plan.

If I made a pre-tax contribution to my health savings account of $85 per month, eliminating the shortfall in IBJ's now-taxed contributions, it would reduce my after-tax savings on premiums by $62 per month. That means I would, effectively, be paying $390 to $550 per month for my Obamacre insurance--savings that would then range from 2 percent to 30 percent off my current contributions.

The way I calculate it, my pay and family size is fairly typical. My pay is higher than average, but our household income is exactly average for a family with two working-age adults. My wife stays home with our boys, as about one out of two working-age, married women do.
 
We’re both 35 or under, which certainly gives us somewhat better rates, but we’re also in the child-bearing years, which doesn’t make us the windfall for insurers that young invincible would be. We have two kids, which is about average.
 
IBJ has exactly 50 employees, meaning it would face a penalty for not providing insurance. And I do not think many employers will drop coverage if it means paying a penalty.

But for firms with fewer than 50 workers, there is no Obamacare penalty for not offering coverage. And IBJ is close enough in size to those under-50 firms, to make its contributions to my health benefits, and the contributions required of me, fairly typical for small firms.

My scenario could be a conservative case since, as I pointed out in my story this week, small firms with younger than average workers are being promised premium spikes at the end of this year ranging from 50 percent to 100 percent. That's because of Obamacare's new community rating rules. If I were already paying 50 percent more toward my group benefits, then the savings in Obamacare's exchanges would look even more attractive.

However, IBJ has typically had fairly high health claims--so perhaps Obamacare's community rating rules will work out in our favor and make our group insurance cheaper. We'll have to see.
 
Still, if my personal situation is common across the country, we could see lots of small employers drop their group coverage. Since about 90 percent of firms have fewer than 50 workers, that could be a big phenomenon. But since two-thirds of workers are employed by firms with more than 50 workers, I don't think it means the collapse of the employer-sponsored health benefits market.
 
It looks like it would not be a bad thing for workers like me or for companies like mine. How it would affect federal finances, well, that's a topic for another post.

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  • Check on payroll taxes
    Many of the payroll taxes apply to pre-tax contributions. The "pre-tax" is often in relation to Federal income taxes. I can't remember from the top of my head if employer match is "pre-tax" for all the taxes.
    • To MarkusR
      I applied the payroll taxes to any employer contirbutions that would become income. I am pretty sure employers do not pay payroll taxes on their insurance contributions toward my health plan. If anyone knows differently on whether payroll taxes apply to employer health insurance premiums paid to the insurer, please let me know. I pay payroll taxes on my contributions to my health plan, and my scenario above assumes no change in that situation. I simply added in the impact of my personal income taxes since my premium payments in the individual market would be after-tax, versus pre-tax under the group plan. Is that helpful?
      • Checked it with the wife
        OK, my wife does this stuff and corrected me. Right now employer contribution is not taxed, so your point in the article is very much on the mark.... The good thing about tax law is that it can be changed. If GOP is willing to accept that ACA is the future, they could craft a bill with Democrats to change the tax law allowing people to deduct health premium costs from their taxable earnings. PS. I think the "previous article" link is broken. It just shows a javascript:void(0) link when I hover over it.

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