Health Care Reform requires certain businesses to offer employees health insurance. Starting in 2014, businesses with more than 50 full-time-equivalent employees will be required to either offer health insurance coverage, or pay a tax penalty based on full-time employees.
Penalty or Contribution?
Businesses with greater than 50 employees should view the potential penalties as a contribution toward their employees' health benefits.
By the employer paying the minimal penalty (much lower than the cost of sponsoring a traditional group health plan), it will allow qualifying employees to obtain the tax credits for health insurance through the state health insurance marketplaces.
As such, the employer "penalty" is actually a contribution that provides financial assistance to qualifying employees.
Let's explore this in more detail.
New Options with Health Insurance Marketplaces & Defined Contribution
With the creation of state health insurance marketplaces (guaranteed-issue, with tax subsidies for eligible employees), many employers are already asking:
Should I continue to provide a group health insurance plan? (Can I afford to offer a group health insurance plan?)
- Should I cancel our group health insurance plan, and send employees to the state health insurance marketplaces? If so, should I help employees with their insurance premium costs by offering a Health Reimbursement Arrangement (HRA)?
For many employers, the second option will make more sense. Rather than paying the costs to provide a specific group health plan (a "defined benefit"), employers will instead fix their costs by establishing a monthly dollar amount (a “defined contribution”) that employees choose how to spend.
What About the Tax Penalty... Don't I Have to Offer Health Insurance?
No. Even with the tax penalty, many businesses (with over 50 employees) will drop their group health insurance, provide a Health Reimbursement Arrangement, and send employees to the health insurance exchanges.
The tax penalty is simply incorporated into your overall health benefits expense. With rising costs of group health policies, employers can offer great benefits at a lower cost (even with the tax penalties).
Complete a Financial Analysis
If your company has more than 50 employees, you'll want to compare the cost of the three options:
Qualified, affordable group health insurance
Health Reimbursement Arrangement (HRA) + Penalties
For a detailed look at how to calculate tax penalties see: Quick Guide to Calculating the Business Health Insurance Tax Penalty.
Less Than 50 Employees? No Tax Penalty
If your company has less than 50 FTE employees, the mandate and tax penalty does not apply to you. With the new health insurance marketplaces, many small employers will:
Drop their group health insurance plan (if they have one)
Send employees to their state health insurance exchange to purchase individual and family policies
Reimburse employees for their premiums (or a portion of their premiums) by offering a stand-alone Health Reimbursement Arrangement (HRA)