Employer provided health benefits are alive and well

Employer provided health benefits are alive and well. The main reasons to provide coverage have not changed.

The traditional reasons for providing benefits are recruiting and retaining good employees. With unemployment decreasing (5.8% in Shasta County -June 2017) employers find that providing health benefits is often critical in the recruiting process. We are pleased to see our groups expanding their insured rolls because it tells us they are growing!

Employers are allowed to provide benefits to employees on a tax-favored basis. In most cases benefit premiums are tax deductible to the employer for federal and state purposes as well as being free of payroll taxes. The employee does not claim the value of the benefit for income tax purposes. It’s the classic win-win situation.

The instability in the individual market has done a great deal toward reaffirming employers’ commitment to maintain group coverage. The employer mandate that was included in the Affordable Care Act (ACA also known as Obamacare) was in many ways not all that big of a deal for firms with over 100 employees. The greatest burden was administrative, rather than the requirement to offer benefits, since most were already providing benefits.

While groups with 50-100 employees might have been more heavily impacted it’s important to remember how the penalty is assessed. The penalty is $2,260 per full-time employee, excluding the first 30 employees. So a 50 life group could end up paying penalty on only 20 employees.

The biggest challenges were felt by the hospitality industry and retail employers who typically paid low wages and little in benefits. Many of these employers responded to the employer mandate by simply reducing scheduled hours of employment to below 30 hours/week to maintain compliance with the ACA and avoid penalties.

Many small employers with less than 50 employees continue to offer health benefits although it is not required. Like large employers, they want to attract and retain good employees and they can do so on a tax-favored basis.

Nationally, employer based health insurance covers about 175 million people under age 65, while only 10 million are covered in the individual market. The ACA was crafted to build upon the employer based system while also providing access to insurance for those that were not covered by employer sponsored plans.

Janet Trautwein, Executive Vice President & CEO of the National Association of Health Underwriters, addressed taxation of employer sponsored benefits in a recent op-ed article in Newsweek. In part her article talked about the fact that the attempt to repeal and/or replace the ACA was not successful. Some lawmakers are hoping to move on to the goal of tax reform, including tax cuts for individuals and business.

She explains that to pay for these tax cuts they are looking at cancelling the exclusion that exempts employer sponsored insurance benefits from taxes. She believes that this would be disastrous because it would shift those costs back to the employees and may even cause some employers to cancel benefit offerings altogether.

The concept of tax favoring these benefits encourages employers to provide the insurance benefits: carrot rather than stick as it were. Further since most employees participate in their employers’ plans, the group insurance pool is relatively stable with a balanced mix of young and older employees.

She opines that the employer sponsored insurance system is popular and is confused as to why Congress would want to upend a popular and successful program. There are some legislators who propose taxing benefits above a certain level. They believe that would then push the taxes “only to the rich”.

Trautwein cited an Urban Institute study that says over 15% of middle income worker would have to pay the tax and since insurance rates are increasing steadily, the number of those that would be subject to the tax would increase as well. Further assessing employees with an effective taxable bonus for the value of health benefits would simply cost shift the cost of these tax cuts to the middle income.

This is definitely food for thought as our country tries to determine “what we want to be when we grow up” as it applies to health care in the US.

Margaret R. Beck
Margaret Beck  CLU, ChFC, CEBS started her insurance practice in Redding in 1978. As an insurance broker/consultant,  she represents businesses and individuals as their advocate.  She assists in choosing proper products, compliance with complex benefit laws and claims issues once coverage is placed. All information in her column is provided to the best of her knowledge, subject to final regulation by the respective agencies. Questions to be answered in this column can be submitted to info@insuranceredding.com. Beck's column is also published in the Redding Record Searchlight.
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