Math for Gov’t Subsidizing Employers’ Insurance

The Math Behind the Government Subsidizing Employers’ Healthcare Expenses in 2014
 
Last week I published Government Offering to Subsidize Employers’ Healthcare Expenses in 2014 which explored a strategy of terminating an employer’s health plan in 2014.  If the workforce demographics are right, the employer’s workforce will be eligible for premium tax credits and be in a better position than they were if the employer had not terminated their health plan…a win-win situation for an employer and their employees.  This publication explains the math behind the strategy to give readers a better idea of how valuable the strategy could be if the workforce demographics are right.
 
Below I will walk through three examples that explain how the strategy would work and what the estimated savings would be for the employer and the employee.  The examples assume the employer’s health plan, which is similar to a bronze plan, costs $3,500 annually per employee covered in 2014 with the employer paying 70 percent of the insurance premium ($2,450 annually) and the employee paying the remaining 30 percent ($1,050 annually).  The hypothetical employee is the only member of his household.  The examples below assume the premiums for the second lowest cost silver plan in the market are $4,500 annually and the State’s Exchange also offers a bronze plan with premiums of $3,300 annually.  The examples assume the employer terminates their health plan for 2014 and the employee is not eligible for minimum essential coverage other than through the individual Exchange market.  Finally, the example uses the latest federal poverty line number for an individual of $11,490.
 
In each example I include the analysis for both a silver and bronze plan.  It is important to remember by dropping the bronze plan the employer previously offered the employer’s workforce will have flexibility to purchase an affordable silver plan with the help of the premium tax credit program.  However, if the employer continues to offer a bronze plan, an affordable silver plan will be costly to employees as they will not be eligible for the premium tax credit program assuming the employer’s plan is affordable and provides minimum value.
 
The $16,000 Employee – $8 per hour (139 percent of the federal poverty line)
 
Maximum Premium Tax Credit for $16,000 Household Income is $4,500 – (0.0329 x $16,000) = $3,973
 
If the employee elects to purchase the $4,500 second lowest cost silver plan, the employee’s premium share would be $527 while the remaining $3,973 of premiums would be covered by the government’s premium tax credit program.  Additionally, the individual would be eligible for the cost-sharing subsidy as the employee’s household income is less than or equal to 250 percent of the federal poverty line.  It is hard to quantify the value of the cost-sharing subsidy which reduces out-of-pocket costs such as co-pays and deductibles.  Similar to the premium tax credit, the cost-sharing subsidy is more generous when an individual’s salary is lower using three different brackets.
 
If the second lowest cost silver plan is selected by the employee, the employee would only pay $527 compared to the $1,050 the employee was paying under the employer’s previous plan.  The silver plan would be much more valuable to the employee with lower co-pays and deductibles particularly taking into account the cost-sharing subsidy when compared to the employer’s old plan.  Instead of the employer paying $2,450 annually per employee covered under the old plan, the employer would pay nothing for an employee’s insurance and there would be no penalty associated with the Play or Pay Mandate for 2014.  In this situation both the employer and the employee would be in a better position if the employer terminated the plan in 2014.
 
If the employee elects to purchase the $3,300 bronze plan, the entire $3,300 would be paid by the government’s premium tax credit program.  Neither the employee nor the employer would pay a single dollar for health insurance premiums.  As a result of the individual selecting a bronze plan, the individual would not be eligible for the cost-sharing subsidy.  The employee would save $1,050 compared to the old plan while the employer would save $2,450 per employer covered under the old plan.  In this situation both the employer and the employee would be in a better position if the employer terminated the plan in 2014.
 
The $24,000 Employee – $12 per hour (209 percent of the federal poverty line)
 
Maximum Premium Tax Credit for $24,000 Household Income is $4,500 – (0.0662 x $24,000) = $2,912
 
If the employee elects to purchase the $4,500 second lowest cost silver plan, the employee’s share of the premiums would be $1,588 while the remaining $2,912 of premiums would be covered by the government’s premium tax credit program.  Additionally, the individual would be eligible for the cost-sharing subsidy as the employee’s household income is less than or equal to 250 percent of the federal poverty line.  As a result of the individual having a higher household income when compared to the individual making $16,000, the value of the cost-sharing subsidy will be less.
 
If the employee elects to purchase the second lowest cost silver plan, the employee would pay $1,588 compared to the $1,050 the employee was paying under the employer’s old plan.  However, the silver plan would be much more valuable to the employee with lower co-pays and deductibles particularly taking into account the cost-sharing subsidy.  Instead of the employer paying $2,450 annually per employee covered, the employer would pay nothing for an employee’s insurance and there would be no penalty associated with the Play or Pay Mandate for 2014.  In this situation the employer would save $2,450 per employee covered, but the employee would be paying $538 more per year for more valuable insurance.  To make up the difference the employer could raise the employee’s hourly rate by twenty five cents and place the employee in roughly the same position with a more valuable health plan (note by increasing the employee’s household income the value of the employee’s premium tax credit will change).  Even with the 25 cent raise per hour the employer would save $1,950 per employee covered under the terminated plan.
 
If the employee elects to purchase the $3,300 bronze plan, the employee’s share of the premiums would be $388 while the remaining $2,912 of premiums would be covered by the government’s premium tax credit program.  The employee would save $662 compared to the $1,050 the employee was paying under the employer’s old plan for similar coverage and the employer would save $2,450.  In this situation both the employer and the employee would be in a better position if the employer terminated the plan in 2014.
 
The $32,000 Employee – $16 per hour (279 percent of the federal poverty line)
 
Maximum Premium Tax Credit for $32,000 Household Income is $4,500 – (0.0889 x $32,000) = $1,655
 
If the employee elects to purchase the $4,500 second lowest cost silver plan, the employee’s share of the premiums would be $2,845, while the remaining $1,655 of premiums would be covered by the government’s premium tax credit program.  As a result of the employee making more than 250 percent of the federal poverty line, the employee would not be eligible for the cost-sharing subsidy. 
 
If the employee elects to purchase the second lowest cost silver plan, the employee would pay $2,845 of the premiums compared to the $1,050 the employee was paying under the employer’s previous plan.  The employer would not be responsible for any of the insurance premiums as the government’s premium tax credit program would cover the remaining $1,655 of premiums.  In this situation the employer would save $2,450 per employee covered, but the employee would be paying $1,795 more per year for more valuable insurance.  To make up the difference the employer could raise the employee’s hourly rate by ninety cents and place the employee in roughly the same position with a more valuable health plan (note by increasing the employee’s household income the value of the employee’s premium tax credit will change).  Even with the ninety cent raise per hour the employer would save $655 per employee covered under the terminated plan.
 
If the employee elects to purchase the $3,300 bronze plan, the employee’s share of the premiums would be $1,645 while the remaining $1,655 of premiums would be covered by the government’s premium tax credit program.  In this situation the employer would save $2,450 per employee covered under the old plan, but the employee would be paying $590 more per year for similar coverage.  To make up the difference the employer could raise the employee’s hourly rate by thirty cents and place the employee in roughly the same position with a similar health plan as the employee received under the old plan (note by increasing the employee’s household income the value of the employee’s premium tax credit will change).  Even with the 30 cent raise per hour the employer would save $1,850 per employee covered under the terminated plan. 
 
Employers exploring this strategy should also consider the deductions the employer receives by offering health coverage and the costs of terminating and reinstating (should the employer wish to reinstate a plan in 2015 to avoid the Play or Pay Mandate) a health plan.  Even with these factors, with the right workforce demographics, the employer could save a significant amount of money in 2014 if the employer terminates its existing plan.
 
Conclusion
 
The examples show employers have an opportunity in 2014 to take advantage of the Affordable Care Act chaos.  If you would like a diagnostic run with your company numbers, I would be happy to show you the free money.
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