No, You Can’t Do That

no you can't do that

Most of my clients are the owners of small businesses, really small.  Lots of my guys have fewer than ten employees.  When we talk about employee benefits we are discussing their money.  Every premium increase is a direct hit on their bottom line.  Some of my business owners are constantly trying to find new benefits they can provide to their employees and to their own families.  In the small group environment, the boss has the same coverages, good or bad, as the rest of the employees.

Or not.  For every business owner who plays by the rules and treats the employees fairly, there is at least one owner spending all of his/her time looking for corners to cut.  Employee benefits may be the corner they love to cut the most.

There were very few rules in the group health insurance business up until recently.

  • Employees had to work full-time (25+ hours per week)
  • The employer could not discriminate.
  • The employer had to pay a substantial portion of the employee’s premium.

Ohio regulation stipulated substantial, but did not define it.  Medical Mutual of Ohio interpreted that as 25%.  The other major insurers defined this as 50%.

What you couldn’t do was pick and choose who got insurance or how much you, the employer, felt like paying per employee.  Couldn’t, but many did.  And other employers reimbursed their employees for individually purchased policies or other health costs.

Those days are over.

The Patient Protection and Affordable Care Act (PPACA) clamps down on these practices.  Enforcement is entrusted to the IRS who takes a dim view of these activities.  Businesses with fewer than 50 employees are not required to offer group health policies, but if they do, they must be compliant.  Employee reimbursement plans and other (not)groups are all lumped into the group category and deemed deficient.  And the penalties are huge.

Such an arrangement fails to satisfy the market reforms and may be subject to a $100/day excise tax per applicable employee.

That’s a penalty of $36,500 per employee.

Is that excessive?  Is that fair?  Yes and Yes.

We always knew the right ways to do this.  The employee should either have access to a real group policy or he/she should be responsible for purchasing an individual policy.  Not every business can afford to provide group health insurance coverage.  The employer may choose to give employees a raise with the hope, but not requirement, that the employee will use the extra money to purchase a policy.  There can be no strings attached to the raise.  The money is fully taxable to the employee and deductible to the business.

This is particularly important for those employees who might qualify for a Tax Credit Subsidy.  Employees are generally not eligible for a subsidy if their employer offers a group health policy.  Separating the real from the bogus may allow families to be properly insured.  The small increase in annual income from a legitimate raise is unlikely to eliminate a subsidy.

If we agree that it is better to have all Americans insured, if universal access to health care is our goal, then we should welcome this new attention to the enforcement of the rules.

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