To cover or not to cover employees?

The one word everyone, even the experts, uses to describe employer-provided health benefits under the new health-care reform law is “unclear.”

“We’re still trying to understand what it is and what it means before we can get the information out to our members,´ said Tammeron Trujillo, director of Human Resource Services for Mountain States Employers Council. MSEC is updating its benefits class for HR professionals, but it won’t be ready until 2011. By then Trujillo hopes she will have more specifics from federal regulators charged with interpreting the law.

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Which leaves small businesses weighing their options for continuing employee coverage very carefully.

“No one has made a final decision yet, but I have three clients contemplating dropping their employee plans,´ said Jessica Hergenreter, director of Colorado operations for Employer Solutions Group in Loveland.

Whether it makes financial sense to stop offering health insurance to employees depends on a whole range of factors, from the size of the company to the health status of individual workers. About 150 million Americans currently receive coverage through a family member’s place of employment.

The relationship between wages and benefits is complex, especially under provisions of the reform act signed into law in March by President Obama. On the one hand, employers can still deduct the cost of workers’ health-care benefits from their taxes. Drop the plan, lose the deduction, and face a fine of $2,000 per worker.

And, if employers give workers a pay raise to cover the cost of buying their own insurance, either on the individual market or in the insurance exchanges created by the health-care reform law, they will pay more payroll taxes, including workers’ comp, Social Security and Medicare, as well as higher income taxes from the lost deduction.

More coverage, less healthy individuals

On the other hand, the law requires employers to offer coverage to individuals they may have never covered before.

“For example, beginning on Sept. 23, adult children of employees became eligible for coverage up until age 26,” Hergenreter pointed out. “In many cases, the children who will go on their parents’ plan are the ones who can’t get individual coverage,” because of pre-existing conditions. If they haven’t had access to coverage for a while, they are also likely to have left illnesses untreated, increasing their demand for services once coverage begins.

Insurers can no longer decline to cover sick kids under age 19 or set a lifetime limit on benefits paid, so an employer’s plan must now cover more – and perhaps less healthy – people. And that means costs will go up, but not so much in Colorado, which had allowed dependents up to remain on their parents’ plan until age 24 before reform.

How much of the premium increases employers will see this year can be directly attributed to the provisions of health-care reform and how much to the insurance industry testing what that market will bear is up for debate.

Hergenreter pegs it at about 3.5 percent caused by more coverage for more people with more medical demand. Large employers with generous benefits – so-called Cadillac plans – are claiming the 40 percent tax on “excess” coverage set to start in 2018 has driven their premiums up as much as 50 percent for next year.

“There’s no direct line between health-care reform and premium increases,” Hergenreter said.

Decision time

But there is a pretty direct line between reform and hard choices for some employers.

Hergenreter outlined the situation of one local firm that had been offering coverage only to its key managers. As long as the plan stayed as it was on March 23, the day the law was signed, it could be offered in its current form – “grandfathered.”

However, the company is facing a premium increase of 27 percent – a change significant enough to cause it to lose grandfathered status. Now, under the new law, it must offer a plan to all employees or face a fine of $100 per day per uncovered employee up to $500,000.

The employer’s cost of extending coverage to all 32 employees would be $210,000. Dropping the plan altogether could be an option, but because of underlying health issues, the owner of the company cannot buy coverage on the individual market. Joining the state-run Cover Colorado plan would cost him alone $33,000 a year.

After some individual research, the key managers said they would be willing to buy their own insurance – but expected the owner to kick their wages up 15 percent to 20 percent to cover the costs.

“And how will offering no health benefits affect his recruitment and retention of key employees?” she asked.

That’s only one part of the equation, which pencils out differently for different companies. Large employers like AT&T, which employ hundreds of thousands of workers, could theoretically save billions of dollars by paying the penalties instead of insurance premiums between now and 2014, when higher fines will be assessed and the insurance exchanges are due to be operational.

“Large employers are covered by different rules,” Hergenreter said. “Small employers, those with fewer than 50 employers, are getting lost in the debate.”