Unintended consequences OF THE ACA

June 30--Editor's note: Part 1 of 2. Next week: More complications

Some New Mexico businesses struggling to comply with the Affordable Care Act at the same time they struggle with ever-more-expensive health insurance thought they had found a solution to both problems.

They would cancel their company insurance plans, tell employees to buy their own individual coverage on the insurance exchange, then give them some extra money to help pay for coverage.

"That was promoted, even by myself, as an alternative," said Patty Padon, a former insurance broker who is now senior director of sales and account services for New Mexico Health Connections.

Employers reasoned that decent insurance policies could be purchased on the exchanges, and employees could qualify for federal subsidies that would make insurance more affordable, she said.

Some employers found coverage to be so expensive that they could not afford to cover employees' spouses, domestic partners and children. Letting employees buy exchange coverage with some financial help from the boss looked like a way to help families afford coverage for everyone, Padon said.

Unintended consequences

Tax and employee-benefits experts warn that this strategy is more complicated than an employer might think. Unintended consequences abound.

First, pay is taxable; health-insurance benefits are not. Any raise the employer provides to help the employee buy insurance is taxable income to the employee, while the cost of the health-insurance benefit is not, said Bob Daniel, an insurance consultant with HR Source, a subsidiary of Pulakos CPAs.

Moreover, the employer's share of the extra payment is subject to Social Security and Medicare taxes, as well as unemployment and workers' compensation insurance premiums, he said. Employees will owe Social Security and Medicare taxes.

It gets worse.

The additional pay could put some employees into a higher tax bracket. Employees whose pay might have been low enough to allow them federal subsidies designed to make insurance more affordable when it is purchased on state and federal exchanges might now earn enough that the subsidies are no longer available, Daniel said.

Before an employee can deduct medical expenses from personal income taxes, he or she must exceed 10 percent of adjusted gross income. Few employees ever will clear that threshold, which makes conventional group insurance paid in part by the employer even more valuable.

Qualifying events

Another complication is the result of a provision in the ACA governing what are called "qualifying events."

The law requires most individuals to have adequate and affordable coverage, and it gives people without job-based insurance the means to buy it on health-insurance exchanges operated by state and federal governments. But coverage only may be purchased during open enrollment periods, which this year begin Nov. 15 and end Feb. 15, 2015. The goal is to discourage people from signing up for coverage only when they get sick, then dropping it when they are well.

A qualifying event triggers an exception to that rule. An employee who loses coverage from an employer, say, because he quits, is fired or is laid off can get new coverage on the insurance exchange.

But an employee who buys his own coverage on an exchange, using additional money provided by the employer, never had job-related coverage. So if that employee quits or is laid off, he can't go back to the exchange to change coverage to something cheaper until the next open enrollment period.

If he didn't qualify for a subsidy when he bought insurance on the exchange, he can't get it when he leaves the company until the next open enrollment period, even though his income has gone to zero, Daniel said. And he can't take COBRA because the employer no longer offers group insurance.

Other way, too

It works the other way as well. Say a new employee has no insurance when she is hired by a company that doesn't offer coverage but expects workers to buy coverage on insurance exchanges.

Joining that company does not constitute a qualifying event, so the employee must wait until the next open enrollment period before she can buy coverage. Meanwhile, she will be paid a higher salary than she might otherwise receive because the employer expects her to buy insurance.

Employers also run some legal risks when they offer pay instead of insurance.

Say an employer does something as innocuous as ask for a receipt to confirm an employee's purchase of insurance on the exchange.

Padon said the IRS has ruled that action establishes a group health plan "because you're telling employees how to use the money. You must then follow all the rules of any employer group health plan." Failure to do so results in a $100-a-day fine per affected employee, she said.

Padon recommends employers who want to pursue this strategy avoid discussing insurance entirely. Cancel the existing policy, give people a raise, and never give the slightest inkling that the extra money is a way to help employees buy coverage.

Pay equity worries

Federal and state governments will be watching for pay equity violations as well, Daniel said.

"Even if I raise your salary to buy insurance, I can't mandate that you buy insurance," he said, since the pay increase can't be tied in any way to the purchase of insurance.

"I have to be universal in the application of that increase. I can't just give a raise to people who have typically got insurance from me before."

Designing a new pay package will be a whole other challenge. Employers have been accustomed to seeing one cost for group insurance, based largely on the medical history of the entire staff, Daniel said.

Employees who buy on the exchange will see a wide range of coverage options and premiums. The price of insurance also will vary by the employee's age and whether he or she uses tobacco.

Deciding how much to add to each paycheck under those circumstances, while still abiding by pay equity laws, will take some effort.

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