Why Are Your Highest Paid Employees Paying the Least Amount for Their Benefits?

How ACA Turns the Current System on Its Ear

Today, everyone who has employer-provided insurance is receiving a federal tax subsidy. You don’t often think of employee benefits that way, but it’s true. Employers get to exclude their contributions as a business expense under IRC §105, §106, and §162. The employees get to deduct their portion of the premium from their wages pre-tax under IRC §125, reducing their FICA liability. Employers also see a matching benefit under FICA when employees deduct pretax, even not-for-profit employers, who typically don’t get the benefit of deducting benefits as a business expense because their marginal tax rate is zero.

This current system of federal tax subsidy towards employer provided insurance is a significant incentive for employers to allocate a portion of employee compensation in the form of benefits, especially contributions towards medical plans. Because of the current tax system, a dollar of compensation paid in the form of benefits is worth more than a dollar. It is worth more than a dollar for the employer and it is worth more than a dollar for the employee.

Most employers have a single contribution structure for all wage classes. This contribution strategy creates a regressive tax situation. The highest income individuals receive the greatest benefit, because they have the highest marginal tax rates. As a result, your highest paid employees are paying the least amount for their benefits.

    Let’s look at an actual employer on our CHROME Compass platform:

In this example the employee contribution for Employee Only coverage is $150 a month ($1,800 annually). A single employee at 100% of the Federal Poverty Line (roughly $11,000) , would pay $1,460 for that coverage after we account for the benefit of pre-tax deduction. A single employee at 600% of the Federal Poverty Line (roughly $67,000) would pay $1,316 after-tax for the same exact coverage. That’s a benefit of $144 – almost a full month’s contribution.

    

The effects are magnified when we look at family coverage. For the same employer plan, the Family coverage contribution is $480 a month ($5,760 annually). An employee with a spouse and two kids at 100% of the Federal Poverty Line (roughly $23,000) would pay $4,667 for that family coverage, after-tax. An employee with a spouse and two kids at 600% of the Federal Poverty Line (roughly $138,000) would pay $4,283 after-tax for the same exact coverage. That’s a benefit of $384.

Currently, individual health insurance does not receive tax favorable treatment; ACA created a system of tax favorability for the individual insurance market. It took this current system, which disproportionately favors higher income individuals, and flipped it on its ear. In 2014, when the largest of the provisions under Health Care Reform take place, there will be a new system of federal tax subsidy towards insurance. The new system will be available to those with household incomes below 400% of the Federal Poverty Line ($44,680 for a single and $92,200 for a family of four today) as long as they meet certain eligibility criteria.

Those eligible employees will receive subsidy in two forms. Premium Credits that will limit the amount they pay for their health insurance and Cost-Sharing Subsidies that will cover some of the out-of-pocket expenses not covered by the health insurance plan. This new system operates on a sliding scale with those at 100% of the Federal Poverty Line, the lowest wage individuals, receiving the greatest benefit.

So, the compelling question is, “so what?” If your clients are in this situation, do they care? Did they do this on purpose or, when presented with this data, are they interested in pursuing a different strategy. We have often said that health care reform presents the greatest opportunity in our lifetimes to get employers to think differently about how they allocate compensation toward benefits. For Certified CHROME Compass Brokers and Consultants, this outcome presents a tremendous opportunity to keep current clients loyal and attract new clients. While some competitors are just now figuring out how to run a rudimentary “play or pay” analysis, CHROME Certified Brokers and Consultants are helping their clients craft intentional strategies that are aligned with their corporate objectives and values.  The journey has just begun.

This article was first featured in the July 17th edition of our e-newsletter, Directions. If you'd like to receive that weekly email, contact directions@continuoushealth.com. (Your email will never be shared, sold, or otherwise distributed, and you will receive only the type of content for which you sign up.)

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