Sunday, June 5, 2011

The 2014 Company Penalty under the Health Care Reform Act?

NFIB, US Chamber and others of a Republican persuasion are creating a Halloween-like scare with $2,000 penalty ghosts flitting about, waiting to wreak havoc on small businesses in 2014. They continue to only deal with one side of the economic occasion.

Let's look at two companies: Noins Co., which currently doesn't provide health insurance for its 50 full-time employees; and Helthins Co., which currently does provide health insurance for its 50 full-time employees. For Helthins Co., 10 employees opt not to have insurance through the company (this is typical), while 15 employees take single coverage and the remaining 25 take family coverage.

(Any company with less than 50 full-time equivalent employees is exempt from providing insurance in 2014.)

In 2011, Noins Co. spends $0 on health insurance.
In 2011, HelthIns Co. spends $2,800/yr for the singles and $7,200/yr for the families. They spend a total of $222,000 per year on health insurance, or $4,440/employee (whether they're taking insurance or not). As long as the proportion of opts-out, singles and families hold, this $4,440 is the cost of hiring a new employee on top of any wages and other fringe benefits, like vacation.

In 2014, Noins Co. will be penalized $2,000 for 20 employees (30 are exempt--i.e. "free"), for a total of $40,000 dollars. Yes, this is more than they paid in 2011.
In 2014, Helthins Co. cancels health insurance coverage and also pays the penalty of $40,000. This is a relatively minuscule cost of $800/employee, relative to the cost of providing insurance. It is a savings of $180,000 or more per year. Taking advantage of the penalty part of the health care reform law will be a profitable move for this company.

Since health insurance premiums typically increase 10% per year, the savings for the second company could be as much as $220,000 per year if they quit providing coverage for their employees. I think this will be a widespread, seemingly guilt-free-because-we're-paying-the-penalty strategic move for many businesses, large and small, in 2014. Since many companies will be discontinuing the practice of providing health insurance, it will not cause a drop in attractiveness as a potential employer.

And with those kinds of savings, it's better than any break in corporate taxes (especially for a behemoth like GE who doesn't pay any taxes somehow). It will spark job growth because there won't the "benefit cost" to hiring new employees. (It's not taxes that hinder hiring; it's the cost of providing benefits like health insurance.)

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