The Internal Revenue Service swoops in with a money grab
by Diana Furchtgott-Roth • MarketWatch
Hey, employers, don’t even think about reimbursing your workers’ health-insurance premiums.
Beginning this month, the IRS can levy fines amounting to $100 per worker per day or $36,500 per worker per year, with a maximum of $500,000 per firm.
This Internal Revenue Service penalty is not written into the Obamacare law. The amount is over 12 times the statutory amount in the Affordable Care Act of $3,000 per worker per year. That is what an employer is charged when one of its employees gets subsidized care on one of the health-care exchanges. It’s 18 times the $2,000 penalty for not offering adequate health insurance.
The $100 fine is applicable not only to large firms, but also those with fewer than 50 workers that are exempt from the $2,000 and $3,000 employer penalties. Firms with one worker are exempt. The penalty for S-corporations will take effect on Jan. 1, 2016. The new rule is broad, sweeping and overly punitive.
This new IRS penalty does not assist in the ACA’s stated goal of expanding health insurance in the United States. Rather, it does the opposite. It discourages people from finding and purchasing the insurance that suits them. It also discourages companies from hiring. Consider that 14% of businesses that do not offer group health insurance have some sort of arrangement to reimburse their employees for insurance costs, according to the National Federation of Independent Business.
The administration should be encouraging employers to take on more labor, because many capable people are sitting on the sidelines. On the day after the IRS rule took effect, the Bureau of Labor Statistics issued its Employment Situation Report for June 2015. The report showed that U.S. labor-force participation had declined to a new low, 62.6%, equivalent to levels in October 1977. The drop included prime-age workers, those between 25 and 55, who are normally in the labor market because they generally have finished school and have not yet retired.
Rep. Charles Boustany, a Republican from Louisiana, has introduced the Small Business Healthcare Relief Act of 2015, and Sen. Charles Grassley, a Republican from Iowa, has a companion bill in the Senate (S.1697). The bills would allow small businesses to use pre-tax dollars to assist employees purchasing insurance in the individual market.
Why has the IRS taken this extreme view? If the employer reimburses an employee for health-insurance premiums, this arrangement is described as an employer-payment plan. The employer-payment plan is considered by the IRS to be a group health plan that has to meet the conditions of Affordable Care Act insurance, including the prohibition on annual limits for essential health benefits and the requirement to provide certain preventive care without cost sharing.
MarketWatch columnist Bill Bischoff explains the new rule as follows. “Employer-payment arrangements have long been a popular way for small employers to help workers obtain health coverage without the hassle and expense of furnishing a full-fledged company health-insurance plan. Under an employer-payment arrangement, the employer reimburses participating employees for premiums paid for their individual health-insurance policies or pays the premiums directly on behalf of participating employees.”
Small employers with a workforce of between 50 and 100 employees are required to offer the more expensive “essential health benefits,” including hospitalization, maternity and newborn care, mental-health and substance-use disorder services, and pediatric services, including oral and vision care.
In contrast, large employers, those with more than 100 workers, do not have to meet all the generous standards for health-insurance plans offered on the state exchanges, but can offer lesser health insurance and still avoid penalties. The “minimum essential coverage” that large employers have to offer to comply with the law turns out to be substantially less generous than the “essential health benefits” required for plans sold to individuals and small businesses by insurance companies.
Of course, not all employers will choose low-benefit plans. In order to retain workers, many large employers are likely to offer generous plans, and offset the cost by paying a lower cash wage. Recent data from the Bureau of Labor Statistics show that benefits account for 32% of compensation packages, with cash wages responsible for the remainder. However, low-benefit plans are likely to be attractive to employers with low-skill workforces in the restaurant, retail, and leisure and hospitality industries.
Although large employers can legally offer low-benefit plants, small employers are not allowed to do so. This leads to an extraordinary discrepancy in potential tax payments between small and large employers. Hence, they face both higher costs for insurance and higher tax penalties if they fail to offer such insurance.
The Boustany-Grassley bill is focused on small businesses, but it makes sense to allow individuals in large companies to choose less expensive options. Health-insurance premiums are rising substantially. Oregon’s health-insurance commissioner has just approved raises of 25% to 33% for Moda Health Plan and Lifewise, affecting over 220,000 people. Other health-insurance companies nationwide are asking for increases in the same range, and insurance commissioners are deciding whether to approve them.
Even the least expensive plans on the health exchanges, termed bronze plans, feature deductibles that are prohibitive for many. The average deductible on a bronze plan is $5,000 for a single person and $11,000 for a family, according to HealthPocket, a research firm.
Businesses need to take a stand against this new IRS power grab. As Americans search for low-cost ways to stay insured, it makes sense for the government to give employers more options, rather than fewer.