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PPACA Produces Plan-Design Surprises

As published by the Society for Human Resource Management on January 18, 2013.

One surprising result of the Patient Protection and Affordable Care Act (PPACA) may be that lower-paid employees hope their employers will offer no or unaffordable health insurance, according to John Woyke, an attorney at Brody and Associates in Westport, Conn. That way, they’ll qualify for “pretty generous” subsidies to buy coverage on health care exchanges, he said during a Jan. 16, 2013, firm webcast.

Subsidy Eligibility

A huge percentage of American households may be eligible for subsidies. Purchasers below 400 percent of the federal poverty line (approximately $44,000 for an individual and $92,000 for a family of four) could get subsidies or refundable tax credits to buy health insurance on exchanges, but only if their employer does not offer qualifying coverage.

Of course, if employees buy health insurance on exchanges, employers with at least 50 full-time equivalent employees would be subject to penalties if they did not offer qualifying coverage. But the penalties might be lower than the cost of better health care coverage, Woyke remarked. This may be true even for large employers, he added.

So consider employee pay levels, Woyke recommended, noting that approximately 70 percent of all American households are below 400 percent of the poverty level.

Effects on Alphabet Plans

In light of this, he said it might be advisable for companies, particularly smaller ones that must play or pay, to provide no coverage and let employees buy it on the exchange, or provide nonqualified supplemental coverage, such as a defined contribution amount for a health reimbursement account (HRA). Woyke predicts that HRAs will become more popular as a result of the PPACA.

Under a generous HRA, funded by the employer, employees might not be eligible for subsidies but could use the HRA funds to buy insurance on an exchange, Woyke said.

Because an HRA is an employer plan, employer cost cannot be capped under the PPACA. But Woyke said the U.S. Department of Health and Human Services could waive this requirement.

Unlike money in HRAs, workers’ pretax money in employers’ flexible spending accounts (FSAs), now capped at $2,500 a year, cannot be used to buy insurance on an exchange, he explained.

States may operate an exchange; this has been conditionally approved in 11 jurisdictions: Colorado, Connecticut, the District of Columbia, Kentucky, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island and Washington. They also may operate a partnership exchange in collaboration with the federal government, as Delaware plans to do. Or a state may rely on a federal exchange, noted Abby Warren, also an attorney at Brody and Associates.

Not everything will be rosy if employers provide money in an HRA for workers to buy insurance on an exchange, Woyke cautioned. There may be issues under the Age Discrimination in Employment Act because insurance prices on the exchange will depend solely on age and smoking habits. Thus, older employees will have to pay more for health insurance on the exchanges.

Health savings accounts (HSAs), which employees contribute to with pretax dollars and which don’t fall under the use-it-or-lose-it requirement that applies to FSAs, will become less popular as a result of the PPACA, Woyke predicted. One of the main points of HSAs was to encourage employees to negotiate lower health care prices, since they would be tapping into their own money. Once exchanges become available, workers may no longer prefer HSAs, he said.

Enrollment in exchanges begins in October 2013. Although employers will make plan-design choices with the limited information they have now and as more PPACA regulations are issued, Woyke said employers should revisit health care costs and employee pay levels as soon as exchange insurance rates are published, which won’t be before October.

Allen Smith, J.D., is manager of workplace law content for SHRM.