Compliance – ACA & Other

By now everyone knows the initial attempt to replace Obamacare with a more workable solution has failed. I’m sure another attempt will resurface later. Let’s focus on what we know and how President Trump’s executive order, signed in January, impacted Obamacare.

President Trump’s executive order is still in effect. – The primary focus of the executive order was for Federal agencies to minimize the economic burden of the Affordable Care Act (ACA), pending repeal of the law. However, until further guidance or legislation, all ACA requirements remain in effect, including penalties for noncompliance.

The executive order specifically calls upon agencies to exercise authority and discretion to:

• exercise all authority and discretion available to them to waive, defer, grant exemptions from, or delay the implementation of any provision or requirement of the Act that would impose a fiscal burden on any State or a cost, fee, tax, penalty, or regulatory burden on individuals, families, healthcare providers, health insurers, patients, recipients of healthcare services, purchasers of health insurance, or makers of medical devices, products, or medications;
• provide greater flexibility to States and cooperate with them in implementing healthcare programs; and
• encourage the development of a free and open market in interstate commerce for the offering of healthcare services and health insurance, with the goal of achieving and preserving maximum options for patients and consumers.

Although the penalties for noncompliance remain in effect it does give the appearance that there is an out. However, I don’t recommend you be the one to test it.

The National Association of Health Underwriters (of which Employee Benefit Advisors is a member) and other industry groups support the employer-based healthcare system and have been opponents to eliminating or capping the exclusion and supports a platform that would preserve existing tax incentives for insurance, including the exclusion.

Proposals that eliminate the exclusion would push individuals from group coverage into the individual market. While deductions or refundable tax credits would help consumers secure coverage in the individual market, NAHU believes that they would fall far short both financially and in terms of coverage of the current system that allows for tax-free contributions from employers.

An individualized health insurance market would be ripe for adverse selection leading to higher insurer losses participating in these markets. Insurers would offset these losses by reducing provider networks and increasing cost-sharing. Currently, employer-sponsored plans are much more likely to have a mix of health risks and, in this case, the volume of individuals allows the costs associated with higher risks to be spread over that mixed population of high and low risks. Eliminating the exclusion and pushing consumers to the individual market would reduce the means for spreading risk among healthy and unhealthy individuals. The healthiest would be more likely to opt-out of coverage, leaving the most unhealthy covered. Employers still offering health insurance could be faced with difficulty meeting participation requirements and ever-increasing rates in a potential death-spiral as only the sickest remain insured.

Financially, employees receiving employer contributions already receive generous “subsidies” for their health coverage. Group premium rates tend to be more favorable than individual markets given the ability to control for adverse selection, and employers and employees alike benefit by reducing the taxable income for contributions made to insurance premiums. When employees’ taxable income increases due to the new taxable status of employer contributions, the employer’s FICA match would also increase. For every new dollar of taxable income due to newly taxable employer contributions or employee contributions previously made on a pre-tax basis under Section 125, employers would be responsible for 7.65% in new costs until the employee reached the Social Security wage base.

Ultimately, eliminating the exclusion would in turn result in a massive tax increase on middle class Americans that would not come close to being offset by any deduction, particularly for lower-paid workers who don’t have a deduction for income tax. Rather, a deduction for this type of worker would likely cause them to forego coverage altogether since it would offer no immediate relief towards the cost of coverage.

Finally, moving from a group insurance marketplace to an individualized marketplace would cause considerable strain on the enrollment process. Group plans are highly efficient at seamlessly enrolling millions into coverage, and without these group plans agents and brokers would be faced with enrolling upwards of 170 million Americans individually into plans. The ACA has demonstrated the challenges of enrolling as few as 13 million consumers onto the federal and state marketplaces. Increasing this number by more than ten-fold would not be any less chaotic.

The bottom line is that the employer-based system has proven highly efficient at providing Americans with affordable coverage options for decades. Eliminating the tax exclusion would likely result in the demise of the employer-based system, a significant tax increase on middle-class families, significantly increased costs for coverage, and more restrictive plan offerings. Healthcare reform has proven its challenges; however it is important that any policy proposals not make difficult situations worse and eliminating or even capping the exclusion would be far worse for all Americans.

Republicans hope to repeal Obamacare. One plan getting attention is creating a health insurance federal income tax deduction of $7,500 per individual and $20,500 for family. Everyone will be free to use their tax credit to buy the health insurance of their choice, not just the plan their employer provides.

A derivative plan recommends a refundable health insurance tax credit that is based on age, rather than income since 40% of people don’t pay any federal income tax. Money left could be put into a health savings account. HSA eligibility would be extended beyond age 65 (an idea Employee Benefit Advisors really likes).

Policy proposals would eliminate or cap the employer tax exclusion for health insurance. This would decimate the employer-based system, where a majority of Americans, roughly 169 million, receive their insurance coverage.

The employer exclusion allows an employer’s contributions to an employee’s health insurance to be excluded from that employee’s compensation for income and payroll tax purposes. The result has been a highly efficient means of providing affordable coverage through group purchasing and its economies of scale by spreading risk and avoiding adverse selection.

Proponents contend that eliminating the exclusion would result in Americans having more control over their coverage, reduce job-lock, and result in greater transparency and reduced costs.