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CCH® BENEFITS — 11/18/10

Most Employers Will Continue To Offer Health Insurance Benefits After Insurance Exchanges Take Effect In 2014

from Spencer’s Benefits Reports: Few employers plan to drop their health care benefits once the health insurance exchanges provided in the Patient Protection and Afordable Care Act (ACA) take effect in 2014, according to a recent survey from Mercer. Just 6% of large employers with at least 500 employees, but 20% of small employers with fewer than 500 employees, said that they are likely to drop their health plans after the health insurance exchanges become available. The survey results preview findings from Mercer’s 2010 National Survey of Employer-Sponsored Health Plans to be announced later in November. More than 2,800 employers participated in the annual survey, now in its 25th year.

Small employers with low-paid workers and high turnover, such as retailers, are especially likely to say they would drop their health benefits. However, Mercer says that the Massachusetts experience with reform indicates that few small employers actually will drop their health plans. Mercer points to the results of a recent study reported in the June 2010 issue of Health Affairs, which show that enrollment in employer plans in Massachusetts grew during the four years in which many of the reforms on which the ACA is based have been in place. “This suggests that few employers have chosen to drop plans despite the low penalties under the state’s ‘play or pay’ rule,” Mercer noted.

Employers also anticipate that the ACA will raise their costs by an estimated 1% to 2% overall, but the estimated impacts for individual employers range from none to 5% or more. Fewer than one-fifth (17%) of employers with 50 or more employees said that the new ACA requirements generally taking effect for 2011 will have no effect on their costs in 2011, but nearly as many (16%) estimate that it will raise costs by 5% or more. Most commonly, employers report that the ACA will raise costs by 2% or less.

The cost impacts might be explained, for example, by the fact that since 23% of small employers currently require employees to pay the full cost of dependent coverage in a PPO, a change in dependent eligibility will have no cost impact. There is no cost impact for the 11% of large employers (500 or more employees) that already covered dependents up to age 26 prior to the start of the 2011 plan year. In addition, about 30% of employers did not use lifetime benefit limits in 2009, so the requirement to remove the limits will not have an effect. Plan membership will likely rise still higher once all individuals are required to obtain coverage in 2014 and employers are required to auto-enroll new hires. Currently, 19% of all eligible employees, on average, opt out of their health plan.

Although the ACA encourages employers to offer health insurance benefits, employers may elect not to do so, and, beginning in 2014, might choose to pay a monetary penalty that may be lower than their current health benefits costs.

“Employers are reluctant to lose control over a key employee benefit,” said Tracy Watts, a partner in Mercer’s Washington, D.C., office. “But beyond that, once you consider the penalty, the loss of tax savings and grossing up employee income so they can purchase comparable coverage through an exchange, for many employers dropping coverage may not equate to savings.”

Likely Responses

Employers’ likely responses to specific changes required by the ACA include the following:

Excise tax on high-cost plans. This ACA requirement is the top concern for the greatest proportion of employers. Two-fifths of (39%) of employers with 50 or more employees can expect to trigger the excise tax in 2018, the year in which it becomes effective. Their most likely response to the excise tax is to either “do whatever is necessary to bring cost below the threshold amounts” (23%), or to “attempt to bring the cost below the threshold amounts, while acknowledging that ‘it may not be possible’” (37%). Only 3% said they will take no special steps to lower cost below the threshold amounts, while another 37% anticipate that their plans will never reach that threshold. Plans of employers in the Northeast region are most likely (53%) to trigger the excise tax if no changes were made.

Dependent eligibility. About two-fifths of employers with 50 or more employees will require dependents above a specified age to verify that they have no other employer coverage available, as permitted for grandfathered plans until 2014. While the law prohibits employers from requiring higher premium contributions specifically for the newly eligible dependents, some (17%) will change premium rate tiers so that employees covering more dependents pay more. Some (18%) say they are likely to increase the total share of cost for dependent coverage.

Shared responsibility rule (2014). All employees working at least 30 hours per week must be eligible for coverage, and 30% of all employers with 50 or more employees currently do not meet this new requirement. The most common response among large employers will be to offer the full-time employee plan to all employees working at least 30 hours per week (45% say they are likely or very likely to do so). Less than a third of the employers currently not in compliance said they are likely to change their workforce strategy so that fewer part-time employees work 30 hours or more per week. Only 6% said that they are likely to make no changes and will simply pay the shared responsibility penalty as necessary.

Employee premium contributions must meet “affordability” standard. The ACA requires employers to offer at least one health plan for which the employee’s premium contribution does not exceed 9.5% of the employee’s household income, or the employer will be subject to penalties. Nearly two-fifths (39%) of employers with at least 50 employees (but less than a third of employers with 500 or more employees) said that their current health plan coverage would likely be considered unaffordable for at least some employees. The majority of these employers (81%) said that they will most likely take steps to ensure coverage is affordable to all (by lowering contributions or adding a low-cost plan, for example). Relatively few—only about one in five—said that they are most likely to make no changes and pay the penalty as needed.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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