Op-Ed Published on LA Biz Journal on March 21, 2017
Starting in the 1940’s, the Internal Revenue Service (IRS) made employer-based healthcare tax free. Employers were not required to offer healthcare but if they did, they could do so on a pretax basis. Since then, as an employee attraction and retention tool, healthcare through employment has become a commonplace practice.
The passage of the Patient Protection and Affordable Care Act (ACA) in 2010 turned that employment practice into a requirement. Under the “Employer Mandate” of the ACA, large employers are required to offer healthcare coverage to at least 95% of their full time employees or face stiff penalties.
Now, House leadership is pushing the American Health Care Act (“AHCA”) to repeal and replace major portions of the ACA. Among its provisions, the AHCA terminates the Employer Mandate and phases out, by 2020, premium tax credits (PTCs) to which income eligible individuals would be entitled provided that they do not have certain employer-based healthcare. The PTC is triggered for individuals with household incomes between 100% and 400% of the federal poverty level and the amount of the PTC is set to ensure that the coverage does not exceed 9.5% of household income.
The PTC would be replaced with a “refundable tax credit” (RTC), the amount of which is based solely on age up to $75,000 ($150,000 for joint return) with a sliding scale reduction for higher incomes. The RTCs are age bracketed: (a) $2,000 for those under 30 years of age, (b) $2,500 for those between 30-40 years of age, (c) $3,000 for those between 40-50 years of age, and (d) $4,000 for those over 60 years of age.
In some ways, the RTCs work similarly to the PTC. Both are conditioned on the individual not being eligible for an employer-based health plan.
While the AHCA’s RTCs will give less than the ACA’s PTCs for individual healthcare costs, overall, because the AHCA has no Employer Mandate, a new question surfaces: Will employers be dis-incentivized to provide healthcare to employees? With no Employer Mandate, if an employer chooses not to offer healthcare, his/her employee could get RTCs from the government and the employer faces no penalty. So, why not allow the employee to get the RTCs and provide the value of the healthcare benefit in some other way? Isn’t that a win-win situation for the employer and employee?
For example, let’s suppose that an employer has a group healthcare plan that costs $400 per month ($4,800 per year) for each employee with a 50/50 employer/employee contribution. That means the employer cost and the employee cost are equally at $2,400 on a pretax basis. If the employer eliminated the healthcare plan, and instead offered up $2,400 in other pretax benefits, such as 401K benefits, to each employee, the employer would not be out of pocket any more than had the employer offered the healthcare plan. However, there is an added bonus. The employee is no longer disqualified from RTCs, which can be as high as $4,000.
From the employee standpoint, the employee receives the underlying $2,400 of value from the employer, but also remains otherwise eligible for RTCs, which he/she will receive for “free” from the government on top of that. From the employer standpoint, the employer losing nothing and on the upside, could be an employee attraction and retention tool.
This may cause the reversal in course from what was the genesis of employer-based healthcare.
This could have a significant impact in Los Angeles County, which, according to the IRS’s latest stats (from 2014), shows a whopping 88% of its single income tax returns with incomes less than $75,000. Where the vast majority of LA based workers and their families are potentially eligible for RTCs, why wouldn’t the AHCA dis-incentivize employers from continuing to offer healthcare? Wouldn’t this be a plausible justification for terminating healthcare coverage by those employers who only previously offered healthcare due to the Employer Mandate?
On Monday, the Congressional Budget Office (CBO) estimated that by 2026, 7 million individuals would lose employment-based coverage. Indeed, the bigger bombshell coming out of the CBO estimate is the 24 million individuals losing coverage by 2026.
It is still too early to tell whether the AHCA will pass given the heavy criticism from both sides of the aisle. What does appear certain is if the AHCA passes, it will not be in its current form.
