The smoke has cleared on the recently failed attempt to reform health care. With the election of Scott Brown in Massachusetts, the 60 Democratic bloc has been broken and so the health care reform as it was being written is essentially dead. Nevertheless, we came within days of turning health care insurance upside down. Now is a good time to look back at the reality that might have come from the Senate bill.
The Patient Protection and Affordable Care Act included 2,076 pages with references to federal status and other acts which it amends. It also contains unique provisions such as Section 2006 which defines which states (i.e. Louisiana) recovering from a natural disaster would receive increased federal Medicaid subsidies.
The question business owners are asking is what all of this might mean to the cost of their operations. Who will shoulder the cost of the penalties proposed as a part of this Amendment or alternative legislation proposed by the House of Representatives?
In its July 14, 2009 Economic and Budget Issue Brief (Brief), the Congressional Budget Office (CBO) stated that “although employers directly pay most of the costs of their workers’ health insurance, the available evidence indicates that active workers—as a group—ultimately bear those costs.”
It states further that, “Employers’ payments for health insurance are one form of compensation, along with wages, pension contributions, and other benefits. Firms decide how much labor to employ on the basis of the total cost of compensation and choose the composition of that compensation on the basis of what their workers generally prefer.”
Except for those businesses that employ individuals whose compensation is at or near the minimum wage; because the cash wages for individuals engaged in minimum wage jobs cannot be reduced, the increased cost of providing benefits required under the Amendment increases the total cost of their compensation.
Consequently, the Amendment’s passage could result in minimum wage positions being eliminated as happens when the minimum wage increases.
Apparently, Congress was not persuaded by the CBO Brief. Subtitle F of the Amendment, titled “Shared Responsibility for Heath Care,” contains penalty provisions presumably meant to require employers to partially shoulder the cost of its employees’ health insurance.
Ostensibly, this is accomplished by subjecting large employers, those with 50 or more employees that fail to offer affordable health insurance coverage to their full-time employees to a penalty.
If such an employer does not provide health insurance coverage, a penalty would be assessed each month in which at least one full-time employee receives a premium tax credit, or is allowed or paid a cost-sharing reduction related to health insurance coverage provided through a health benefit exchange established by one of the states.
The monthly penalty is equal to $62.50 times the number of full-time employees. For an employer with 50 full-time employees, the monthly penalty would be $3,125 or $37,500 annually, and this penalty is not deductible for income tax purposes.
An employer is also subject to a penalty under the Amendment even if it does provide health insurance coverage but the employee’s portion for the cost of the coverage exceeds 9.8 percent of his or her income or the employer pays for at least 60 percent of the cost of an employee’s health insurance premiums.
This penalty is equal to the product of the number of full-time employees certified to have received a premium tax credit or cost-sharing reduction and $250. The affordability penalty, however, cannot exceed the product of the number of individuals employed full-time by an employer and $62.50.
Logically, employers required to provide and pay for a prescribed portion of the cost of health insurance for their employees, which is deductible, will do so to avoid the penalties assessed under the Amendment which are not tax deductible.
Eventually, as employers incur the cost of health insurance for their employees, cash compensation employers pay their employees will decrease as they adjust the relative amount of the components of employees’ compensation such that total compensation remains constant.
Consequently, as the CBO stated in its Brief, it is improbable that the cost of health care reform will increase the cost of most business’s operations.
Will Rogers also said, “Things in our country run in spite of government, not by aid of it,” which is instructive to those intent on enlisting employers in government’s attempts to provide affordable health insurance to more Americans.
Now that bipartisan support is essential to the passage of health insurance reform, it may be even tougher to achieve the systemic reforms that many are seeking. At the same time, incremental reforms may be more likely as Republicans and Democrats seek common ground to demonstrate some progress on rapidly escalating health insurance premiums.
John D. Blair Sr. is a managing partner at Blair, Bohlé & Whitsitt, PLLC, a CPA firm that provides accounting, assurance, tax compliance and planning services in addition to strategic planning and tax minimization strategies to privately held businesses. Contact him at 704-841-9800 or visit www.bbwpllc.com.