After narrowly passing the House, the American Health Care Act (AHCA), which represents the latest effort to repeal the Affordable Care Act (ACA) and reform health care, moved to the Senate early last month. The AHCA received mostly negative marks from the nonpartisan Congressional Budget Office (CBO) in late May, increasing the pressure on the Senate to address the AHCA’s biggest issues: over 14 million Americans losing coverage in the first year after the AHCA’s implementation, increases in health care costs for low-income Americans, and the removal of ACA protections that guarantee access to insurance and cost-certainty for individuals with pre-existing medical conditions. These are among the reasons Sen. Richard Burr (R-NC) expressed his skepticism that any health care reform could be passed in 2017.
One of the CBO’s main findings was that the AHCA could destabilize the individual insurance market, since it would remove major subsidies for individuals using the marketplace. Because the AHCA’s main goal is to reduce deficit spending, the cost savings from the reduction of these subsidies is central to the plan.
Republican senators, in search of a new source of revenue to help keep the individual marketplace stable, have been weighing a major change that would impact the nearly 180 million Americans on employer-sponsored health insurance: the taxation of employee health benefits. Because employee health benefits are often pre-tax, Speaker of the House Paul Ryan (R-WI) has called the pre-tax treatment of employer benefits discriminatory and called on the House to level the playing field for individuals purchasing their insurance on the marketplace. Additionally, the ACA only requires employers to offer medical insurance to full-time employees (averaging thirty or more hours), leaving part-time employees and many who work on short-term assignments or as contractors without the option for employer coverage and the tax benefits that come with them.
Under Section 125 of the IRS Code, employers can make many benefits available to employees and their spouses and dependents on a pre-tax basis. For individuals, this means that they get employer contributions to health insurance premiums, and make their own contributions, without paying taxes on either of those amounts. The elimination of this exception would require that employer and employee contributions be taxed, effectively raising the cost of health insurance for both individuals and their companies.
Eliminating the pre-tax treatment of employer-sponsored health insurance would raise billions of dollars to stabilize the individual marketplace and partially offset the elimination of subsidies, but is likely to be wildly unpopular with employers and employees.
A person making an annual salary of $50,000 who currently receives $400/month from her employer and pays $100/month of her own money, each on a pretax basis, to cover a $500/month premium for medical insurance would need to pay $100/month in taxes of the $400 contribution (25%) and would also need to pay her own contribution on an after-tax basis, meaning another $25 reduction in take-home pay.
In this example, to cover the cost of that same $500/month premium, the employee would see a further $125/month reduction in take-home pay, on top of the $100 contribution she is already making.
On the other side of the aisle, Democratic lawmakers are looking at another option to close the gap between those eligible for employer-sponsored health insurance, and part-time and short-term workers, who are typically not eligible for insurance offers from their employers. With as much as one-third of the American workforce working in temporary, contract, or on-demand roles, millions of Americans fall into the group not required to be offered coverage.
Sen. Mark R. Warner (D-VA) and Rep. Suzan DelBene (D-WA) have introduced legislation aimed at creating portable benefits for these workers. The Warner-DelBene plan seeks to create incentives for the creation and expansion of any plans or programs that expand access to medical, retirement, or ancillary benefits for temporary and transient workers. This plan follows efforts at the local level to prohibit employers from hiring only part-time workers to avoid offering employee health benefits, such as San Jose, California’s recent voter-approved law requiring that current part-time employees be offered more hours before employers can hire new part-time employees to fill staffing needs.
These possible changes to employee health benefits are complex and evolving. While Republicans seek to keep the AHCA alive and attempt to solve the issues it could create in the individual marketplace, and Democrats seek to deliver expanded coverage options for transient workers, the ACA remains in effect. Whether Congress is able to pass a full repeal of the ACA and replacement bill, piecemeal changes to the ACA, or nothing at all, remains to be seen.
As these issues continue to swirl, employers will need constant vigilance to keep apprised of both existing requirements and possible forthcoming changes. The Zenefits team, with our experienced brokers and compliance and ACA reporting software, is here to help. Reach out to schedule a demo here.