The Effects of the Affordable Care Act on Small Business The Role of Employer-Sponsored Health Plans Though media attention has focused on the federal and state health exchanges, employers are responsible for much of the growth in the number of insured. And much of the burden of complying with the Affordable Care Act will fall on business. From September 2013 to mid-March 2014, according to RAND Corporation estimates, a net 9.3 million Americans gained health coverage. The majority of the gains during this period came from employer-sponsored coverage: 8.2 million people enrolled in employer plans rather than purchasing individual coverage in an exchange. These new enrollees include individuals who previously declined employers offers of insurance but are responding to the individual mandate to obtain coverage or face a tax penalty. Only 1.4 million were newly insured by exchange plans. (Though 3.9 million people enrolled in exchange plans, most were previously insured.) Why Do Employers Provide Health Benefits? The practice of getting health coverage through the workplace began with a series of laws that originated during World War II.3 In a tight labor market with wage and price controls, the War Labor Board ruled wage controls did not apply to fringe benefits. Thus, employers could provide health coverage in lieu of higher cash wages.4 A few years later, in 1954, Congress and the Internal Revenue Service agreed that the value of health coverage provided by an employer could be excluded from taxable income.5 Today, as a result of this policy, most Americans get health insurance through work: Nearly two-thirds of Americans with health coverage have employer-sponsored health insurance - approximately 171 million people. Slightly less than three-fourths (71 percent) of firms that employ 10 to 24 workers offered coverage in 2011. In contrast, only 48 percent of firms employing three to nine workers offered coverage in 2011. The proportion of small employers offering health coverage has been declining for years. Under the Affordable Care Act, many firms will find it in their self-interest to abandon their company health plans. Employer Costs for Health Insurance. Health benefits are a significant expense for U.S. employers and a substantial portion of workers total compensation: The cost of employee health benefits averages $2.70 per hour, according to the Bureau of Labor Statistics, representing 8.5 percent of private industry workers total compensation. The Kaiser Family Foundations annual survey of employer health benefits found the average cost of an employee family plan was $16,351 in 2013. Health benefits substitute nearly dollar-for-dollar for cash wages. The Value of Employer-Provided Insurance Varies by Employees Incomes. The cash value of excluding employee health coverage from taxable income is substantial. This is the major reason why most Americans have health coverage tied to their employment. For example: To a middle-income couple with a marginal federal income tax rate of 25 percent, payroll taxes add another 15.3 percent and state and local taxes could add another 5 percent to their tax burden. Thus, at an effective tax rate of 40 percent to 45 percent, the tax exclusion is worth nearly half the cost of coverage. For instance, a family in an employer health plan costing $16,351 would only experience a reduction in take home pay of $8,993 [$16,351 x (1-0.45)] - a tax savings of $7,358. Furthermore, because the value of the tax subsidy increases with income, high-income families receive a greater benefit than low-income families. For instance, a family with an income of $150,000 or more receives about $4,436 in tax relief, compared to only about $147 for families earning less than $10,000 annually. Lower income workers are less willing to use scarce wages for health benefits. Thus, small employers that predominantly hire low-income workers are far less likely to offer health benefits than firms with higher average wages. As the cost of health coverage rises, firms like these are the most likely to drop employee health plans altogether.
Posted on: Tue, 26 Aug 2014 01:01:10 +0000
Trending Topics
Recently Viewed Topics
© 2015