For the past year, we’ve been getting periodic phone calls and e-mails from our group clients wondering if they should simply disband their group coverage in favor of paying employees’ a subsidy and allowing them to purchase their own coverage. At one time, IRS allowed premium reimbursement arrangements, but closed that loophole in September of 2013 to deter employers from dropping their group coverage in favor of allowing employees to purchase individual plans. Mark Pauly, an economics and health-care management professor at the University of Pennsylvania’s Wharton School recently addressed this topic. “That may sound good in theory but it might cost your employees more in practice, he said. A worker with middle-class or above income won’t be eligible for a tax credit subsidy on the exchange. Plus, there is no guarantee they will have a comparable plan for what they current contribute. And then there are the taxes. They will have to pay tax on the cash that the employer pays them in lieu of the benefit. So they may end up actually behind because the value of the tax break they lose may be less than any subsidy they would get on the exchange.” Pauly said offering benefits like health insurance is a ‘good way to attract and retain’ high quality workers. His advice to small business owners is to ‘hang in there with group coverage’ even it means giving smaller raises next year. “The tax considerations are important. If you do pay them cash instead, they are going to have to pay the tax on that income, whereas the extra they pay for an upgraded plan will be taken on a pre-tax basis if it’s in employer provided group insurance.” The major carriers today are allowing groups to offer multiple lines of coverage so you have the ability to set a ‘base’ plan that the employer subsidizes as well as buy-up plans where the employee can pay the difference in premium if they want the richer plan.
