Health insurance: play or pay?

Nov 8, 2013
by DTN

The “play or pay” lingo is a dilemma facing large employers on the question of providing health insurance. For those with 50 or more employees, there is the messy choice of maintaining employee health insurance under stringent rules (play) or eventually incur a $2,000 penalty per employee for not offering coverage (pay). However, we are seeing increasing evidence that exempt smaller employers will move away from employerprovided health insurance.

Nondiscrimination rules

The Health Care Act imposes new nondiscrimination standards on those providing health insurance to employees. The rules aren’t effective yet, and won’t be until the IRS issues final regulations (probably several years down the road).

But when those rules hit, you won’t be able to cover some full-time employees and not others, or to have better coverage for some than others. The penalty for violators is insanely high: $36,500 per year per discriminated worker. That threat alone suggests staying in the game may not make sense. Further, most owners (farm proprietors, partners, and S corporation shareholders) can deduct their own health insurance without having their business involved. For C corporation owners who cannot use the 100 percent selfemployed health insurance deduction, the solution will likely be a high deductible policy with a pre-tax Health Savings Account.

Government subsidies

Starting in 2014, the potential exists for subsidized premiums and tax credits for individuals purchasing health insurance whose income is beneath 400 percent of the federal poverty level. This definition catches individuals with income of $46,000 or less, and a family of four beneath $94,000 of income. The Kaiser Foundation reports these limits will allow about 48 percent who use the exchange to gain subsidized coverage.

Most farm employees will have compensation beneath this poverty definition, meaning the workers are subsidized if they buy insurance on their own. Bluntly stated, why would an employer continue to pay for an employee’s health insurance when the government will cover most of the premium? As the exchanges become operational, employers will want to look at the pricing and the subsidized rates at different income levels to see how their employees might fare if on their own.

The shortfall

If the employer has been paying 100 percent of the health insurance premium, there will be an expectation to make up the employee’s premium outlay. A simple approach is to bump the pay, but that’s costly in several ways. Both the employer and employee incur payroll taxes on that extra compensation. Raising the compensation also may diminish the exchange subsidy, as it’s income sensitive.

An alternative is to look at a Section 105 plan or Health Reimbursement Arrangement (HRA), but not for coverage of premiums; that would disqualify the employee from the exchange subsidy or tax credit. Rather, this plan should cover other outof-pocket medical costs (dental, optmetrical, co-pays at the clinic, etc.). The employer funding of the HRA is tax deductible, but the benefit is tax-free to the employee. This value can effectively make up for the extra premium outlay of the employee. But the plan must be established on a nondiscriminatory basis for all full-time employees. — Andy Biebl DTN Tax Columnist

Editor’s Note: Andy Biebl is a CPA and tax partner with CliftonLarsonAllen LLP in Minneapolis and a national authority on ag taxation. He’ll address “Punt, Pass or Play on Health Care Reform” at the DTN Ag Summit Dec. 9-11 www. To pose questions for upcoming columns, email