Worst Case Obamacare: Employer pays $140,000 to pay 95% of full time employee’s medical insurance cost….but will be hit by $25,000 fine in 2015. By Dave Petno
How could an independent grocery store in Ohio that pays over $140,000 annually to pay for 95% of all premiums for 26 full time employees get hit with a $25,000 NO OFFER penalty under Obamacare?
I have a long standing client in Northern Ohio who runs a small, independent grocery store. It has been in his family for several generations. The store owner asked to not be identified due to concerns about attracting the ire of the federal government.
He has about 70 total employees who provide personal customer service in a more down-home way than big box stores like Walmart and Giant Eagle. “We want to treat our employees well, that way the stay with us a long time, and then they treat our customers like family.” Notes the owner. “That is why we pay 95% of the costs of the health insurance of all of our full time employees.” With 26 Full Time Employees, the store pays approximately $140,000 annually in health insurance costs.
Unfortunately, under Obamcare the store would be subject to a $25,000 annual penalty which is ironically called the No Offer Penalty in the law. So how could this be?
The answer lies in the fact that the store has historically offered health insurance benefits to full time employees, and defines full time employees as those working 40 hours or more per week (we will call them the “40 and overs”. Under Obamacare, the employer will be forced to either offer health insurance to all employees who work 30 hours or more, or pay a $2,000 fine per TOTAL full time employees working over 30 hours per week. Since the store has around 20 employees who work over 30 hours but under 40 (we will call them “30 to 39’s”) complying with this mandate requires a significant increase in the number of benefit eligible employees for the store to cover.
(But wait, you might ask, penalties do not kick in unless an employer is over 50 FTEs, and the numbers above do not total above 50. We have done a full analysis of the hours worked by employees, and the totals exceed the 50 FTE threshold using the prescribed formula. So, unfortunately, this store needs to plan to penalty eligible. )
As a result, the store is forced to evaluate the following options:
Current Situation: Prior to Obamacare, the store pays approximately $140,000 to provide generous health insurance package to over 40s. This represents approximately 95% of the total cost of the insurance premiums.
Option 1: Change Nothing and absorb the penalty: Since the store does not offer acceptable coverage to all employees who work 30 or more hours per week, the store would pay the $140,000 in annual health insurance premium AND pay an additional $25,000 penalty. Total Cost Increase: $25,000 –Not good for the store.
Option 2: Comply with the Law, and expand Health Insurance Offering to those working 30 hours or more. This would eliminate the penalty. However, since the store covers health insurance at 95% of premium cost, it would be expected that nearly all of the 30 to 40s would pick up coverage. As a result, the store would pay the original $140,000 PLUS ADDITIONAL $100,000 to cover the newly eligible employees. –Not good for the store.
Option 3: Reduce Staffing Hours to get Below 50 Employees: Since the FTE Calculations for the store show that it averages around 55 FTEs per month, the store would need to reduce total FTEs by 6 employees. That is a 11% reduction in labor. Obviously, this would be a hardship for the 6 employees who would lose their jobs, or the unknown number who may see reduced hours. The customers of the store may also see longer lines, weakened customer service. It is also possible that store hours would need to be cut, again affecting the consumer. If customer revenue declines, this is not a good option for the store. –Not good for the store or for the employees.
Option 4: Offer Health Insurance to all over-30s, but reduce the employer contribution to 50% and increase the employee contribution to 50%: Since most of the 30 – 40s would likely waive this coverage offering, and since many of the current 40 and Overs would balk at the increased cost, the cost to the store would be expected to decrease overall by 50 – 75%. However, if an employee is offered affordable coverage by his employer, that employee is not eligible for tax subsidy at the exchange. This is a very bad option for the employees. Also, even though the employer may be avoiding the NO OFFER penalty, some employees at this level may deemed as UNAFFORDABLE coverage. This means the employer may still be subject to a $3,000 penalty for all UNAFFORDABLE employees who gain coverage at the exchange. –Not good for the store, or the employees.
Option 5: Continue only offering coverage to 40 and Overs, Increase Employee contribution percentages, and pay the Penalty Tax: The store concedes that it must pay the NO OFFER penalty tax, and determines to make up the expense by causing the participating employees to pay an additional 17% toward their existing coverage. The result is revenue neutral for the store, but causes the existing Full Time employees to have to pay 17% more for the same coverage. Not good for the Employees. –Not good for the store or the employees
Option 6: Drop Health Insurance, Pay Penalty, Use Exchange: By dropping coverage for the current Full Time employees, the store avoids the $140,000 insurance expense on an annual basis. The $25,000 NO OFFER penalty would apply, for a net savings of $115,000. If desired, the store could distribute some or all of the net savings to the employees in order to help them fund their coverage at the exchange. The downside of this is that the employees would no longer have coverage through their employer, and they would be on their own. Also, since the state exchanges are unproven and non-functional, this would be considered to be a very high risk strategy. –Not good for the store or for the employees.
So what is this store-owner likely to do? Right now he has given me instructions to take Option 5. He will plan to pay a $25,000 annual penalty while maintaining his health insurance package for his 40 and Overs. To fund it he will charge his 40 and Overs an additional 17% to participate in the plan. He is not happy, and his employees will not be happy either.
Thank you Obamacare.