Who's Afraid of the Obamacare Affordability Penalty?
It’s hard enough to understand the intricacies of health-care reform without the relentless campaign of disinformation launched by Obamacare’s opponents.
Let’s take a recent column at Forbes.com, written by Sally Pipes, president of the Pacific Research Institute, a libertarian think tank. Among other charges in her piece, “Delay of Obamacare's Employer Mandate Exacerbates An Already Bad Situation,” Pipes writes that the Affordable Care Act “gives businesses a powerful incentive to avoid hiring low-income workers in the first place.”
Why? Because, Pipes writes: “A company faces a penalty of $3,000 for every worker who gets subsidized health insurance in Obamacare’s exchanges. But the subsidies are only available to lower-income families.” Pipes quotes the testimony before Congress of James Capretta, of the Ethics and Public Policy Center, a conservative advocacy group. Capretta warns that “a small restaurant chain might find it more attractive to hire a low-wage service worker who happens to live in a middle class neighborhood than to hire someone from a lower income area who might be eligible for the health law’s premium subsidies.”
But under the guise of standing up for the little guys, Pipes and Capretta are ignoring a few inconvenient truths that undermine their whole theory. Where to begin?
First, in states that have accepted new expanded Medicaid eligibility rules (28 states are currently moving toward some kind of expansion), most people with income up to 138 percent of poverty level would qualify for fully government-funded Medicaid, relieving employers completely of having to pay either premiums or penalties for such workers.
Second, lower-income workers don’t automatically qualify for subsidies and trigger hefty penalties for their employers. The only way that someone who is offered a health plan through work can qualify for subsidized coverage in the exchange is if the employer’s plan fails to provide “minimum value” (i.e., paying at least 60 percent of covered benefits) or fails to provide coverage that is considered “affordable” (i.e., the employee’s share of the premium for self-only coverage cannot exceed 9.5 percent of their income).
It is true that in the original version of the health care law, affordability was determined based on household income. That's the assumption that Pipes and Capretta are making. But there is something that Pipes and Capretta surely know, but choose to omit : proposed IRS regulations published this January include an alternative, “safe harbor” method for calculating affordability, based on an employee’s W-2 wages instead. That is, as long as an employee’s required contribution for health insurance doesn’t exceed 9.5 percent of their W-2 income, the employer can’t be hit with a penalty. What this means for employers, contrary to Capretta’s outrageous assertion, is that a low-wage worker is a low-wage worker regardless of the neighborhood they live in. Household family income has nothing to do with the penalties an employer might be subject to. In fact, even if an employee’s household income qualifies them for exchange subsidies, if the coverage that you offered is affordable based on their individual W-2 wages, you’re still in the clear.
Bottom-line: If you run the numbers and make sure your plan hits the marks for your lowest-paid workers, you don’t have to worry about the affordability penalty. And even if you don’t -- saying, “To heck with it, my plan isn’t going to be affordable for some people; they can go to the exchange” -- chances are good that they’ll never get there. That’s because, as I’ve written about before, it’s low-wage workers who are most likely to forgo health-care coverage altogether, opting for cash in pocket instead. According to a 2013 survey by benefits consulting firm ADP, just 37 percent of single employees earning between $15,000 and $20,000 per year participate in employer-sponsored health plans. Even with federal subsidies, a single person making $20,000 a year would still have to pay about $1,000 a year in annual premiums for an exchange-based plan, which is a lot more than the $95 individual penalty they would have to pay for going without insurance starting in 2014. And if they don't apply for the subsidies, you can't get the penalty.
Might ObamaCare be a disaster? Sure. Will there be substantial new costs for some businesses? Absolutely. But affordability penalties won’t be among them -- and there’s no logical reason to use a fear of incurring them to keep anyone out of your workforce.