http://blogcritics.org/politics/article/the-15-percent-solution-adapting-to/
Why is healthcare
tied to employment?
One of the smartest
decisions the federal government made was compelling employers to collect
insurance, taxes, unemployment, and Medicare/Social Security contributions
through the employee’s paychecks.
We all have had the
same reality check when we received our first paycheck. You remember…you worked
at a fast food place in high school, and you received $5 per hour. You worked
20 hours, and realistically believed you would receive $100.
That’s the first time
you learned about taxes, and the thrill of the moment, receiving your first
paycheck, is tempered by the reality of FICA, or payroll taxes. I don’t know
anyone who was prepared for this, and although it wasn’t a lot of money, it just
seems all a little unfair, especially to a teenager.
Most successful
unions not only negotiate benefits on behalf of their membership; they also
force the employer to collect their members’ union dues. Most unions would not
survive if they were forced to collect their own dues from union members.
Thus, unions will
negotiate a ‘dues check off’ with the employer, in which the employer agrees to
collect dues on behalf of the unions through the union member’s paycheck. If the union is successful in negotiating a
‘dues check off’ provision, they will then receive their dues payments in a
lump sum from the employer, instead of the necessity of setting up a billing
and collections department within the union administrative offices to
facilitate the collection of dues.
If the union does not
compel the employer to collect the dues, they basically would need to wait
outside the bank while the employee cashes their check and then use their
influence to make the employee pay their ‘fair share’.
Simply put, it’s much
easier to collect premiums and taxes from employers than from each individual
insured. Business has the means, the capability, and the infrastructure
necessary to administer this program. Businesses are also responsible to
collect payroll taxes, state unemployment taxes, federal income tax and federal
unemployment insurance. They are also required to provide and fully fund
workers’ compensation benefits. Heavy fines and penalties await those
organizations that fail to deliver on these requirements. Unions figured this
out years ago.
Why, then, doesn’t it
work with healthcare benefits?
The incentive is missing. All successful businesses,
regardless of size, prepare for the day when they will add employees. They will
improve their employee benefits to make employment at their firm more
attractive and competitive for the top talent in the job market. These benefits
include compensation,
healthcare, bonuses, taxes, tuition reimbursement,
retirement programs and 401(k) matching contributions, and many others benefits we’re all familiar with.
The cost of these programs to the employer can be
quantified as a percentage of payrolls. Workers’ compensation, for instance,
averages approximately one percent of total payroll, and healthcare can average
around 15 percent.
When a business plans to make a new hire, it takes the
proposed salary for that employee and adds in the total burden percentage for
benefits. This gives the company an estimated cost of that employee annually.
As an example, if an employee is hired at a salary of $50,000 per year and the
total burden rate for benefits is estimated to be 50 percent, or $25,000, the
total annual cost of that employee to the company is $75,000.
All companies perform these functions already. Just as
the fast food company took out FICA on your first paycheck, businesses are able
to administratively adapt their accounting methods to incorporate a system like
this immediately, without additional capital to facilitate any sort of change.
If we continue to compel business to collect and disburse funds on behalf of
the federal government, state and local jurisdictions, benefits, and union
dues, we need to realize that businesses are much happier to comply if they are
compensated to perform this valuable service.
It is important that businesses be given the incentive to
perform these functions. If the federal government is able to create an
opportunity for businesses to have a healthy financial hiring environment,
where it is less expensive to hire more employees AND provide health care
benefits than it would if they refrained from hiring, employment percentages
would improve with less individuals accessing the federal government programs
for assistance with their health care needs.
Employers provide
healthcare as group coverage. Each employee is afforded the same coverage, and
all are rated the same, regardless of past illnesses and pre-existing
conditions. Thus, it is quite simple to calculate the cost per employee, or the
‘burden’ the employer pays to provide benefits to each employee.
Since all of these
benefits are group plans, the costs are spread to each employee equally,
regardless of income, need or ability to pay. Most employers offer cafeteria
benefit plans, in which the employee can choose a specialized plan within the
framework of the overall program offered by the employer.
Unfortunately, the
choices are often limited, and many plan administrators will offer plans that
are substantially more attractive to the insurer, and will price more
comprehensive plans out of reach. So, while there is an appearance of choice,
they are really leading you into the most advantageous plan for the insurer.
Most companies do not
have the in-house expertise to purchase, implement and adequately explain the
choices that are provided to employees on an annual basis.
Some of this is by
design…if the employer makes wrong decisions on coverage or the application of
premium, they could be held accountable for these decisions, both with
potential civil and regulatory penalties assessed to the company. So the
decisions on health care are generally left to the insurance broker or the
insurer themselves from the commencement of the purchase of insurance to the
decisions regarding coverage in both broad and specific areas.
Generally, though,
health care coverage is much more complicated and intricate for most human resource
personnel to understand, so companies tend to rely on the folks selling the
program to them for the professional expertise necessary to procure such
programs.
THE 15% SOLUTION - A
MORE DETAILED LOOK AT COST
If we assume again
that healthcare dollars represent 15 percent of payroll to employers, this loosely
breaks down as follows:
Life Insurance - 1% Includes the following:
• Short Term
Disability (STD)
• Long Term
Disability (LTD)
• Accidental Death
& Dismemberment (ADD)
• Employee Assistance
Program (EAP)
Dental and Vision –
1.5%
Health Insurance/Comprehensive
Medical/HMO/RX- 12.5%
Now, let’s say we
take this 15 percent and ask each employer to put aside this amount to fund all
life, health, dental and vision, and give each employee options as to which
coverage, levels and amount of insurance they received.
This would give the employer and the employee flexibility
in their healthcare planning. Just as important, it would tie the incentive to
hire with a truly flexible fringe plan, so that the employer has the opportunity
to offer options based on the circumstances of the individual employee rather
than trying to find a universal “one size fits all” solution to life and health
benefits.
HOW IT WOULD WORK
Once hired, the
employee is steered to a website that offers a wide variety of benefits plans,
including health, dental, vision, disability, long-term care and life
insurance. The employee is then required to select an option that provides
health and life insurance.
Or…they can opt out
under the Affordable Care Act, aka Obamacare, and the employer would have the
proper documentation to avoid any fines related to claims arising from
employees who state they were not offered coverage.
Note that most health
care companies now offer web-based programs that are now able to tie in with
the employer’s payroll system (with proprietary safeguards) and the health care
company’s claim system. This is certainly not a new or innovative product.
All of the health
care options have deductibles and co-pay options.
At this point, the
employee is free to make the selection of their health care.
Once the selection is
made, the monies left over are credited to a health savings account (HSA), to
be used for out-of-pocket expenses, such as those co-pays and deductibles. These
funds are used through the calendar year, and if there is a balance in the HSA
at the end of the year, the employee is given the option of rolling these funds
into the HSA for the next calendar year, or rolling the balance into the
company-sponsored 401 (k) plan.
As in the past, once
the employee makes a selection of his or her health care, they are tied into
the benefits selected for a period on one year. If needs change, adjustments
can be made during the open enrollment period for the next policy year.
Let’s use an example
using an employee making $50,000 per year. Upon hire, he is steered to the
company benefits website. Once the health account is set up, the employee will
find his account with a balance to spend of $7,500 or 15 percent of his salary.
This employee is a
30-year-old single male, with an active lifestyle and limited healthcare
intervention. He elects a plan with a high deductible and co-pay, a low payout
of life insurance, and perhaps a first dollar or lower out-of-pocket for
disability.
In this scenario, his
annual healthcare, life and disability premium would be approximately $3,000
and the balance would be placed into an HSA. If the employee chooses a $2,000
annual deductible and a 40 percent co-pay and an annual out-of-pocket maximum
of $5,000, he will not be unreasonably tapped out should he have a catastrophic
incident, such as a broken limb or a concussion. This is similar to current
high deductible plans.
This situation will
also allow for a chronic condition should it arise, but the key is that the
employee is banking on his health. If he is right, he can put some money into
his 401 (k) to fund his retirement with the remaining funds in the HSA, but he
is also hedged against a substantial injury or illness.
Now, let’s say we
have the same $50,000 hire, but a 45-year-old male, married with two kids, ages
10 and 13. The wife has chronic asthma, and both children have medical needs
throughout their lives. This employee would probably choose a plan with a lower
deductible for healthcare, disability and higher limits for life insurance.
This plan may cost $6,000, leaving $1,500 for his HSA.
If the employee had
to spend more on health care, that amount could be tax deductible on federal
taxes. More on that below…
In both instances,
the employer is able to write off the entire cost of the healthcare benefits,
which would then be offered to employees on a tax-free basis. The federal
government would calculate a federal tax deduction of 15 percent of total
payroll, and the IRS would put regulatory guidelines on the reporting of
benefits afforded to each employee.
This is essentially
what employers do now when they report pre-tax benefits on an employee’s W-2,
reducing the taxable income by the amount of the qualified pre-taxed income.
Instead of a complicated tax calculation, the employer would receive a tax
deduction based on 15% of their entire payroll, regardless of overtime pay,
exempt versus non-exempt employees, etc.
Companies could
self-insure a portion of the coverage, which would allow for the potential for
more savings, and would also encourage employees to take advantage of wellness
and preventative medical services, such as annual checkups, smoking cessation,
weight control counseling, etc.
Self-insuring would
lower premium cost and allow employers to offer more programs to encourage a
healthy lifestyle for the employees and their families. There would also be tax
benefits tied to these programs, which would further encourage a healthy environment
and lower long-term medical costs.
All plans would
include preventative expenses paid at 100 percent, and employers could be
entitled to additional tax credits for encouraging healthy lifestyle and
effective work-life balance. The employee would pay for premiums, co-pays, and
out-of-pocket expenses from this account.
THE
EMPLOYEE TAX BREAK –The Little Known and Less Advertised Donut Hole
‘As you have probably
heard in the press, there is the now infamous ‘donut hole’ in the current
Medicare coverage…
This is how the donut
hole works (from Medicare.gov)…
- You pay out-of-pocket for monthly Part D premiums all year.
- You pay 100% of your drug costs until you reach the $310 deductible amount.
- After reaching the deductible, you pay 25% of the cost of your drugs, while the Part D plan pays the rest, until the total you and your plan spend on your drugs reaches $2,800.
- Once you reach this limit, you have hit the coverage gap referred to as the “donut hole,” and you are now responsible for the full cost of your drugs until the total you have spent for your drugs reaches the yearly out-of-pocket spending limit of $4,550.
- After this yearly spending limit, you are only responsible for a small amount of the cost, usually 5% of the cost of your drugs.
The PPACA will close this donut hole in 2020, but until
then, seniors need to pay this additional $1,750 with relief for some, but not
all.
There is also a
little known donut hole in the current federal tax code that affects all those
who incur medical out of pocket expenses in excess of what their flexible
spending account or health savings account pays. This is basically a carryover
from the days before high deductible plans became the norm, and most
individuals and families generally would not incur the type of out of pocket
expenses that is the norm today.
Currently, an
individual or head of household can deduct medical expenses when, and only when
their out-of-pocket medical expenses exceed 7.5 percent of adjusted gross
income. So under the current system, the worker making $50,000 per year must
incur $3,750 out of pocket before these expenses can be written off.
Let’s take the worker
who elects to have $5,000 placed in an HSA for additional medical expense, and
his healthcare premium is fully funded by the employer. The worker ends up with
out-of pocket expenses of $10,000. The HSA pays $5,000, leaving the employee
with $5,000 in additional expenses.
First the adjusted
gross income is reduced to $45,000 ($50,000 less $5,000 pre-taxed HSA).
Because the $5,000 in
the HSA has been issued on a pre-taxed basis, the 7.5 percent starts when these
monies run out…
The 7.5 percent
medical threshold is now 7.5% of the adjusted gross income of $45,000, or
$3,375.
This means the
employee can write off only that which above this threshold, or $1,625. This
reduces the employee’s taxable income to $43,375.
Based on 2012 federal
tax rates, an employee filing single would incur a burden of $7,025. With the
$5,000 out of pocket expense, and the funded $5,000 in the HSA, the employee is
out a total of $17,025.
Now, let’s use the 15%
Solution:
Same employee - $50,000
per year.
Employer places $7,500 into a 15 percent
account. Employee elects to take a high-deductible plan costing $2,500 per year
and leaves the same $5,000 in an HSA. The employee incurs out-of-pocket
expenses of $10,000, leaving $5,000 in additional medical expense.
Now, the taxable
income stays at $50,000, and the benefits are provided by the employer. The
$5,000 paid through the HSA was tax-free income provided by the employer. Thus
the employee is out of pocket $5,000.
Because the 7.5
percent threshold has been eliminated, the employee can write off the entire
$5,000 out of pocket expense, for a taxable income of $45,000. Again, a single
filer based on 2010 federal income tax rates, would incur a tax burden of
$7,438, for a total out-of pocket of $12,438.
These benefits bear
repeating:
• The company gets
tax savings on benefits they already provide, at a relative rate.
• The employee has
$4,587 more in his or her pocket to pump back into the economy.
• The federal
government collects $413 more in taxes per person per year.
Under this plan, the
employer receives a tax incentive to provide health care benefits, wellness
programs, and lowers its overall costs because a healthier workforce lowers the
burden on the health care plan, and also lowers the costs in productivity lost
due to absences by employees for health reasons.
The employee has the
opportunity to fund their health care, framing their care to the needs of themselves
and their family, and create the opportunity to have it funded entirely by the
employer or on a tax-free basis should the need arise to go out of pocket for a
catastrophic event.
The federal
government would reap the benefits of increased tax collection, as well as the
reduction in disability costs associated with those who cannot work or who may
be uninsured at the time of a catastrophic illness or injury. These funds can
be utilized to provide more benefits for those who do not or cannot contribute
to the programs, such as the poor, the elderly, or the incapacitated.
One of the best parts
of this solution is the simplicity of the tax calculation, which makes it much
more transparent for the employer and the employer to calculate and plan for their
taxes as the tax year goes along, instead of having to wait to see how it all
plays out and hope you don’t owe too much.
The inability to plan
for taxes can be devastating to the continuity of operations for a business,
and can also financially devastate a family dealing with the stress of a
chronic or catastrophic medical issue and also an unanticipated high tax bill.
So this is the
question… if you could implement a plan in which all employed individuals and
their families are insured under the individual’s company health care program;
the plan would be funded by the federal government indirectly through tax
incentives; the plan would actually create additional tax revenues, and the
program can be implemented immediately utilizing programs that are already in
place...
Why wouldn’t you do it?
