The success of the ACA relies on young, healthy people joining the insurance exchange. Without them, there is the risk of adverse selection and it is impossible to keep prices down. To deal with this, the US Department of Health and Human Services (HHS) announced proposed rules that it will allow for auto-enrollment for current marketplace consumers. Navigators were first and now we have auto-enrollment. It is safe to expect additional efforts to continue driving people into the exchanges.
The reason this new development is important for employers to understand is because it drives a nail in the coffin of one of the ACA strategies many employers were considering. Many employers of low-wage workers assumed that their low wage workers will not sign up for anything that they have to pay for, even health insurance. Based on this assumption, some employers had decided to only offer a skinny plan to satisfy Penalty A ($2,000 x total number of full-time employees per year) and offer nothing to satisfy Penalty B ($3,000 x total number of full-time employees who receive a subsidy). Then if no employees applied for subsidies, no B penalties could be triggered.
Those of us who understood that there were generous subsidies and tax credits for low-wage workers knew this was risky. These new regs, make it downright reckless.
The problem is that an employer cannot be sure its employees will not apply for subsidies on the exchange. When an individual can get a subsidy if they earn up to 400% of the federal poverty line (up to $92K for a family of 4), it is very likely that they are going to apply; especially parents and people with pre-existing conditions. Just this week, I heard of one employee qualifying for subsidies for a silver plan that left her paying only $65 out of her pocket.
This new move by HHS has just made the likelihood of B penalties being triggered go up exponentially. Employees who are already enrolled in an exchange will be automatically enrolled the following year. We anticipate even more efforts by the feds to get everyone into the exchanges.
Employers need to be aware that their assumption that no one will apply for a subsidy is flawed. Brokers and anyone advising employers need to analyze the numbers and estimate penalty exposure if and when employees do in fact apply for subsidies. Given that there are insurance plans out there that cost far less than the penalties and even provide tax planning opportunities, incurring this cost without first understanding the risk is poor planning indeed.
For example, FreedomCare is a program that satisfies the A penalty by offering a MEC plan as well as the B penalty by offering a bronze plan. Even if beneficiaries of FreedomCare refuse the coverage, their employers have satisfied the Employer Mandate by offering the bronze plan and therefore cannot be subject to B penalties. In most cases the cost of offering FreedomCare would be less expensive than the penalties and would provide tax planning opportunities on the back end.
This is one of the most avoidable costs we have seen under the ACA. The next most avoidable expense is the expense associated with waiting until the last minute to prepare!