Can Employers Dump Workers To Health Exchanges? Yes, For A Price

How to expand Americans’ health insurance choices under the Affordable Care Act without sabotaging employer coverage? The Obama administration is still working to get the balance right.

The latest tweak¬†from the Internal Revenue Service essentially prohibits employers from giving workers tax-free dollars to buy policies in the online public marketplaces created by the health law. The New York Times first reported the rule. But the Times’s headline, “I.R.S. Bars Employers From Dumping Workers Into Health Exchanges,” overstates the case.

Nothing stops employers from canceling company plans and leaving workers to buy individual policies sold through the exchanges — as long as they pay the relevant taxes and penalties, said Christopher Condeluci, a Venable lawyer specializing in benefits and taxes. Those will vary according to a company’s size and circumstances.

If an employer has fewer than 50 workers, there is no penalty under the health law for dropping coverage or never offering it. Larger companies that don’t offer coverage may be liable for fines of $2,000 and $3,000 per worker starting next year. (The employer mandate doesn’t kick in for firms with 50 to 99 workers until 2016.)

Nor is there anything stopping companies from giving workers raises to buy individual policies on the exchanges as long as the money is taxed as income.

“If an employer wanted to give additional taxable cash to employees, without regard as to whether the employee used the money to buy coverage on the exchange or not, the IRS doesn’t seem to care,” said Edward Fensholt, director of compliance for the Lockton Companies, a large broker and benefits consultant.

The IRS statement reinforces a ruling last year essentially prohibiting income-tax breaks for money used to buy health insurance that isn’t routed through a conventional company plan, lawyers said. It doesn’t affect the fast-growing “private exchanges,” in which employers give workers tax-free money to shop a variety of plans on a company web site.

Whether the health law would prompt employers to move workers to the ACA’s exchanges has been much discussed. Analysts expect large employers to maintain health benefits for a long time, although many are shrinking coverage for spouses. Even small employers, needing to offer competitive benefits to attract good workers, will tend to keep offering coverage, some believe.

But some employers are contemplating moving their sickest and most expensive workers to the health law’s online marketplaces.