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Design health plan to attract low-wage workers

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in Compensation and Benefits,Human Resources

With data showing how employee income and health-benefit plan participation are closely intertwined, a new study is sounding alarm bells for employers that must begin complying with the affordability mandates of the Affordable Care Act (ACA) health care reform law next year.

The ADP Research Institute warns that many low-wage employees may opt to remain uninsured because they perceive that premiums will eat up too significant a percentage of their annual income.

The institute found that 81% of employees with W-2 wages greater than 400% of the federal poverty level (FPL)—roughly $45,000 for a single person under 2012 guidelines—consistently participate in health coverage. However, as income declines below 400% of the FPL, health plan participation rates decline sharply to just 37% for single employees earning between $15,000 and $20,000 per year.

The finding is significant because, starting in 2014, the ACA requires employers to pay an annual penalty of $3,000 for every employee for whom the premium for self-only coverage exceeds 9.5% of their wages. That puts pressure on employers to ensure their health plan premiums don’t exceed 9.5% of their lowest-paid full-time employee’s yearly wages.

ADP researchers say approximately 8.6% of single, full-time employees pay 9.5% or more of their W-2 earnings to obtain health coverage.

“While no one can predict the future, the ADP Research Institute findings suggest that lower income employees may avoid participation in a health plan that consumes a significant percentage of their income,” said Tim Clifford, president of ADP Benefits Administration Services. “Clearly, employer-to-employee communications will be essential in ex­­­­plaining the options moving forward.”

The ADP Research Institute study—which analyzed real-world insurance data on approximately 1 million employees—found one silver lining among the clouds surrounding low-wage workers: Employees earning $22,340 or more per year (200% of the FPL for a single wage earner) may still be better off obtaining coverage through their employer’s group health plan, despite affordability issues, rather than participating in a public health exchange with government-provided subsidies.

That’s your goal: If you decide to offer health benefits in 2014, commit to a plan design that encourages all eligible employees to participate. That way, you’ll avoid costly ACA penalties.

3 ways to get below 9.5%

The bottom line for avoiding the ACA’s affordability penalties: Ensure your employees don’t defect to in­­dividual state exchanges to obtain health coverage or otherwise qualify for government insurance subsidies. You won’t be liable for penalties if your premiums pass one of these affordability tests:

  • Employees’ contributions don’t exceed 9.5% of their W-2 incomes.
  • Employees’ contributions don’t exceed 9.5% of their hourly rates of pay on the first day of the plan year, multiplied by 130.
  • Employees’ contributions don’t exceed 9.5% of the federal poverty line for an unmarried individual, divided by 12.

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