If you’re thinking about dropping your company’s health coverage for your workforce, you’re definitely not alone. Rising health care costs are making it more expensive to offer health insurance as a workplace benefit. At the same time, the Affordable Care Act (ACA) has created new, complicated regulations for workplace plans while also making it easier for your employees to buy health insurance themselves outside of work.
While these factors might tempt you to cancel, it isn’t a decision you should rush into. Offering health insurance still has many benefits, while ending coverage may lead to some significant problems for both you and your employees. Here are four considerations to make when facing this decision.
1. Can Your Business Afford the Possible Penalties?
Canceling your workplace coverage can lead to costly penalties. The ACA requires that companies of 50–99 employees offer minimum, affordable health care coverage, or else they’ll be charged a monthly fee.
Even if your company has fewer employees than this specific range, you could still owe a penalty for moving your employees onto the individual-market health care exchange. If you reimburse your employees for their individual health insurance premiums, the IRS will charge you an excise tax penalty because you are using the individual exchange to cover your employees rather than offering your own plan.
2. What About Increased Costs and Taxes?
Ending your company health care coverage may also lead to extra taxes and costs for your business. To make up for not having a workplace plan, you’ll most likely need to pay higher salaries to your employees to stay competitive. You’ll need to pay for FICA, unemployment and workers’ compensation via this extra salary — all items you wouldn’t need to account for to offer competitive pay if you still offered health insurance coverage as a benefit.
Your employees will also owe more in state and federal income taxes after you cancel your plan. Governments tax salary, whereas workplace health insurance coverage is tax free. Your employees receive more of an after-tax benefit for the same amount of money with health care coverage compared to extra salary.
3. How Will Dropping Coverage Affect Company Loyalty and Turnover?
Workers continue to rate health insurance as one of the most important workplace benefits. Even though it’s now easier to buy coverage outside of work, many employees still prefer the safety of a workplace plan, especially as the ACA makes changes to the landscape. By not offering a workplace plan, your compensation package is an immediate red flag for new applicants, especially those who have always had workplace coverage and have never bought a plan on the individual market.
Your company may also face higher turnover from current employees. If an employee already has health insurance outside of your company, it makes it that much easier for them to move to another job. On the other hand, when your company offers a complete set of benefits including health insurance, your employees will be more connected to your company’s benefits package and will be less likely to leave.
4. Will My Employees Suffer Without Comprehensive Health Coverage?
Employer health care plans tend to have better coverage than individual health care plans. The market for employer plans is still larger, and there are more insurance options available. If you end your health care coverage, your employees may need to sign up for an individual plan with a worse provider network or reduced benefits.
At the same time, if there are problems with your current plan, there are other options to choose from. Insurance companies have been working to adjust to the ACA and have launched a number of workplace plans to meet the new requirements. For example, if cost is the issue, you should check to see if there are lower-cost options before you completely end your coverage. Don’t assume that, just because there are problems with your current plan, all workplace plans would be a bad fit.
This isn’t to say that you should never end your workplace plan. In some situations, it could still make sense. It’s just important to consider these potential drawbacks first so you can make an informed decision before canceling health care coverage for your company.
This content is provided solely for informational purposes. It is not intended as and does not constitute legal advice. The information contained herein should not be relied upon or used as a substitute for consultation with legal, accounting, tax and/or other professional advisers.
David Rodeck is a professional freelance writer based out of Delaware. Before writing full-time, he worked as a health- and life-insurance agent. He specializes in making insurance, investing and financial planning understandable.