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I have posted an excerpt from a short article posted online at truthonthemarket.com and written by Thom Lambert. It goes over exactly this. Great site too, the contributors are law professors and/or economists specializing in business/corporate law with a libertarian slant.
Do Your Low-Wage Employees a Favor: Drop Their Health Care Coverage
Thom Lambert — 12 November 2012
...It is well understood in labor economics, and a vast body of empirical research demonstrates, that employee benefits are a one-for-one substitute for salary. When an employer purchases benefits for an employee, she normally reduces the employee’s take-home pay by an amount equal to the amount she spends on the benefit. The employer thus faces a “wage or benefits” decision whenever she sets up a employee’s compensation package, and she should settle on the combination that provides the most total benefit to the employee.
When the employer buys health insurance for her employees, they receive an effective subsidy from the federal government because compensation paid in the form of health insurance benefits, rather than salary, is not taxed. The amount of the effective subsidy is the sum of the payroll tax rate and the employee’s marginal income tax rate times the policy price paid by the employer. Because marginal tax rates increase with income, the effective subsidy for high-wage earners is much greater than for low-wage employees. (For most lower-income workers, the effective subsidy will be 22.65% * the policy price. That assumes a 7.65% payroll tax (1.45% Medicare + 6.2% Social Security) and a marginal income tax rate of 15%.)
If, but only if, an employer declines to purchase ACA-compliant insurance for her lower-wage employees (those earning up to 400% of the Federal Poverty Level), they may purchase federally subsidized insurance on a state exchange. The amount of the subsidy available on an exchange is greater at lower-income levels. It generally swamps the effective subsidy for employer-provided health insurance, especially at lower wage levels.
Because higher-wage employees (1) receive relatively higher effective subsidies for employer-provided health benefits, and (2) are not eligible for ACA subsidies on state exchanges, it makes sense for their employers to continue providing them with health insurance benefits. Lower-wage workers, by contrast, are better off if their employers stop compensating them with health insurance, for which only relatively small subsidies are available, and thereby enable them to take advantage of the large subsidies available to employees without employer-provided health care coverage.
An example may help here. Suppose an employer wishes to provide $40,000 in total compensation to a 40 year-old employee who is the head of a four-person household. If the employer purchases a family policy for the employee (approximate cost $12,000/year), it will pay the employee $28,0000/year. The employee will pay no payroll or income tax on the component of her compensation provided as health insurance, so she receives an effective federal subsidy of $2,718 (22.65% * $12,000). If the employer were to drop health care coverage, the employee would receive all her compensation — all $40,000 — as take-home pay. On the incremental $12,000 paid as cash rather than benefits, she’d have to pay $2,718 in tax, but she would now be eligible to purchase her own insurance at a subsidized rate. The ACA would limit her out-of-pocket insurance expense to 4.95% of annual income ($1,980), which means she would receive a whopping $10,020 subsidy on the $12,000 family policy. This employee is $7,302 better off if her employer drops coverage (costing her $2,718 in foregone tax subsidy) and allows her to access the more generous subsidies available on state exchanges (benefiting her by $10,020).
In a competitive labor market, we can expect all sorts of employers seeking to attract lower-wage workers to follow this ”pro-employee” practice. We can also expect ACA-proponents and a compliant press to pillory such employers. The real culprit, though, is the group of policymakers who forced upon us the perverse set of incentives known as the Affordable Care Act. Sadly, it seems it’s here to stay.
Do Your Low-Wage Employees a Favor: Drop Their Health Care Coverage
Thom Lambert — 12 November 2012
...It is well understood in labor economics, and a vast body of empirical research demonstrates, that employee benefits are a one-for-one substitute for salary. When an employer purchases benefits for an employee, she normally reduces the employee’s take-home pay by an amount equal to the amount she spends on the benefit. The employer thus faces a “wage or benefits” decision whenever she sets up a employee’s compensation package, and she should settle on the combination that provides the most total benefit to the employee.
When the employer buys health insurance for her employees, they receive an effective subsidy from the federal government because compensation paid in the form of health insurance benefits, rather than salary, is not taxed. The amount of the effective subsidy is the sum of the payroll tax rate and the employee’s marginal income tax rate times the policy price paid by the employer. Because marginal tax rates increase with income, the effective subsidy for high-wage earners is much greater than for low-wage employees. (For most lower-income workers, the effective subsidy will be 22.65% * the policy price. That assumes a 7.65% payroll tax (1.45% Medicare + 6.2% Social Security) and a marginal income tax rate of 15%.)
If, but only if, an employer declines to purchase ACA-compliant insurance for her lower-wage employees (those earning up to 400% of the Federal Poverty Level), they may purchase federally subsidized insurance on a state exchange. The amount of the subsidy available on an exchange is greater at lower-income levels. It generally swamps the effective subsidy for employer-provided health insurance, especially at lower wage levels.
Because higher-wage employees (1) receive relatively higher effective subsidies for employer-provided health benefits, and (2) are not eligible for ACA subsidies on state exchanges, it makes sense for their employers to continue providing them with health insurance benefits. Lower-wage workers, by contrast, are better off if their employers stop compensating them with health insurance, for which only relatively small subsidies are available, and thereby enable them to take advantage of the large subsidies available to employees without employer-provided health care coverage.
An example may help here. Suppose an employer wishes to provide $40,000 in total compensation to a 40 year-old employee who is the head of a four-person household. If the employer purchases a family policy for the employee (approximate cost $12,000/year), it will pay the employee $28,0000/year. The employee will pay no payroll or income tax on the component of her compensation provided as health insurance, so she receives an effective federal subsidy of $2,718 (22.65% * $12,000). If the employer were to drop health care coverage, the employee would receive all her compensation — all $40,000 — as take-home pay. On the incremental $12,000 paid as cash rather than benefits, she’d have to pay $2,718 in tax, but she would now be eligible to purchase her own insurance at a subsidized rate. The ACA would limit her out-of-pocket insurance expense to 4.95% of annual income ($1,980), which means she would receive a whopping $10,020 subsidy on the $12,000 family policy. This employee is $7,302 better off if her employer drops coverage (costing her $2,718 in foregone tax subsidy) and allows her to access the more generous subsidies available on state exchanges (benefiting her by $10,020).
In a competitive labor market, we can expect all sorts of employers seeking to attract lower-wage workers to follow this ”pro-employee” practice. We can also expect ACA-proponents and a compliant press to pillory such employers. The real culprit, though, is the group of policymakers who forced upon us the perverse set of incentives known as the Affordable Care Act. Sadly, it seems it’s here to stay.
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