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penalty

When a Penalty Is Not a Penalty

The Affordable Care Act requires most Americans to buy qualifying health insurance coverage. Fail to comply with this mandate, and there’s a financial penalty waiting for you come tax time. But when is a penalty not a penalty? When is a mandate not a mandate? Hey, kids, let’s do some math.

The penalty for going uninsured in 2016 is $695 per adult and $347.50 per child, up to a maximum of $2,085 or 2.5% of household income, whichever is greater.

To determine the cost of coverage, we’ll use the second-lowest Silver plan available in a state. That’s the benchmark used to calculate ACA subsidies, and in 2015 Silver plans were roughly 68% of policies sold through an exchange. Even more important, I found a table showing the cost of the second-lowest cost Silver plan for 40-year-olds by state, but I couldn’t find a similar table for other levels.

The least our 40-year-old could spend on the second-lowest Silver plan this year is $2,196, in New Mexico; the highest premium is $8,628, in Alaska. The median is $3,336. Divide the penalty by the premium, and you get 32% of the cheapest premium and 21% of the median premium. Put another way, paying the penalty saves our 40-year-old  consumer $1,500 in New Mexico and more than $2,600 in the mythical state of median.

I did find a table showing the national average premium a 21-year-old would pay for a Bronze plan: $2,411.  In this situation, the $695 penalty amounts to just 29% of the policy’s cost, a savings of more than $1,700.

The purpose of this post is not to encourage people to go uninsured. I think that’s financially stupid given the cost of needing health insurance coverage and not having it. And, personally, I support the individual mandate. I also understand the political obstacles to establishing a real penalty for remaining uninsured.

However, I also believe the individual market in this country is in trouble. (More on this is a later post). Adverse selection is a contributing cause to this danger. The individual mandate is supposed to mitigate against adverse selection. The enforcement mechanism for that mandate, however, is a penalty that, for many people, is no penalty at all.

That’s not just my opinion. That’s the math.

A version of this article was originally posted on LinkedIn.

Is It Better To Pay The PPACA Penalty Or Continue Offering Health Coverage?

When 2014 arrives, employers and their workers must be prepared for the changes brought by the Patient Protection and Affordable Care Act (PPACA). New regulations will require larger employers to offer medical coverage to employees or pay a penalty for not doing so. This is why it is important for employers to start analyzing their options and developing a strategy sooner rather than later.

Many employers have reported that the PPACA law will increase their expenses, which will result in the need to reduce workers' hours or lay off employees. Many employers are favoring the idea of eliminating their health insurance offerings, in part because the penalty appears to be much cheaper than the cost of the coverage they are currently providing. Although paying the penalty may seem like the right answer for some employers, there are several reasons why this may not always be the best choice.

Reporting Requirements
If employers eliminate their health coverage offerings, they will be subject to federal reporting rules to determine the amount of the company's penalty that applies. In addition to collecting more data from employees, employers may have to deal with the hassles of inquiries from the state insurance exchanges about whether coverage is available to employees.

Losing Tax Breaks
Employers offering health coverage qualify for several tax breaks. For example, employee premiums paid through Section 125 plans are not counted as taxable wages, which reduces the payroll taxes paid by the employer and employees. Employers who do not sponsor coverage will lose some of these tax breaks.

Difficulty Recruiting And Keeping Top Talent
If employers make too many cuts to their health programs or choose not to offer coverage, they could make their companies less attractive to the best potential employees. Workers who are considered top talent may start looking elsewhere for employers offering health benefits. In addition, the costs of hiring new workers, compensating for lost productivity and paying the costs associated with business disruptions could cost more than offering reasonable coverage.

Variable Financial Complications
If employers decide to drop coverage, they will likely see employees start demanding other forms of compensation, since they will be expected to use their own money to pay for coverage in the state insurance exchange. Furthermore, the penalties are not deductible as a business expense for the company, and the penalties may increase over time.

Counting Difficulties
It will be difficult for most employers to form a final count of their staff. Classifying part-time and full-time employees is not an easy process. In 2012, the Internal Revenue Service released a set of rules that are not completely clear about what constitutes part-time status. If employers miscalculate how many part-time workers they have, this mistake could be costly.

The Patient Protection and Affordable Care Act will bring big changes for both employers and employees. As employers develop their plans for 2014, the impact on both the business and the employees over the next several years should be considered.