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Split Subsidy with Employees?

By on | 11 Comments

Question: I employ three people at my small company making what I believe is between 200-300% FPL based on what I know about their family situation. I offer them health insurance as part of their compensation (so that the premiums are paid pre-tax) but have decreased their salaries accordingly. Can I just cut-off their health coverage and send them to the exchange subsidies ? (I would propose them a salary increase equal to half the subsidy they’d get from the state, in essence drawing a new subsidy and splitting the benefit between them and myself? Seems almost certain that we would both benefit and thus find the arrangement attractive).

Answer: A few points you should consider; (1) You can stop providing group health insurance. There is no requirement for groups with less than 50 full-time employees to provide health insurance benefits, (2) The employee’s premium assistance (subsidy) is their private concern. If you base their salary increase on their premium assistance you will be infringing on their privacy in requiring them to disclose it to you, (3) Splitting their subsidies with you is a bad idea and may even be illegal.

Let’s be candid. You are not providing any employee benefit now because you have decreased their salaries equal to the cost of the benefits they are receiving . As a result, they do get a a portion of their incomes pre-tax, but we taxpayers are providing that benefit not you. You would be doing them a great favor by dropping your current health plan at the end of the year and replacing the wages you are withholding.

11 Comments

“And health care is the great divide. In my case, I work pretty much full-time hours for one mammoth company but get no benefits. I guess I am technically a contract worker; I am referred to as a “casual.”

and

“My schedule can fluctuate wildly, calling for a shift of, say, 10 a.m. to 6 p.m. one day, 4 p.m. to midnight the next and noon to 8 the day after that.”

Who determines your “shift”. If the employer is telling you when to work, where to report, what deadlines to meet, they probably CANNOT classify you as a “casual” worker or “independent contractor”. That is an abuse. Of course, once you report them to the Dept of Labor, you stand a great chance of being classified “unemployed”.

You don’t mention your age or income, but if you are making $10 per hour, at $20,000 per year, you would qualify for a premium tax credit. You could choose an HMO, PPO, POS, or HDHP/HSA-compatible plan, at a cost of about $200 per month including subsidy.

“there are 10 people who would take my spot in an instant, so I suck it up and deal with it”

I understand your dilemma, and you shouldn’t be forced into this situation. The good news is that there are attorneys who would be happy to represent you in wrongful termination/unpaid wages & benefits litigation because you would probably win.

Thank you for the message. I’d hate to be working for John’s company. Unfortunately, so many people are getting the short end of the stick these days. I’m a print journalist (yes, I know, ugh), so I read about what a wonderful economy we have. But in reality, it’s a tale of two economies: It’s the best of times in one and the worst of times in the other. And health care is the great divide. In my case, I work pretty much full-time hours for one mammoth company but get no benefits. I guess I am technically a contract worker; I am referred to as a “casual.”

Freelancers probably have it better, as they can at least pick and choose assignments from different places and are not tied down. And some weeks, they may get an especially good gig that can put them over the hump financially. For me, though, if I’m sick, I have no choice but to work. And it’s not like I can see a doctor; I have no insurance. I also can’t take a vacation. My schedule can fluctuate wildly, calling for a shift of, say, 10 a.m. to 6 p.m. one day, 4 p.m. to midnight the next and noon to 8 the day after that.

At least I know I’ll be working. Even so, after a few years of this, you get kind of worn down and your brain no longer functions like it used to. But there are 10 people who would take my spot in an instant, so I suck it up and deal with it. Covered California will be a godsend …

You’re right, Peter. If John is paying his employees 200% of FPL, that about $23,000 per year for a single employee, or just under $500 per week. Assuming 40 hours per week, a little over $12.00 per hour.

Next, he says, “I reduce their pay by the cost of the insurance.” So he’s making them pay 100% of the premium, as I read it. If self-only cost is $200 per month, or about $50 per week, their pay before tax is now $450, and after tax, about $350 after FIT, FICA, SIT, SDI.

Under the ACA, the employer is supposed to pay 50% of the premium for the benchmark plan he selects. But John doesn’t want to do that, instead, he wants to “split” the premium tax credit with his employees by sending them to the exchange. Except that he cannot obtain any portion of the employees’ tax credits.

Well, he can certainly send his employees to the exchange since he has less than 50 employees. But if he fails to restore the $200 by which he’s already reduced their pay before he so generously gives them half of the subsidy amount as a pay increase, then he hasn’t provided any benefit to his employees at all.

As you surmised, he’s ripping off his workers.

What John fails to understand is that because his employees earn so little money, he qualifies for the 50% tax credit, and he gets to deduct the rest of the balance of premiums from business income anyway, so he’s not out anything other than a portion of cash flow each month, which he’ll recoup when he files his business tax return.

Someone is getting the raw end of the deal here, and I think it’s the employees …

“California employment and healthcare law may say what it says, and my employees may ask what they want. But I cannot force my international customers to buy my products v.s. the products of my international competitors, just because my employees want their salary net of health costs.”

Then move your business offshore like your competitors so you won’t have to observe US and California state law. But as long as your business is here, you have to comply.

California employment and healthcare law may say what it says, and my employees may ask what they want. But I cannot force my international customers to buy my products v.s. the products of my international competitors, just because my employees want their salary net of health costs. They insist, we all go down as a company and get replaced by our international competitors. No jobs, no quarrel. It is just as simple as that. International competitiveness depends on very narrow margins. An employee has to earn his/her compensation inclusive of healthcare costs, taxes etc. There is little difference whether it is the company or the employee that pays all those bills. It all comes out of the same pile: the prices we can charge internationally and still outcompete the world.

Frank … certainly some employees’ pay would be higher if they were not receiving benefits from their employers. The IRS now requires the full value of employer-sponsored health benefits to be stated on the employee’s Form W-2. Why? Because eventually, this is going to become “imputed income” for which the employee will have to pay income tax.

No one disputes that the cost of benefits and payroll taxes, and things like workers’ compensation add at least 30% to 40% of an employee’s wages to the cost of doing business.

But I get the distinct sense that the original poster was saying, “OK, you want health insurance, I’m giving you health insurance, and I’m reducing your pay by the amount of the premium.” That’s not lawful in California, unless it is voluntary, as in, “The cost of health insurance for you is $XXX per month, and we will take it out of your pay if you sign up for the insurance.”

In the former scenario, the employee has no choice but to accept the benefit and the reduced pay, or quit. In the second scenario, the employee has the right to decide what’s more important, pay or benefits. Very different. And if they don’t like either choice, they may still quit.

Max and Phil, I think both of you are off the mark when you fail to realize than an employer reduces their employee’s salary as a result of the health care premium payment that the employer is paying. This is taking place with all employers of all types. The cost of benefits provided (health care and dental premiums, disability insurance, life insurance, vacation, employer’s FICO expense, etc.) are all part of the employer’s expenses and fall to their bottom line from a P&L standpoint. These benefit package overhead overhead costs typically fall between 20-34% of the employee’s salary for an employer who offers all of these. The salary that is ultimately paid to the employee will always be affected by these benefit packages.

“Right now, due to job market equilibrium, we essentially split their healthcare tax exemption.”

There is no such thing! You are ripping off your employees by lowering their salary to pay their health insurance. What are they obtaining as a “pre-tax” benefit? Even less take home pay?

If you were going to drop the employees’ health care and send them to the Exchange for their coverage, and not replace 100% of their income with what you are now spending on their insurance, you would continue to exploit them at the taxpayers’ expense.

I’m not going to get into the ethics of what you are doing — you can run your business pretty much any way you want. But from the tone of your comments, maybe you would be better off closing up your shop and going to work for someone else … who might provide you with enough income to pay for your health insurance.

Of course I am able to provide the employee benefit because I have decreased their salary by an equal amount. Their combined health benefits cost me 30k for three employees. Without decreasing their salaries commensurately I would not be competitive, and I have to compete internationally. If I bare the cost myself, from profit, then I’d fare better closing my four person software company and becoming an employee myself at some other company.

Right now, due to job market equilibrium, we essentially split their healthcare tax exemption. But the subsidy amount would be much higher. So it would be better to split that. I don’t have to really ask them what the amount is. I would simply estimate an amount actuarially, assume a strong subsidy and eventually reshuffle my workforce, shopping around for an employee who can get such subsidy and thus accepts my deal. I need not know why he/she is accepting, but can actuarially guess why. No need to delve into or disclose specifics either on the employee or employer side.

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