Archive for the ‘Healthcare Reform’ Category

The Cost of NOT Offering Health Insurance to Employees

May 30, 2013


ACA is here to stay, and employers, large and small, are assessing their workforce composition and the obligations or penalties which will kick in next year.  Businesses which are deemed to be small employers under the regulations are breathing a sigh of relief that the burdensome requirements of the new legislation do not apply to them.  Large employers, those employing 50 or more FTEs as defined by the law, are deciding whether to “play or pay”, meaning to offer health insurance or pay an IRS penalty for not doing so.  Whether an employer is exempt from the requirement or calculates that the penalty is less expensive than paying health insurance premiums, the consequences of not offering health insurance can hit the bottom line hard.

Unfortunately, the sensibility of offering health insurance is escaping many employers.  The 2013 Aflac Workforce Report examined issues impacting employee benefits.  As shown by the results below, a gap exists between employer and employee perceptions of the importance of benefits.


Employers believe benefits are extremely or very influential on:

Employees believe benefits are extremely or very influential on:

Job satisfaction – 56%

Job satisfaction – 79%

Loyalty to employer – 50%

Loyalty to employer – 66%

Willingness to refer friends – 39%

Willingness to refer a friend – 54%

Work productivity – 32%

Work productivity – 62%

Decision to leave company — 34%

Decision to leave company – 55%

Read the full study at

Employers who fail to recognize the value that employees place on benefits put their business at a disadvantage for talent attraction and retention.  Losing an employee who defects to a competitor for a more attractive benefit package creates costs which are no less important or real than the costs associated with paying vendors for goods or services.  These are very real costs to the employer, but rarely are they measured because no process is in place to tabulate the costs; such costs are not reported to top management; and many employers view turnover as an inescapable cost of doing business.

Numerous sources provide estimates of the cost to replace an employee.  The range is anywhere from $2,000 to $7,000 for an $8.00 per hour employee, or 30-50% of the annual salary of an entry level employee.  For middle level employees the replacement cost is estimated at 150%, and for specialized, high level employees or management the cost can be as high as 400% of their annual salary.   Consider the direct and indirect costs of hiring a new employee:

Terminating the Departing Employee

Processing a terminated employee includes:

  • ·         Conducting  an exit interview, stopping  payroll, and revoking passwords and other security privileges
  • ·         Processing the various forms needed to terminate an employee and updating personnel records
  • ·         Communicating the termination to the existing staff


Recruiting a Replacement Employee

Finding a replacement for the terminated employee requires:

  • ·         The internal or external recruiter’s time to understand the open position requirements and the desired qualifications
  • ·         Placing and paying for advertisements and job postings for the open position or incurring outsourcing costs for a search firm
  • ·         Conducting interviews, discussing assessments and selecting a finalist. Keep mind the multiples associated with this process                  as generally there are several candidates for a position.
  • ·         Incurring costs of educational, credit, criminal background, and other reference checks

Managing the Vacant Position

The time between the employee’s resignation notice and hiring of a replacement places additional burden on supervisors and staff which includes:

  • ·         Identifying and assessing the status of incomplete or pending work
  • ·         Re-assigning work to other employees, shifting the responsibility to supervisory personnel or hiring a temporary employee.   It may also be necessary to explain and review work assignments more carefully if the work has been assigned to someone who normally does not do it.
  • ·         Following up with customers to communicate change in personnel
  • ·         Assessing the impact on potential loss in sales, production delays or new product introductions

Orientation and Training of the New Employee

Once a new employee is hired, onboarding and training are required to:

  • ·         Add the new person to payroll, establish computer and security passwords, and issue  identification cards
  • ·         Establish an email account, telephone extension, and credit card accounts
  • ·         Assign  equipment such as a desktop, laptop, cell phone, or automobile
  • ·         Train the employee on duties, expectations and responsibilities
  • ·         Integrate the employee into the right team of peers
  • ·         Introduce the employee to the organization and  customers

Impact on Customer Relationships

When a knowledgeable employee leaves, taking experience and customer service ability with him or her, customer relationships can suffer if:

  • ·         The employee takes the customer with him or her to the new employer
  • ·         Customer commitments are not met after the employee leaves because of the intimate knowledge the employee had of a transaction or arrangement
  • ·         Customers become frustrated or annoyed dealing with trainees

Replacing key personnel, such as those with highly technical or industry knowledge or management experience, magnify many of the costs described above.   And the longer a specialized or management position is vacant, the potential harm to a business grows.

In light of the cost to replace an employee, is it a wise decision to not offer health insurance?  It hardly seems so when the actual costs to replace an employee can easily exceed the employer’s share of health insurance premiums.  And if administration costs of a group health plan are a concern, they will only be substituted by the administration of terminating and hiring replacements.  Failing to offer health insurance will not only cause employees to seek benefits elsewhere, but will also place a company at a competitive disadvantage in attracting new talent.  The best and brightest will find the employers with the most attractive benefit package, leaving those who do not with a mediocre workforce.

The complexity of the new healthcare requirements can be overwhelming, especially for an organization which does not have the resources in-house to deal with them.   But working with the right team of experts can assist a business in developing a strategy for managing costs and attracting and retaining the talent needed to support growth and long term viability.  A knowledgeable insurance broker and a healthcare reform consultant can help develop a workforce structure and benefits package to ensure a business has the human capital to meet its goals.

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Balancing Business Strategies: Workforce Realignment Considerations Under ACA

April 30, 2013

ERISA510Like most employers, you’ve probably spent the last several months wading through a sea of information on the Patient Protection and Affordable Care Act (“ACA”). You may have even begun devising a strategic plan that addresses the Employer Shared Responsibility rules released earlier this year by the Department of the Treasury dubbed as the “Play or Pay” provisions.  But just when you think you have it all figured out, there is another set of potential issues to consider before implementing an ACA compliance strategy; the provisions of the Employee Retirement Income Security Act (ERISA).

Most employers are familiar with ERISA when it comes to vested benefits such as retirement plans, but ERISA also applies to non-vested benefit plans including health insurance coverage.  Section 510 of ERISA specifically prohibits certain actions that could interfere with an employee’s attainment of a right to a benefit. The statute provides, in part, that “it shall be unlawful for any person to  . . . .  discriminate against a participant or beneficiary for exercising any right to which he is entitled under the provisions of an employee benefit plan . . . or for the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan.”  And, that is where the rub comes in.

ERISA §510 and Workforce Restructuring

In 2014, under the ACA, large employers (those with 50 or more full time equivalent employees) will be required to either offer affordable health coverage to full time employees (classified by ACA as those working 30 or more hours per week) or be subject to a “No Coverage” excise tax as codified in §4980H of the Internal Revenue Code.   The ACA’s mandate is an either/or proposition and this key point should not be overlooked during ACA compliance planning.

Many large employers have indicated that they will consider adopting financial strategies aimed at minimizing their exposure to Play or Pay penalties through workforce realignment initiatives designed to replace full time employees with part time workers and further limit hours worked by part time employees to fewer than 30 hours per week.   This is a strategy that may be particularly attractive to employers with variable, per diem workforces; high turnover and/or lower paid workers.   In certain cases, however,  workforce restructuring efforts may open up ERISA §510 exposure and, as a result, employers considering realignment strategies will want to tread carefully and ensure that their actions to minimize exposure to penalties under the ACA don’t end up creating replacement liability under ERISA.

To bring an action under ERISA §510, an employee is required to demonstrate that his employer interfered with an ERISA guaranteed right to participate in the employer’s health plan.   However, since health benefits are not considered vested for purposes of ERISA, employers are free to periodically modify coverage provided as well as eligibility for benefits under an existing health plan without interfering with rights guaranteed to employees.   Thus, modification of the health plan or modification of an employee’s work requirements does not, in and of itself, constitute a problem under ERISA.    On the other hand, if an employee is eligible for health care benefits under an existing plan and the employer curtails working hours specifically to create ineligibility for attainment of coverage and/or avoid a potential “Play or Pay” penalty, an ERISA complaint may be actionable.

Consider the following examples:   The employer currently offers healthcare coverage to all of its full time employees who work 40 hours per week and their dependents.  Part time employees who work fewer than 40 hours a week are not eligible for coverage.  In 2013, as a means of avoiding the 2014 No Coverage penalty, the employer adopts a workforce realignment plan that effectively reduces the hours for all current non-covered, part time employees to less than 30 hours per week by the close of the year.  Because the employer has not interfered with any part-time employee’s current or attainable right under the employer’s health plan, the realignment action would not be considered an ERISA violation.

On the other hand, if the employer goes further and similarly reduces the hours of full time employees who are either currently covered or who expect to be covered after satisfaction of a plan waiting period, a §510 claim would likely survive because, in this instance, the employer has interfered with a current or attainable benefit under the plan.

Alternatively, consider the employer who has traditionally offered healthcare coverage to all of its employees who work at least 4 days, or 32 hours, per week.  After performing an analysis of anticipated premium increases, the employer concludes that it must limit its offer of coverage to a smaller employee group working at least 40 hours per week because it simply cannot afford to continue benefits for an expanded portion of its workforce.  Thus, the employer modifies the eligibility provisions of the plan to require at least 40 hours per week as the threshold for coverage eligibility and changes other coverage provisions of the plan to reduce the impact of the expected premium increase while also, subsequently, cutting the hours of current employees who work fewer than 40 hours per week, limiting them to no more than 24 hours/3 days per week to avoid exposure to the “Play or Pay” penalties.  In this case, an affected employee who loses hours but who is no longer eligible for coverage due to the changed eligibility requirements would likely have no claim under §510 of ERISA.

In all cases, it is imperative that employers considering realignment strategies that could result in plan changes and/or workforce changes should consult with qualified counsel to determine the risk associated with HR strategies in the face of the ACA requirements.  2013 will be a year of careful planning and analysis of what the ACA means to employers and it is not too soon to start thinking about compliance strategies that will minimize risk as well as financial impact.  And, as always, when dealing with issues related to ERISA rules, consult with qualified counsel.