Math and Morale

How Small Companies Can Start Dealing With Employee Anxiety About Obamacare

Workers in small firms may be confused about their health care fate under the new law, but virtually all the recent surveys show one thing quite clearly – they are also worried that the financial fallout from Obamacare will hurt their families.

This is a critical point for small-business owners to consider and internalize.

Companies that drop health coverage and let workers fend for themselves risk alienating staff, especially high earners who might have to pay far more for their health insurance than they do now. This worker backlash could cause powerful and profound damage in terms of employee engagement, productivity, recruiting and retention.

Math – as well as morale – may also convince small-business owners not to do away with health benefits.

As I mentioned, opting out can sound appealing to some small companies at first glance. The average family health policy is expected to cost $12,000 by 2014, with employers typically picking up 80 percent of the bill, or $9,600. That’s almost five times more than the $2,000 per-worker penalty, which applies to any company that employs 50 or more workers.

But small-business owners need to remember that the penalty isn’t tax deductible like other business expenses. And employees who lose coverage could easily demand some of the funds back in the form of cash or other perks. The problem here is that health benefits are tax-free, but wages aren’t; so, in the end, dropping health benefits could prove to be more expensive for companies than retaining the current plan.

Health care premiums paid directly by the company for the benefit of the worker are tax deductible. Premiums reimbursed to workers for buying their own insurance are not deductible for the employer, and are taxable to the employee.

So, what an employee sees as apples to apples – “Don’t pay my insurance premium of $1,000; give me the $1,000 and I’ll buy my own insurance” – means that the employer has to pay employment tax on the $1,000 and the employee has to pay income tax on the $1,000.

This means that the $1,000 is likely to be worth only about $750 by the time the employee gets it, and the real cost to the employer could be $1,050-$1,100 based on the employer’s portion of “wage taxes.”