We’ll Read the Bill, Part I: ObamaCare’s Employer Mandate

The Washington Times, July 21, 2009

How will ObamaCare affect you? Not in some broad political sense, but in a narrow sense — how will it affect you as an employer, as a patient?

It hasn’t been easy for most Americans to find answers. House Democrats won’t even commit to reading the bill they proposed. President Obama admits that he doesn’t know what’s in it.

Luckily, we’re here to read it for you.

Today’s feature of Health Care Reform is the mandate on employers to provide insurance for employees. What does it mean for your employer, and what does it mean for you?

The House Democrats’ bill (text here) requires all employers with annual payroll greater than $250,000 (all but the tiniest businesses) either to pay a new and addition payroll tax, or else to provide health insurance for their employees. This is in keeping with the proposals President Obama offered during his run for office. The new ObamaCare payroll tax is set up as a direct disincentive to employment: the more jobs an employer creates, the higher the tax rate he pays, ranging from 2% up to 8%.

If an employer chooses to provide health insurance, he can avoid the tax, but there are rules about what kind of coverage counts. Most importantly, the employer must be paying 72.5% of the lowest premium plan available for individuals, or 65% of the premium for an employee who covers his family. All employees must be auto-enrolled in the company program unless they specifically request otherwise.

On average, employer-based family plans cost $12,700 in 2008, and individual plans cost $4,700. For low-wage employers who don’t currently offer insurance — particularly those in states where the cost of living is low — the prospect of paying an extra $8,255 or $3,407 per employee per year will be daunting. Businesses with smaller profit margins might not survive this mandate. In many cases, especially for a firm whose employees have families and children, the employer is likely to opt for the payroll tax.

Small businesses cannot, in most cases, simply eat such expenses since they have such small margins. In order to counterbalance this new cost, many businesses will naturally want to turn to reducing employee wages. The House Democrats’ bill, however, does not allow for this, even if the employees consent to such a reduction. As the bill states:

“[A]ny contribution on behalf of an employee with respect to which there is a corresponding reduction in the compensation of the employee shall not be treated as an amount paid by the employer.”

How does an employer make up for the added expense if he can’t cut the wages of existing employees? His options are to raise prices, freeze salaries and hiring, cut pay for new employees, or lay off current employees. He can also provide no insurance and pay the 8 percent payroll tax instead. If it’s cheaper, he can offset the tax with smaller price-hikes, shorter wage- and hiring-freezes, and fewer layoffs.

Another solution for some smaller businesses, especially new ones, is to avoid mandates and taxes through outsourcing and contracting. “You’ll see businesses contracting people and not hiring,” said Sally Pipes, a health care expert at the Pacific Research Institute. “There will also be a lot of businesses that just don’t start.”

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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