The Senate health care bill includes a well-known “employer mandate” provision that would require employers to offer “qualified” health plan and pay 60% of the premium, or pay an annual tax penalty of $750 per full-time employee.
What is less well-known is that the provision would also tax companies even if they do offer insurance – but only if they hire people from low- and moderate-income families who qualify for, and elect to accept, premium subsidies. And the tax penalty for hiring those employees – arguably the people who need jobs the most – would be a whopping $3000 per year.
Who would qualify for such a subsidy?
There are two criteria. First, family income – not how much this employee is paid by this company, but total family income – would have to below four times the federal poverty level (FPL). The FPL depends on family size; for 2009 four times the FPL would be $43,320 for a single adult with no children and $88,200 for a family of four (regardless of whether it’s a single parent with three children or two parents and two children).
Second, the premium share to be paid by the employee would have to be more than 9.8% of family income. Note that in both cases, whether a company has to pay the $3,000 tax depends not on how much that company pays its employee, but on the total income of all the employee’s family members from all sources. (Normally employers don’t know the income of their employees’ family members, but the Senate bill calls for the IRS to tell employers which employees fall into this category on a monthly basis.)
The combination of this tax penalty and the rules for determining who qualifies for premium subsidies would encourage companies to engage in some new and repulsive forms of employment discrimination. Here are some examples.
The Single Parent vs. The “Second Income”
Suppose an employer is faced with two applicants for the same job at the same pay: a single parent of three children, and a married parent with two children and a working spouse. In this case, the “4 times FPL” threshold is the same for both applicants, since they both have the same family size. However, once hired, the applicant with the working spouse will have a higher family income, so the single parents is more likely to qualify for a premium subsidy – which means the company is more like to face a $3,000 penalty if they hire the single parent. This means, of course, that they are more likely to hire the applicant with the working spouse.
The Teenager vs. The Adult
Now suppose company has an entry-level job, and the two applicants are a teenager and an adult. Suppose the teenager has one or two working parents, and is still a dependent on their tax return. In this case, the teenager may have a larger family size (unless the adult has children), but most likely has a much higher family income. The teenager may be covered under a parent’s health plan, but even if not, the teenager’s “family income” includes the parents’ income. The teenager is not likely to generate a $3,000 tax penalty for the employer, but the adult is – especially if the adult has children to support. So the employer’s incentive is clearly to hire the teenager rather than the adult – especially if the adult is a single parent.
The Illegal Alien vs. the Legal Resident
The bill contains provisions that bar illegal aliens from receiving premium subsidies. Putting aside the controversy over whether those provisions would be enforceable in practice, let’s take them at face value and assume that an employer faces two applicants, one of whom is an illegal alien and the other of whom is a U.S. citizen or legal resident alien. Of course, the employer is not supposed to hire the illegal alien in the first place, but the presence of millions of employed illegal aliens means we already know that this is not effectively enforced. However, if one must prove legal residents to receive a premium subsidy, the illegal alien is not likely to apply, much less receive, the subsidy. If there is no subsidy, there is no $3,000 tax penalty for the employer. If the job is low-paying and any (legal resident) employee likely to qualify for a subsidy, the employer’s incentive is to hire the illegal alien, rather than pay a $3,000 tax penalty for hiring a U.S. citizen or legal immigrant.
The Double Layoff
Suppose an employee has a working spouse, and their combined income is high enough for their family size that they don’t get a subsidy and don’t generate a $3,000 penalty for each employer. Then, suppose one spouse loses his or her job and with it the family’s health insurance – and the other spouse’s income is, by itself, low enough to qualify the family for a subsidy. In that case, the IRS will notify the other spouse’s employer that they now have a subsidize employee and they have to start paying the $3,000-a-year tax (monthly, at the rate of $250 per month). This sudden increase in employment cost will encourage the other spouse’s employer to lay off the second spouse as well, leaving both of them unemployed. The only way for the couple to avoid this outcome would be to go without insurance – but that would require them to pay an individual tax penalty of $1500 a year for both of them going uninsured (more if they have children, up to a maximum of $2250 per year) – and with one less job, they’d have less money available to pay the penalty.
The Marriage Penalty
In 2009 four times the FPL would be $43,320 for a single adult with no children, and $58,280 for a family of two. Consider a couple with no children, each earning $30,000 a year. If they marry, their income will exceed four times the FPL; they will not be eligible for a subsidy and will have to pay the full cost of health insurance, which could be over $10,000 for two single policies or over $13,000 for a family policy. On the other hand, if the “live in sin,” they would both be eligible for subsidies, and would be required to pay a maximum of 5.8% if their income for health insurance. This amounts to $3470 for the two of them. In other words, marriage cost them a health insurance penalty of over $6500 per year.
The Senate health care bill includes a well-known “employer mandate” provision that would require employers to offer “qualified” health plan and pay 60% of the premium, or pay an annual tax penalty of $750 per full-time employee.
What is less well-known is that the provision would also tax companies even if they do offer insurance – but only if they hire people from low- and moderate-income families who qualify for, and elect to accept, premium subsidies. And the tax penalty for hiring those employees – arguably the people who need jobs the most – would be a whopping $3000 per year. However, there is a limit: the total tax penalty under this provision is limited to $750 times the total number of full-time employees. That is, once enough of a company’s employees (that is, 25% of them) qualify for the subsidy, they are paying the same tax penalty as if they didn’t offer insurance at all – so they might as well drop their health.
The question is, how would this affect the company’s other employees?
Who Qualifies for the Subsidy?
Who would qualify for such a subsidy? There are two criteria. First, family income – not how much this employee is paid by this company, but total family income – would have to below four times the federal poverty level (FPL). The FPL depends on family size; for 2009 four times the FPL would be $43,320 for a single adult with no children and $88,200 for a family of four (regardless of whether it’s a single parent with three children or two parents and two children). Second, the premium share to be paid by the employee would have to be more than 9.8% of family income. Note that in both cases, whether a company has to pay the $3,000 tax depends not on how much that company pays its employee, but on the total income of all the employee’s family members from all sources. (Normally employers don’t know the income of their employees’ family members, but the Senate bill calls for the IRS to tell employers which employees fall into this category on a monthly basis.)
Who Does NOT Qualify for the Subsidy?
There are basically three categories of people who fail to qualify for a subsidy: People who are paid “too much” by this employer, people who have other working family members whose total income is “too high,” and people from small families (including single childless adults) who are disqualified at lower income levels.
What Would an Employer Do?
How an employer responds to this mandate depends to a large extent on the income and family characteristics of the employees.
A company with mostly highly-paid employees (for example, a law or consulting firm) would face the $3,000 penalty for only a small proportion of their employees (for example, low-paid support staff). A company in that situation would likely continue to offer a health plan for the benefit of their highly-paid employees. For the lower paying positions, the company would try to hire as few subsidy-eligible people, but discriminating in favor of those with other working family members and against single parents, single breadwinners, and those with larger families. (Insert link or footnote to employment discrimination WM and the discrimination vignettes post/WM).
A company with mostly lower-paid employees would have the opposite response – faced with paying the same tax regardless of whether they offer a health plan or not, they would likely not offer one. Indeed, since most (non-self-insured) employer plans require a minimum percentage of employees to participate, many employers in this situation would be unable to offer health insurance even if they wanted to.
Consider a company that has (say) 90 low-wage, low-skilled factory employees, and 10 higher-paid managerial employees. Most of the low wage employees would qualify for subsidies, which may be used only in the exchange and not to pay for an employer-sponsored plan. The offer of an employer-based health plan would not be a substantial draw or recruiting such employees, since they would not participate in it anyway.
Increasing Income Inequality
However, the lack of a plan would be a substantial loss to the higher-paid employees, who wouldn’t qualify for subsidies. Furthermore, they are likely in higher tax brackets, and would be harmed more by losing the tax benefits associated with employer-sponsored insurance. The company dropping its plan could “make whole” these employees by paying them even more – that is, by raising their salary to the point that their net pay, after buying their own health insurance with after-tax dollars, would be the same as it was before (perhaps minus the $750 per-employee tax penalty for not offering insurance).
The result would be an increase in income inequality, as higher-paid employees would be paid even more, and lower-paid employees would be paid less – about $750 less each, so the employer has enough left over to pay the tax penalty for not offering health insurance.
Who will be hit the hardest?
The hardest hit, however, would be those in the lower-paid positions who for some reason do not qualify for a subsidy, perhaps due to small family size or the income of other working family members. These employees would lose their health plan, have their pay reduced by $750, and then have to buy a health plan themselves, paying 100% of the cost with after-tax dollars – or go uninsured and face additional tax penalties.