The law that governments most commonly pass is the Law of Unintended Consequences.
The legislation to help small businesses reduce costs and insure more people, the Affordable Care Act, or Obamacare, may do the opposite.
First, a little history on employer-provided healthcare.
During World War II, labor markets were tight and demand for good employees was fierce. When federal law imposed wage and price controls that prohibited employers from raising wages to attract workers, employers increased benefits such as healthcare.
In 1945, President Truman proposed a national healthcare system open to everyone on an optional basis. It failed in the face of fierce opposition from the U.S. Chamber of Commerce and various medical associations, which called it “socialism.” Labor unions campaigned for employer-provided healthcare. In 1954, Congress passed section 105 of the tax code, which allows employers to provide employee healthcare without the employees having to pay tax on the value received. (Today, that law is the most expensive tax “loophole,” costing the government more than $175 billion per year.)
By 1958, three quarters of Americans had employer-provided health coverage. (Today, the figure is less than half.)
In 1961, the IRS approved Healthcare Reimbursement Arrangements, or HRAs, that allowed employers to reimburse employees – with a receipt – for healthcare expenses without the employees owing tax on the reimbursement. Obviously few, if any, employers have unlimited reimbursement plans.
For whatever reason, group plans cost more per person than individual plans. For example, a group plan for a company with 10 to 25 employees with an average age of 35 costs about $800 per month per employee. Individual plans average about $300 per month. As a result, many small companies use HRAs to reimburse employees for their individual plans.
Beginning this year, Obamacare eliminated policy limits, so that a person with cancer no longer had to worry about running out of insurance.
But guess what? HRAs have limits, so reimbursement plans are now taxable for employees. Though HRAs are mainly used by small businesses, Target recently announced it was going to use HRAs to reimburse thousands of its employees up to $500 per month so they can buy their own insurance. (This also cuts Target’s cost in half, since group insurance costs $1,000 per month.) Because $500 is not an unlimited amount, those employees will owe tax on their reimbursements.
Clearly, Obamacare was trying to protect that cancer patient by requiring unlimited benefits, but did it intend for employees of small businesses to be hit with higher taxes? Does Obamacare intend to push small businesses into buying group policies at double the cost of individual plans? That’s not imaginable, though cynics and Obamacare-haters will say: Of course.
How many small companies use reimbursement plans? The executive director of a small Habitat for Humanity affiliate that uses a reimbursement plan says, “Lots of trees in those woods.” Its employees will collectively owe an additional $8,000. My company’s employees will owe an additional $25,000. Both the Habitat affiliate and my company will also reimburse the employees’ additional tax, but that only increases our costs.
In its effort to reduce costs and help small businesses, Obamacare increased taxes on the employees of small businesses. That is the Law of Unintended Consequences.