By Jonnelle Marte
Expecting to get a raise next year? It could be eaten up by your health care bill.
In an effort to meet the affordability requirement of the Affordable Care Act, which kicks in next year and requires that workers spend no more than 9.5% of their income on premiums, more employers are turning to insurance plans in which premiums vary based on a person’s salary, rather than having all workers pay a flat rate. That way, employees who make more money pay bigger premiums.
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Some 12% of companies used salary-based premiums in 2012, up from 10% in 2011, according to a study by benefits consultant Mercer. The practice is especially common among large employers, with 20% of companies that have at least 5,000 employees using the strategy last year. A separate survey by the Kaiser Family Foundation found that the approach of varying premium contributions by wage level is more popular in the Northeast, where 9% of companies used the strategy, and in the Midwest, where 6% of employers did, compared with 2% of companies in the South and the West.
While the strategy, which some employers have been using for decades, is still not mainstream, more companies are adopting the system as a way to prepare for the health reform law. It makes sense for some employers to shift costs to wealthier workers, especially as health-care costs continue to grow at a faster clip than wages, says Tim Nimmer, chief actuary and chief broking officer with Aon Hewitt, a human-resources consulting firm. Companies feel more comfortable “putting that increase on their higher earners just because they can afford it,” says Nimmer. If premiums increase by $100 for a company’s chief executive it may seem “meaningless,” but “for someone making $25,000, it could be the difference between going out to eat or paying electric bills or buying gas,” he says.
The average total monthly premium for full-time employees grew to $832 this year, up nearly 14% from $731 in 2010, according to a study released by the ADP Research Institute this week. And those costs are taking up a larger percentage of income for lower-wage workers, the study found, with premiums taking up 8.4% of income for workers earning $15,000 to $20,000, up 0.9 percentage points from 2010 when premiums took up 7.5% of income. Workers earning more than $120,000, in contrast, paid 2.1% of their annual income on premiums.
Some companies will set up salary “bands” where they increase premiums in small increments of $5 or $10 based on income. Workers earning $25,000 to $50,000 may pay one rate, $50,000 to $100,00 another rate, and so on, says Nimmer. At some companies, the premium costs between lower wage workers and higher earners could vary by as much as 20%, he says.
The perks may seem obvious for the employees getting a break on their premiums, but it doesn’t offer total relief from rising health-care costs. Other expenses such as deductibles, copayments and coinsurance payments typically remain the same across all incomes. And health insurance experts say such programs face resistance from workers and other analysts questioning the fairness of the approach, especially at companies that don’t have large wage disparity between workers, says Helen Darling, president of the National Business Group on Health, a nonprofit group that represents employers offering health benefits to workers. ”You’re basically saying anybody under this gets a deal and anybody over it pays more,” says Darling. “So anybody close to the line is going to get mad.”
Still, some higher earners may be okay with the strategy for a less obvious reason: the tax perks. The earnings that workers use to pay health care premiums, along with the portion that employers put toward premiums, are exempt from income taxes, and that tax break is more valuable for higher earners who are subject to higher tax rates, says Gary Claxton, vice present of the Kaiser Family Foundation. It may be even more appealing after the new top tax bracket of 39.6% that was introduced this year for earnings above $400,000 for an individual, along with other tax hikes, goes into effect. “So if you’re a higher wage worker, you’re not likely to pass it up,” says Claxton.