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What to make of the IRS's latest Obamacare move

Chris Hondros/Getty Images News

The IRS recently issued a ruling that aims to discourage "employer dumping" into the new state exchanges, Robert Pear reported in the New York Times.

It's important to be clear as to what this ruling does and doesn't do. It doesn't prohibit or even penalize employers from sending their employees to purchase insurance marketplaces. It just clarifies that any additional money businesses offer employees to help them buy insurance will be taxed like normal wages.

But to understand the commotion around this ruling you need to understand what the Obama administration's health wonks fear most: employer dumping.


What is employer dumping?

Obamacare requires large employers, defined as those who have 50 or more full-time employees, to offer health insurance to all of their employees or else pay a penalty starting in 2015. The health insurance has to meet certain minimum standards with regard to how generous the benefits are and how expensive the monthly premium can be as a share of the employee's income. And good health insurance is expensive. Recent estimates peg the annual cost at $23,215 for a family of four, on average.

One big reason employers offer health insurance is that any money a company puts towards premiums is exempt from taxes. Wages, by contrast, are taxable. This means a dollar paid toward health insurance goes farther than a dollar paid toward salary.

Most big employers currently offer insurance. But the fear is that the health insurance exchanges — and the subsidies that come with those plans for some families — might give them a reason to stop. Instead, they might just pay the penalty and "dump" their employees on the exchanges. This would be less expensive for the employer than offering full health benefits, and it might even be better for the employees. But it will be worse for taxpayers who have to pick up the tab for the subsidies.

What did the IRS do about employer dumping?

Employers can still cease offering health insurance and dump their employees into the exchanges. What the IRS said they can't do is use tax-exempt funds to help offset the cost of exchange coverage, even though their contributions toward traditional employer-sponsored coverage were untaxed. Doing that comes with a penalty of $100 per day per employee — up to $36,500 per worker. This is the fine that the New York Times published an article about.

In other words, if employers want to give their workers more money to buy health insurance on the exchanges, that money will be taxed just like normal wages would be. The only way for employers to spend on health insurance tax free is to offer the insurance themselves.

Is there evidence of employers dumping so far?

There's no hard evidence showing a trend among large businesses to move their workers from employer-sponsored coverage to state exchanges. The closest is the withdrawal of health insurance offers for some part-time employees, who businesses are not required to cover under Obamacare. Trader Joe, Home Depot, and other retailers have made this move, arguing that their part-timers are better off with higher wages and the more generous coverage they'll receive through the exchanges.

There are also anecdotal reports of employers scaling back hours so that employees count as part-time, not full-time, absolving employers of their responsibility to provide health coverage. However, this trend has yet to show up in employment data.

What's the bottom line?

This ruling from the IRS actually changes very little. Employers might still drop insurance coverage and direct their employees to the health insurance exchanges — they just can't keep claiming a tax preference if they do so. It will be several years, at least, before we can judge how pervasive this trend actually is, and how it affects businesses and their workers.