Health care reform top business budget issue

January 11, 2010
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Health care reform and President Barack Obama’s corporate tax changes are two bottom-line issues that executives should pay close attention to this year.

As the U.S. Senate and House prepare to iron out the differences in the chambers’ health care bills, company officials need to concentrate on two key areas in the reform legislation.

“The first one is what I call the ‘pay-or-play’ mandate, which, in this case, employers are required to provide employee coverage that meets what I’ll call a minimum standard. If the minimum-coverage standard isn’t offered, a company will be required to pay an amount to the federal government. So therein lays the ‘pay-or-play’ formula that the government has come up with,” said David Hoogendoorn, managing partner for the West Michigan and Northern Indiana regions of Ernst & Young LLP.

As Hoogendoorn pointed out, some companies may have to increase funding to their employee health care offerings if they don’t meet the minimum the bill ultimately mandates. Other companies may be forced to offer coverage if they haven’t done so recently.

Hoogendoorn said management also has to consider any administrative costs that may be associated with a plan.

“And the filings that the federal government will require will be a big component of that administrative burden. But I think the thing that will surprise many is what the government is using as the definition of an employee. So where, traditionally, seasonal workers, contractors and, in certain cases, even part-time workers have not normally been included in plans, they’ll have to be included under the way the bills are written,” he said.

“I think the second piece of those bills that companies need to be cognizant of is the health care excise tax,” said Hoogendoorn.

The levy taxes health insurers for selling what is commonly referred to as a “Cadillac” plan, one that costs more and provides more coverage than the average policy. For instance, the Senate bill is calling for a 40 percent tax on every dollar of an annual premium for a family plan that exceeds $23,000. The same goes for an individual policy when its premium tops $8,500. But Hoogendoorn doesn’t think insurers will simply absorb that additional cost.

“You can rest assured that the insurance companies that are going to face those taxes will find a way to pass those costs on to the employers via some type of an administrative charge.

“The excise tax will be one element of it. I think the other portion will be how employees may be required to pay an additional amount of tax on the ‘Cadillac’ level of benefits. You might have additional W-2 reporting requirements and things of that nature,” he said.

“Corporate America is going to have to wrestle not only with the nature of the health care reform bill itself, but also how to manage the cost of it. When I look at the issues facing corporate America going into 2010, that will be the No. 1 issue every employer will have to deal with because of the nature of the health care reform mandate.”

Another cost that firms may have to learn to manage could come from the president’s tax-reform proposal, which has a focus on international companies. This may surprise some as the issue has cooled down since it was first proposed in October, but Hoogendoorn thinks it will heat up again this year.

As part of his budget plan, the president said last fall that he wanted to close what he called an “international tax gap” that costs the federal government $100 billion annually. Obama said that revenue loss comes from having U.S.-based global companies shift income to countries he described as tax havens, such as the Cayman Islands.

“The issues there are going to come, clearly, in a very generic sense, in increased tax costs. But more importantly, it will be a loss of current U.S. tax deductions for certain global companies and a foreign tax expense that may increase a restriction on foreign tax credits. Multinationals rely on all of those to manage cash flow,” said Hoogendoorn.

“What that, then, kind of cascades into is the second issue, which is the administration’s proposal could drive up a higher cost of capital for global businesses in 2010 and 2011, because what it may require is some offshore planning relative to the loss of deductions or loss of credits in an increased tax expense that may come at a higher cost outside the U.S.”

Besides the ongoing global credit crisis, Hoogendoorn said all business executives need to keep their eyes on health care reform and many need to closely follow any potential changes to the federal tax code.

“West Michigan has a number of global companies and they’ll all be affected by this,” he said. “But health care reform is, of course, a domestic issue which every business will face, whether it’s an international business or a local-only business.”

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