October 2, 2022

You’re the Boss: Is Dividing a Company the Way to Beat the Affordable Care Act?

The Agenda

That’s one notion that seems to be circulating among small-business owners and their advisers lately. Consultants at McKinsey Company floated the suggestion as part of their controversial report on employer views of health insurance. And in The Times’s coverage of that report, Milt Freudenheim interviewed a small-business owner who said he was hoping to “game the system.” The owner, Gerry Harkins, who is also chairman of the National Federation of Independent Business’s Georgia State Leadership Council, said he might split his Atlanta-based construction company into two smaller companies to evade the overhaul’s employer mandate, specifically the penalties on companies that fail to offer affordable health insurance to employees.

Unfortunately for Mr. Harkins (who did not return a call from The Agenda seeking an elaboration of his comments), the authors of the Affordable Care Act are one step ahead of him, according to several tax and benefit lawyers contacted by The Agenda. The authors included a provision that basically adopts parts of the Employee Retirement Income Security Act of 1974 that say any group of companies under common control are to be treated as a single company. Common control is defined as the same five or fewer people owning at least 80 percent of the companies, according to Al Martin, a tax lawyer at the Kansas City law firm Lathrop Gage. Spouses and children are generally considered one owner, according to Mr. Martin.

No doubt this will make it difficult for people like Mr. Harkins to game the system. “You’re going to wind up changing economic relationships if you avoid the rules,” he said. “You’ve got to change ownership structure.”

“The idea that that would be an easy thing to do would be hard for me to believe,” added Jon Staudt, a tax lawyer with Belin McCormick in Des Moines. “People have been trying to avoid the E.R.I.S.A. law so that they could have separate pension plans, for example, pretty unsuccessfully for 36 years.”

The McKinsey consultants, for their part, had other reasons for proposing a split. The thrust of their advice is to find ways to wean lower-wage employees off employer-sponsored coverage while keeping higher-wage employees, who won’t be eligible for subsidies, insured.

Until the Affordable Care Act, federal law was a bit schizophrenic when it came to group health insurance plans for 50 or more people. A company that funded its own health insurance plan — a strategy that often makes financial sense for companies with several hundred participants — was subject to an antidiscrimination law that banned those plans from offering looser eligibility requirements or better benefits to top executives.

“The basic rule is you can do anything you want, but if the plan is self-funded, and if the effect of it is that the highly paid get the Cadillac deal and everybody else gets the Ford, that’s not going to work,” said Charles Wolfe, a lawyer at the Chicago law firm Vedder Price, and a co-chairman of an employee benefits committee of the American Bar Association. “The executives are going to get taxed.”

There was a loophole, however: because group plans insured by a third party (like an insurance company) are regulated by the states, they weren’t subject to federal discrimination laws. The solution for big companies, said Mr. Wolfe, was to self fund health insurance for the rank and file and buy a separate insured plan for the executives.

Now the Affordable Care Act is poised to close that loophole by applying the same antidiscrimination rules for self-funded plans to insured plans. (Because the regulations have not been written, the Internal Revenue Service is not yet enforcing this provision of the new law.) One option McKinsey proposes is to split the company into two separate entities, one with company managers and others who would get employer-sponsored insurance and the other for employees who would get no insurance. The company without insurance would have to pay the mandate penalty on those employees, and perhaps even additional compensation, but that could still be cheaper than buying their coverage.

Ah, but beware of free advice, which, as they say, is often worth what you pay for it. Here again, Congress linked the antidiscrimination law for self-funded plans to E.R.I.S.A.’s common-control provision. And the section of the Affordable Care Act that extends the discrimination ban to insured plans explicitly ties the new ban to those same common-control rules. McKinsey’s suggestion “strikes me as a bit odd, in the sense that I don’t think it will be possible for a company to keep its corporate or senior management in one company and the rest of its work force in another company and still provide tax-advantaged benefits to the senior management,” said Philip Mowrey, one of Mr. Wolfe’s partners at Vedder Price.

A McKinsey spokeswoman said the firm had no comment.

The penalty assessed under the Affordable Care Act, Mr. Mowrey also noted, was stiff: $100 a day multiplied by every employee discriminated against.

At least in theory, that is. According to Mr. Mowrey, the discrimination regulations for self-funded plans have never really been enforced, because they don’t address very well the new types of health care plans that have been developed since the regulations were adopted in 1981. “It was sort of a moribund law,” he said. With the expansion created by the Affordable Care Act, he says, it’s clear that the I.R.S. is committed to implementing the bans for both kinds of insurance plans.

That means the only way a business owner will be able to beat the health care law by splitting a company into two will be by selling one, or most of one, of the resulting pieces.

Article source: http://feeds.nytimes.com/click.phdo?i=0fd12f8b0f28cc4b64ed8af7fa4eca56

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