The Birth (And Possible Death) of the Employer Mandate

by Charles Katebi

Ever since Congress passed Obamacare in 2010, each April 15, the dreaded tax return filing day, brings ever more complexity to our federal tax code. This year's complexity is the employer mandate, the most harmful of the law's tax provisions because it spells trouble for businesses and workers alike. If the Supreme Court sides with the plaintiffs in King v. Burwell, the mandate becomes a lot harder to enforce and could free states from its distortions entirely.

The employer mandate is by far the most ill-conceived dictates of the President's healthcare law, not to mention the most far-reaching. It requires every employer with 100 or more employees (and 50 or more beginning in 2016); be they private, public, or non-profit, to offer all of their full-time employees health insurance. Employees are considered full-time if they work 30 or more hours a week.

The mandate's structure as well as its enforcement mechanisms hurt both companies and employees. Company growth could be stymied if hiring that 100^th employee means it has to offer health insurance to all its employees. Firms also have a great incentive to shift workers from full-time time status to part-time. Employees who qualify for full-time work under normal circumstances must now compete with part-time workers in a job market where firms refuse to expand their payroll.

When an individual purchases health insurance on an exchange and receives a subsidy, the IRS will be notified if the company they work for failed to offer them insurance, and will fine the company. The CBO estimate that between 2015 and 2024, the mandate will impose $139 billion in tax penalties on employers.

This IRS requirement also encourages business to hire individuals from high income households at the expense of those from low and moderate income households. As mentioned earlier, the mandate is enforced when the IRS receives verification of an individual's work-status when they receive subsidies. But if an individual is from a household that makes too much money to qualify for subsidies, the IRS is never notified should they purchase insurance on an exchange. This means that firms can still get away with denying insurance to an employee from a high-income household, but would be stuck with paying health insurance costs if they decided to hire someone from a low income household.

If a business fails to offer insurance to their fulltime employees, the IRS will tax them $2,000 per full-time employee each year. However, with skyrocketing insurance costs, many employers may find it more cost effective to pay the health tax instead of their workers' health insurance premiums.

Because the employer mandate creates such distorted incentives, economists don't expect to see many people receiving insurance from their employer. The Urban Institute expects the mandate to insure only 200,000 individuals.

Fortunately for employees and employers, a pending Supreme Court case could make the mandate much easier to skirt. The nine justices are currently considering King v. Burwell, a case that will decide whether the IRS is illegally subsidizing insurance in states with federal exchanges. According to the explicit language of the Affordable Care Act, only individuals who purchase insurance on exchanges "established by a state" are eligible for subsidies.

Without insurance subsidies, the employer mandate becomes impossible to enforce. The employer mandate's penalties are triggered when an individual that works at a firm subject to the mandate purchases insurance on an exchange and gets subsidies. If the subsidies go away in states with federal exchanges, employers will be freed from the employer mandate. There are currently 57 million employees and 252,000 businesses in states with federal exchanges that are subject to the employer mandate. In Wyoming, 1,074 businesses and 107,000 employees would no longer be subjected to the law's expensive dictates.

The employer mandate is one of the most egregious provisions of the Affordable Care Act. It taxes companies to the tune of billions for growing and encourages them to hire people from high-income households. Luckily for employees and employers, the architects of Obamacare put as little thought into its enforcements as they did into its design. If the Supreme Court's nine justices rule that the IRS illegally subsidized health insurance on federal exchanges, Wyoming and 35 other states could be freed from the employer mandate just 6 months after it was slated to go into effect.