Planning for a jump in health insurance cost when employees turn 26

Finance departments should create solid guidelines to handle young adults leaving their parents' policies.
By Lou Carlozo

Young adults grow up anticipating milestones both numerical and legal: to drive a car sometime around 16, vote at 18, and purchase alcohol at 21. But they may be less aware of another critical age ceiling: 26. That's the age through which current federal law says they must be allowed to remain on their parents' health insurance policies. Most insurers don't allow them to remain after that.

And if young employees get caught off guard, it's possible their employers will as well. ADP's recent Health Benefits Report for 2016 sheds light on this risk: 44% of those under 26 participate in employer-based health care. That rate for the 26–34 age group jumps to 71%. (From there, participation rates remain fairly steady, rising to 78% for employees ages 55–64.)

For businesses, that increase in participation can add up to significant costs. Data from the U.S. Bureau of Labor Statistics (BLS) as of December indicate that employer costs for employee benefits average $11.03 per hour—31.6% of the average of $34.90 per hour for compensation. 

But there is also good news. Some experts believe that increases in health care costs overall are often tempered by the robust health of younger workers. "Generally speaking, people under the age of 26 are relatively healthy and require much less in the way of health care," said Thomas Torre, CEO of Copatient, a health care expense management company that works with businesses and patients. "Organizations that have an experience-based plan and a large employee base of Millennials can actually expect to save on per-person plan costs." (Experience-based plans correlate classes of employees to risk, with rates dropping when lower-risk employees enter the insurance pool.)

Here are five ways finance departments can prepare for increased employee participation in health insurance plans. 

 Know your industry's costs. Health care cost per employee often varies by industry and is based on salary, percentage of pay, or both—so be sure that you're relying on the right numbers, as opposed to a one-size-fits-all estimate. For jobs in areas such as finance and insurance, for example, "the hourly wage runs $33.93, or about $67,860 for a 2,000-hour year," said Keith Baker, CPA, CGMA, former CFO of Enhance Financial Services Group Inc. and now chair of mortgage banking for Dallas County Community College District.

Based on those numbers, which come from BLS statistics, "the added cost of providing just health insurance coverage would have averaged 12.7% of pay, or $8,620," he said. But in professional and business services, the average hourly pay is $30.85, with 9.4% of salary dedicated to health insurance—making for a lower yearly total of $5,820. In either instance, BLS statistics can help finance departments project, for example, a maximum cost based on providing health insurance to every employee who is turning 26.

Do a head count. The 26-year-old ceiling might not mean a great deal to some businesses, said Kate Henry, regional managing director at NFP, an insurance broker and consulting firm. "Most employers have few employees under the age of 27 relative to their total populations," she said. "In industries such as retail and hospitality, where a young workforce is commonplace, low participation rates have historically been the norm—even if employees don't have access to other coverage—due to turnover, compensation levels, and lack of eligibility because of part-time status." 

Take the company pulse. It's a good idea to let your workers know ahead of time that their insurance needs will change once they turn 26, said Ron Lang, CEO of CalCPA Health, Group Insurance Trust of the California Society of CPAs. "Have some type of flag—maybe at six months out—that says, 'Your birthday is coming up and you'll be off your parents' plan.'" That's also a good time to see who might be interested in going on company health insurance, though it will take more than employee email responses to get a reliable estimate. Baker suggests asking supervisors to talk to their employees in person, adding: "Do you pay attention to every email you get from your HR department?"

Keep a close eye on Congress. Efforts to repeal the Patient Protection and Affordable Care Act are still underway and could result in changes to the age 26 threshold.

Avoid advising. There are three main health insurance options for 26-year-olds leaving their parents' plans, Lang said: to buy insurance on the individual market, sign up for COBRA, or enroll in their employer's plan. But HR departments must take care not to make outright suggestions to employees about which option to pursue, Lang noted. "There can be some liability if an HR department suggests buying a certain plan. Stay out of the benefits advisement business. You can mention the three options and where to get more information." In addition, he recommended that employers require any employee who does not enroll in the employer-sponsored plan to sign a waiver.

Lou Carlozo is a freelance writer based in Chicago. To comment on this article, contact Chris Baysden, senior manager of newsletters at the AICPA.

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