Subject: Business and Management
Topic: PROS AND CONS OF PAYING THE FINE
Language: English (U.S.)
Pages: 1
Instructions
Provides a logical rationale by examining the pros and cons of their proposed solution The government has recently changed the law regarding health insurance benefits, and your company will need to comply with the changes. The law requires that all full time employees have affordable and adequate health insurance coverage. Since there is no employee contribution toward the health-care benefits you are already providing, the coverage passes the "affordable" test. However, the law also requires that coverage be at least the equivalent of the Tier 3 plan, and that a Prescription Drug Plan be included. If you do not provide adequate coverage, your company will be fined. The penalty for inadequate coverage is $3,000 per year for employees who opt out of the company plan and qualify for a government subsidy to purchase their own coverage. It is not known what percentage of employees will opt out, but health-care consultants have estimated that 65% would do so if the company offered the Tier 1 Plan at the wages you started with in period 0. That percentage should be lower at higher wage levels and better health care benefits. For this incident, you will need to evaluate your health care coverage and bring it into compliance with the law. If you do not provide benefits of at least the Tier 3 Health Care Plan along with the Prescription Drug Plan, you will see a one-time charge against your budget next quarter. The charge will be based on your current benefit and wage decisions, and shown under "Incident Cost" on the Budget Analysis. 1) Comply with the law. Be sure you have selected either the Tier 3, or Tier 4 Plan for health benefits, as well as the Prescription Drug Plan. 2) Pay the fine. The cost of $750 for each employee that opts out of your health-care plan will be charged against next quarter's budget. As with benefit increases, the firm will absorb future costs.

Pros and Cons of Paying the Fine

The employer mandate is designed to make the employers provide affordable health insurance to their full-time or full-time equivalent workers. If the employer fails to achieve this mandate then he will be penalized. The penalty, usually referred to as a free-rider penalty, is triggered when an employee opts to obtain the government’s subsidized health care coverage rather than the coverage offered by his employee. The company has decided not to comply with the law and instead pay the fine of $750 for each employee that opts out of its Tier 1 coverage plan. This decision is beneficial in a number of ways.  

For starters, the total cost of paying the fine is significantly smaller than upgrading each full-time employee to a Tier 3 health coverage plan. Instead of tying all those funds to covering the full time employees, the company can use the additional money for other profitable purposes. In addition, the company can also retrench some of its workforce under the guise of cutting costs on medical coverage. Human resource is the biggest expense that a company has and retrenching some of the ‘non-essential’ workers can help free up money to be invested elsewhere. Another advantage of paying the fine instead of complying with the law is the fact that the liability of the business when it comes to employee health is curtailed. Unnecessary trips to the doctor will reduce because the employees are now going into their pockets to pay for the doctor’s visits although these expenses have been discounted by the government.  

There are also significant drawbacks of not complying with the law. Qualified and talented employees will not be drawn to a company that does not offer sufficient health coverage to its employees. Benefits such as dental and premium health care coverage attract the most qualified people. These are the people with the biggest talents that could give the company a competitive edge in the market. Denying such people the required health coverage will make them seek better pastures whereby they are covered the way they deem fit. The penalties also increase the company’s current liabilities, which will definitely have a negative impact on the company’s bottom line. The profit margin will be substantially lower while the company’s debt seems to be growing. On that same note, the penalties will increase with increase in benefits’ status. When employees are promoted, their benefits and allowances also increase. If the company continues to refuse to pay for increased coverage of its full time employees, then the benefits’ increase will lead to an increase in penalties. The firm might soon find itself flooding in penalty arrears to the government as a result.