The September 11 terrorist attacks have created massive dislocations in certain sectors of an already-weakened American economy.
Within the major airlines, for example, 73,000 employees are expected to be laid off. American Airlines and United Airlines each announced they would cut 20,000 jobs; Continental expects to cut 12,000; US Airways estimates it will cut 11,000; and Northwest expects to cut 10,000. Airplane manufacturer Boeing may also lay off as many as 30,000 workers. The anticipated layoffs in related service industries and small businesses are just as staggering.
In addition to the fears regarding national security that many Americans face, tens of thousands of men and women must now cope with unexpected unemployment. The loss of income and benefits, particularly health care benefits, imposes additional pressure on these displaced workers.
In response to this situation, Senator Jean Carnahan (D-Missouri) recently introduced S. 1454, the Displaced Workers Assistance Act. The measure proposes a three-pronged strategy to target the needs of workers who have been laid off as a result of the September 11 tragedies.
Specifically, with regard to health care benefits, the bill provides for full federal reimbursement of COBRA (Consolidated Omnibus Budget Reconciliation Act of 1986) premiums and offers uninsured workers access to Medicaid coverage.
What Congress Can Do
The federal government can provide the economic victims of September 11 with the assistance they need to maintain solid private health insurance coverage. But this need not entail locking these families into an inflexible government program. Medicaid is a welfare program that has provided substandard health care, and Congress should avoid enrolling working families in it.
Instead, Congress should take steps to enable working families to get back on their feet and move back into private health insurance. Specifically, to ensure that displaced workers and victims’ families will continue to have adequate health care coverage, Congress should:
- Allow rollovers of unspent health care flexible spending account (FSA) balances. Many employers, including US Airways and United Airlines, offer their employees FSAs, through which they can set aside a portion of their pre-tax earnings to pay for unreimbursed health care expenses during the plan year. However, at the end of the plan year or when employment is terminated (either voluntarily or involuntarily), any unused money in an employee’s FSA must be forfeited to the employer.
At a minimum, Congress should allow workers whose employment is terminated involuntarily through recent layoffs and the families of deceased victims to keep any outstanding balance in their health care FSAs to help them pay for COBRA health care continuation coverage.
This can be accomplished by allowing the affected individuals and families to transfer their money to new FSA rollover accounts or to medical savings accounts (MSAs), as proposed earlier this year by Representative Edward Royce (R-California) in H.R. 167, a broader FSA reform bill.
- Allow dislocated workers and affected families to continue making tax-free FSA contributions through the end of their current plan year. Not only do workers forfeit the unspent balances in their FSAs when they are terminated in the middle of a plan year, but they are also prevented from making any further planned contributions.
For example, an airline worker who had decided at the beginning of 2001 to set aside $100 a month, and was then laid off at the end of September as a result of the attack, would have contributed only $900 of the planned $1,200 contribution for the plan year. That denies the worker an additional $300 in pre-tax contribution to his or her FSA account.
Congress should allow these workers and families to fulfill their planned contribution, whether through an existing FSA or a new rollover FSA.
In addition to easing up FSA restrictions, Congress can use refundable tax credits to help encourage recently displaced workers to participate in the private health insurance market.
- Provide refundable tax credits to displaced workers eligible for COBRA coverage. The federal government requires employers with 20 or more employees to offer continued group coverage to their employees and dependents after certain events, but it does not require the employer to contribute toward the premium. The cost of maintaining premiums without an employer’s contribution can be unworkably high.
A federal refundable tax credit would help displaced workers pay premiums for either COBRA or a private replacement coverage alternative. This assistance should be given at the time premiums are due rather than making people wait for the federal government to reimburse them. Such an approach would be especially helpful to low-wage workers with limited disposable income.
- Extend refundable tax credits to unemployed workers who are ineligible for COBRA or who are uninsured. There are many displaced workers who are not eligible for COBRA coverage because they worked for businesses with fewer than 20 employees, were not offered coverage by their employer, or chose not to participate in their employer’s health care plan.
For these individuals and families, the federal government should offer a refundable tax credit, similar to the proposal described above with regard to COBRA, to help cover the cost of health care coverage. The credit could also be extended to previously uninsured workers as a way to encourage them to obtain coverage for themselves and their families.
Coordination with the Department of Labor and the U.S. Treasury could facilitate the administration of these tax credits. The Department of Labor could distribute the credits to the states, which in turn could direct them to their recipients through unemployment offices. Alternatively, the U.S. Treasury could assign the credit directly to an insurer, who would then reduce the premiums of participating individuals.
Both these options avoid saddling employers with unnecessary administrative burdens and ensure the tax credit directly benefits workers.
- Allow states to offer tax credits as well. Low-wage workers could be helped further if states were allowed to augment a federal tax credit with their own credits by using Medicaid and the State Children’s Health Insurance Program (SCHIP) funds.
The Department of Health and Human Services recently announced a Health Insurance Flexibility and Accountability Demonstration Initiative providing states with an opportunity to integrate Medicaid and SCHIP funding with private health insurance options. Offering this flexibility immediately would allow states to help displaced low-wage workers stay out of the ranks of the uninsured.
A good model for designing such tax credits is S. 590, the Relief, Equity, Access, and Coverage for Health (REACH) Act introduced by Senator Jim Jeffords (I-Vermont) with broad Senate support.
Similar tax credit assistance could also be extended to U.S. military reservists. As many as 35,000 reservists may be called up for duty.
Under the Uniformed Services Employment and Reemployment Act (USERRA) of 1994, reservists are able to continue participating in their employer-sponsored health plan for 18 months.
The employer is required to maintain their coverage for 30 days. After 30 days, the reservist may elect to stay with the employer-sponsored plan, but he or she becomes responsible for the full cost of the premium as described under COBRA; the employer is not required to contribute.
While TRICARE, the military health coverage plan, is offered to reservists after 30 days, many find its coverage inadequate. They, like displaced workers, should not fear losing their benefits.
Reservists who have FSA accounts with their employers should be able to contribute to and access those accounts while on duty. In addition, reservists should be eligible for a tax credit to help them maintain their employer-sponsored plans under COBRA or secure private replacement coverage.
Employer-Based System Flawed
The dislocation of workers and families affected by the September 11 terrorist attacks highlights the flaws that exist within the current employment-based system of health care coverage. Employees do not own or control their benefits, cannot carry them from job to job, and cannot maintain coverage during periods of unemployment.
America’s health care system needs to be reformed to ensure that workers and their families have direct control over, and true portability in, their health insurance benefits.
Although it will take time to enact the necessary reforms to address all of the problems in the current system, Congress can take some immediate actions to address the current health care crisis. Clearly, the solution does not lie in enrolling additional families in Medicaid, a health care welfare program with a dismal record of service and efficiency. American workers deserve more.
Congress can begin effective reform today by improving flexible spending accounts and providing refundable health care tax credits to displaced workers to help them maintain or purchase solid, private health care insurance.
Nina Owcharenko is health care policy analyst at The Heritage Foundation.