Job lock: Relevant laws and regulations

Links to all posts in the series to which this post belongs are in the introductory post

As Austin observed last week, job lock wouldn’t be a problem in perfectly efficient labor and health insurance markets. But these markets don’t work as smoothly as they might, in part because the law prevents them from doing so.

The single most important contributor to job lock is section 105 of the tax code, which excludes the premiums that an employer pays on an employee’s behalf from the employee’s income. By itself, the unavailability of the tax exclusion for retired workers and some of the self-employed discourages workers from quitting.

In recognition of this concern, Congress in 1986 allowed employees who leave their jobs to retain their coverage at the group rate for up to 18 months. Such “COBRA coverage” gives employees some financial security when they need to find a new job. It also helps that an employer’s COBRA contributions are excluded from its former employee’s income. But COBRA coverage is temporary and it can be difficult to cover COBRA premiums without an income. At best, it’s a partial solution.

A number of federal non-discrimination laws also affect job lock. These laws either discourage or prevent employers from discriminating against low-wage workers, the sick, the disabled, and the elderly. Taken together, they make it easier for workers with higher-than-average medical expenses to secure coverage on relatively generous terms.

This has a mixed effect on job lock. Prior to the ACA, such generous coverage was unlikely to be available on the individual market, where experience rating and preexisting-condition exclusions were the norm. The non-discrimination laws thus exacerbated job lock when it comes to the choice to retire (at least for workers under the age of 65). They also discouraged workers from taking jobs that didn’t offer health coverage—often jobs at smaller firms.

At the same time, however, the non-discrimination laws make it easier for workers with large anticipated health costs to switch employers and retain affordable coverage. That should ease job lock for switchers.

Low-wage workers. To take advantage of the tax exclusion, employers can’t extend health coverage to upper management while withdrawing it from line workers. The exclusion is only available when employers don’t discriminate “in favor of highly compensated individuals” in setting eligibility rules or the prices that employees pay for their health plans. Enacted in 1980, this nondiscrimination rule originally applied only to self-insured firms. Under the ACA, it now applies to all employers—or will, once the IRS finally issues rules to implement it.

The regulations governing the “highly compensated individual” prohibition are make-your-head-hurt complicated. But the basics are easy enough to grasp. In general, a plan has got to satisfy the “percentage test,” under which a plan qualifies for the exclusion if (1) 70% of all employees have actually signed up for the plan or (2) 80% of the employees who are eligible for the plan have enrolled and at least 70% of all employees are eligible to sign up. The tax code thus encourages employers to offer the same health plans, at the same prices, to most of their workers—even those workers who are relatively expensive to cover.

The sick. HIPAA offers additional protection to sick workers in flat-out prohibiting employers from crafting eligibility rules or raising a worker’s premiums based on “health status-related factors.” HIPAA also makes it harder for employers to decline to cover preexisting conditions. (The ACA prohibits the practice outright.) Under HIPAA, employers can exclude most preexisting conditions from coverage for up to a year. After that year is up, however, exclusions aren’t permitted. In addition, workers who have had employer-sponsored coverage for a preexisting condition for more than a year are, if they switch jobs and have a gap in employment of less than two months, entitled to immediate coverage of that condition at the new job.

The disabled. The Americans with Disabilities Act (ADA) forbids employers from discriminating against a job applicant with a disability, unless that disability would, even with reasonable accommodations, impair his ability to do the job. The term “disability” is defined broadly to include “a physical or mental impairment that substantially limits one or more major life activities.” Many workers with chronic illnesses would qualify. Refusing to hire them would contravene the statute. So too would charging them more for a health plan.

The elderly. The Age Discrimination in Employment Act (ADEA) prohibits making hiring decisions based on age. The ADEA also limits the extent to which employers can charge their older workers for the health plans. Under federal regulations, older employees can’t be “required to bear a greater proportion of the total premium cost (employer-paid and employee-paid) than the younger employee.” So if a health plan for a 60-year-old costs the employer a total of $12,000 and a comparable plan for a 25-year-old costs $4,000, an employer could ask his 60-year-old employees to contribute $3,000 and his younger employees to contribute just $1,000. Because both are still paying 25% of the costs of their health plans, those differential costs wouldn’t count as discrimination.

On the whole, these four nondiscrimination laws ease job lock for those looking to switch jobs and, together with the tax exclusion, make employer-sponsored coverage a sweet deal when compared to the pre-ACA individual market. By the same token, the laws exacerbate job lock for those looking to leave the labor market, to take a job at a firm that doesn’t offer health coverage, or to strike out on their own. The ACA, of course, aims to reduce that kind of job lock—but more on that later in the series.


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