Few employers are likely to drop their health plans in 2014, when penalties click in under health reform, according to a survey by the consulting firm, Mercer, even if penalties may be cheaper than the plans.

More than 2,800 employers participated in the annual survey, now in its 25th year.

Under the new federal law, penalties click in unless employers offer at least one health plan that costs employees no more than 9.5% of their household income. Nearly two-fifths of employers with at least 50 employees say that their current offers wouldn’t pass the test for at least some of their staff.  About 20% of these employers say they probably won’t change their plans and pay the penalty instead. The remainder say they will add low-cost options or lower contribution requirements.

According to Mercer’s results, some companies will change the plan structure to raise costs for employees covering more dependents. Large employers are likely to open up the full-time employee plan to all part-time or hourly employees working 30 or more hours per week, and few say they’ll cut employee hours.

Small employers with less than 500 workers are more vulnerable to rate increases. Although a fifth of this group say they’re likely to drop their plan, the history of reform in Massachusetts suggests that many won’t.  Enrollment in employer plans actually grew over the four years after the state instituted low penalties under a “play or pay” rule.

“Employers are reluctant to lose control over a key employee benefit,” said Tracy Watts, a Partner in Mercer’s Washington, DC, office. “But beyond that, once you consider the penalty, the loss of tax savings and grossing up employee income so they can purchase comparable coverage through an exchange, for many employers dropping coverage may not equate to savings.”

While 17% of employers with 50 or more employees say that the requirements taking effect for 2011 – extending coverage eligibility to dependents up to age 26 and removing lifetime benefit limits – won’t raise their cost in 2011, nearly as many (16%) estimate that it will raise cost by 5% or more.  The most common cost is estimated at 2% or less.   

Why such a difference in costs? Many companies didn’t have lifetime benefit limits or already covered these dependents. The more generous the plan, the less likely reform will require changes.

The number of participants in company plans should rise after 2014, when everybody is required to have coverage and employers must auto-enroll new hires. Currently, 19% of all eligible employees, on average, opt out of their health plan.

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