The Wendy’s Co (WEN), Wal-Mart Stores, Inc. (WMT) & The Coming Obamacare Unemployment Surge

Page 1 of 2

Starting Jan. 1, businesses with 50 or more full-time workers will have to provide company-sponsored health care insurance or pay a $2,000 per employee penalty.

With the cost of the average cost of a single-coverage health insurance policy premium averaging about $5,600, according to the Kaiser Family Foundation, on the surface it certainly seems cheaper to simply pay the penalty. A business with 50 employees would have a choice between paying an average minimum cost of $280,000 in premiums or a penalty of $100,000 for not providing coverage.

Do or die
Surprisingly, it’s not as simple as the cost analysis suggests. According to the National Small Business Association, 71% of 400 businesses it surveyed with 50 or more employees intend to continue providing coverage. That was reiterated by a recent Wall Street Journal/Vistage poll that found more than three quarters intending to provide coverage to avoid penalty. Less than 2% of respondents said they would go the route of paying the penalty.

There might be a couple of reasons for that. First, providing health insurance coverage could be an attractive qualifier for skilled employees or highly desirable managers, and second, the cost of health insurance premiums are tax deductible as a cost of doing business; the penalty is not.

The Wendy's Co (NASDAQ:WEN)

There’s also the possibility employees won’t take the coverage. The Wendy’s Co (NASDAQ:WEN) was initially a fierce critic of the health care law, but has more recently scaled back its rhetoric. It went from saying it would raise costs for each of its restaurants by $25,000 a year to now saying it will only cost $5,000 per store extra. That’s because it believes employees themselves will prefer to pay the $95 fine they’ll face than contribute to the hundreds of dollars in costs that coverage will cost them.

The cost of the unknown
Of course, some stores in its chain have also started reducing employee hours to 28 hours a week to get under the law’s odd definition of full-time being 30 hours or more of work per week.

Similarly, AFC Enterprises, Inc. (NASDAQ:AFCE) chain Popeye’s is counting on employees foregoing the cost of coverage to hold its own costs down. Currently, fewer than 5% of its employees enroll in the plan because it carries high deductibles and it costs costs $2.50 a week, or $130 a year. When they have to pay some $25 a week even though it offers more coverage, Popeye’s doesn’t see many more employees rushing to take advantage of it, as it will simply be cheaper to pay the fine — for next year at least, since the penalty more than triples to $325 in 2015, and hits a maximum of $2,085 for family coverage in 2016.

Page 1 of 2