Friends with HEALTH Benefits

Easier Access to Exchange-Based Premium Tax Credit Subsidies Means Employers Need To Think About Their Liability and Risk Tolerance

April 28, 2021

Recently we’ve been discussing both tax credits and business risk. Right now, more Americans have access to individual market premium tax credit subsidies than ever before. These subsidies offset the cost of qualified health plan coverage purchased via the health insurance exchange marketplaces. Typically, a person can only access them during the individual market enrollment period each Fall or if they have a special qualifying life event.  However, due to pandemic economic upheaval, the Biden Administration gave consumers a new string-free open enrollment window. People who live in the 36 states served by the federal health insurance marketplace have until August 15, 2021, to enroll in coverage. The rest of the states operate independent exchanges, and they have all offered some extended enrollment period for 2021. 

The American Rescue Plan Act (ARPA) also makes many more Americans eligible for an exchange-based health insurance premium tax.  The Affordable Care Act (ACA) limited subsidized exchange coverage to people who: 

  1. have a family income between 100-400% of the federal poverty level; and
  2. do not have access to employer-sponsored health insurance coverage that meets “minimum value” and “affordability” tests.

ARPA keeps the employer-sponsored coverage limitation in place but specifies that for 2021 and 2022 only, no qualified enrollee will pay more than 8.5% of their income for individual market exchange-based coverage. Since the cost of coverage varies, as does subsidy value based on each person’s family income, it’s hard to say precisely how many more people will benefit from the eligibility change. However, data shows that enrollment is already rising.  Since the Biden Administration is investing resources in promoting exchange-based coverage, we’re guessing it will continue to grow.

If you’ve made it this far, you might be thinking to yourself, isn’t this a blog mostly about employee benefits? Where are these two going with all of this individual market talk?  Well, have faith, friends. We spend a lot of time helping out applicable large employers (ALEs) subject to the ACA’s employer shared responsibility provisions (aka the employer mandate). So we think any change to subsidy eligibility criteria is quite important.  Remember, for ALEs, the employer mandate penalty trigger is if an eligible employee qualifies for a subsidy through an exchange.  So if more people are suddenly rushing to the exchanges to see if they might be eligible for cheaper coverage, employer liability risk might be going up.  

Now we know what you are thinking. We just pointed out ARPA does not change the ACA rule that people offered employer-sponsored coverage can only get a premium tax credit if their employer coverage is “unaffordable.” However, since this is a blog read primarily by 1) our mothers; and 2) the most astute employee benefits professionals in the world, at least half of our core audience knows that for 2021, “affordable” means no more than 9.83% of household income. Some of the people who read this blog like math (a predilection that eludes Jessica), so many of you have already calculated the 1.33% difference between 8.5% of income and 9.83%.  It doesn’t seem like much, but that difference could mean more penalty triggers for employers in the future.  

Risk-averse members of our audience, please keep in mind 9.83% of income means employment income, whereas 8.5% is overall household income. Since employers generally do not know total household income, the Internal Revenue Service (IRS) helpfully created three safe harbors for employers. The safe harbors allow ALEs to judge coverage affordability based on information employers do have available. So this year, more than ever, if you want to avoid the dreaded 227-J letter and a potential penalty assessment, make sure that you choose a safe harbor carefully, make employer contribution calculations accordingly, and ensure that your Forms 1094 and 1095-C are accurate.  

We also know that some of our dear friends and readers like to play the numbers and roll the dice. They might be more comfortable with calculated business risk when it comes to setting employee premium contributions. Employers with this mindset may choose to set contribution rates at a financially comfortable level for the business, knowing full well that certain employees may not receive an "affordable" coverage offer. We can support this strategy as long as the decisions behind it are purposeful. It's one thing for an employer to know in advance that they might incur a penalty.  It’s quite another to be surprised by a letter from the IRS suggesting that you owe Uncle Sam money!  So if you are an ALE, think this all through.  If you advise ALEs, communicate with them about how their employer mandate liability might be growing and the various strategies out there to address it.  

What do you think, friends?  Are we on to something? Will the changes to the subsidy eligibility levels lead to more employer mandate penalties over the next few years?  Or are we being worrywarts again?  It certainly wouldn’t be the first time!