The Build Back Better Act Could Increase Employers’ Costs & Penalty Risk

The Build Back Better Act Could Increase Employers’ Costs & Penalty Risk

The Build Back Better Act (BBBA) – the multitrillion dollar spending bill that passed the House on November 19 – contains provisions that could require employers to incur a larger share of employee health insurance costs in order to avoid penalties.

While the BBBA is currently being debated in the Senate, it’s important to be aware now that the bill could change the affordability threshold of employer-sponsored health insurance. Under the Affordable Care Act (ACA), in 2022, employers must offer a health plan that costs no more than 9.61% of an employee’s household income or face penalty. The BBBA could reduce this amount to 8.5% of income and would be in effect for tax years 2022–2025 – meaning that employers could pay more for employee health coverage during these years if they want to avoid penalties.

Because employers seldom know what an employee’s household income is, they are allowed to apply one of three affordability tests – or safe harbors – when making contributions and plan decisions. For example, when using the hourly rate of pay safe harbor, multiply the hourly rate of pay at the beginning of the coverage period for each employee by 130 hours. That result, multiplied by the 2022 affordability percentage of 9.61%, equals the self-only contribution maximum.

 

 Maximum monthly contributions for John Smith earning $10 per hour

$10 an hour x 130 hours = $1300 X 9.61% = $124.93 maximum monthly contribution

for a plan year that begins in calendar year 2022

 

Maximum monthly contributions for John Smith earning $10 per hour using the BBBA threshold

$10 an hour x 130 hours = $1300 X 8.5% = $110.50 maximum monthly contribution

for a plan year that begins in calendar year 2022

 

Click here for additional safe harbor calculation examples. Employers also may want to work with their brokers to make sure their plans are appropriately priced based on the affordability percentage.

Penalty B risk increases
Another change proposed by the BBBA, as it currently stands, could extend the elimination of the income cap for people to qualify for subsidies when seeking to buy Marketplace coverage. Under the original ACA, people buying Marketplace coverage could qualify for subsidies only if they met certain eligibility requirements, including income between one and four times the Federal Poverty Level.

The American Rescue Plan Act (ARPA) of 2021 lifted the income cap and increased subsidy amounts for tax years 2021 and 2022. The BBBA could extend the ARPA’s modifications through the end of 2025, making it more likely for a greater number of employees to qualify for and afford Marketplace insurance, potentially increasing Penalty B risk exposure for employers.

Under the ACA, employers are deemed at risk of incurring Penalty B when they fail, for whatever reason, to offer affordable minimum essential health coverage that meets minimum value to eligible employees. In 2022, failure to meet this requirement will result in a $4,120 annual ($343.33/month) penalty per full-time employee who receives a subsidy when purchasing insurance through the Marketplace.

The possible impact of the BBBA on employers could be significant, but the story isn’t completely written yet. We’ll be closely watching in December as the Senate debates – and potentially modifies – the BBBA’s provisions. Check back here regularly for updates.