President Biden just signed into law the American Rescue Plan, the most sweeping health reform legislation since the passage of the Affordable Care Act (ACA) 10 years ago. The $1.9 trillion pandemic stimulus package supports healthcare affordability and increases marketplace access for millions of Americans by expanding consumer eligibility for premium tax credits to pay insurance premiums.
While this may be welcome news to many struggling Americans, employers need to understand – and prepare for – the possible financial implications this legislation poses to them; for inside the American Rescue Plan lies health insurance coverage provisions that could place employers at greater risk of incurring IRS penalties for noncompliance with the ACA.
How does expanding eligibility for subsidies impact employers?
Under the ACA, employers are at risk of incurring a Penalty B fine when they fail, for whatever reason, to offer affordable coverage that meets minimum value requirements. Coverage is deemed affordable if the employee’s contribution for employee-only coverage is less than or equal to 9.83 percent of their income. Failure to meet this requirement will result in a $4,060 tax penalty per full-time employee who receives a premium tax credit (also called a subsidy) when purchasing insurance through a public healthcare exchange.
Until now, only individuals who made less than 400 percent of the federal poverty level (FPL) were eligible to receive a subsidy. Now, the American Rescue Plan expands eligibility by eliminating the 400 percent FPL income cap for tax years 2021 and 2022. With the threshold removed, more individuals will qualify for subsidies, resulting in greater risk to employers that fail to offer affordable coverage. When a full-time employee receives a marketplace subsidy, the IRS will send an employer a 226-J Letter with a notice of proposed Penalty B fines for each employee identified. For employers that do not meet the offer requirements, this could result in thousands and thousands of dollars in fines. Even for compliant employers, responding to the 226-J Letter can be timely and costly.
Unrelated to the bill, there is already an increased risk of employers’ plans being classified as unaffordable because of the pandemic and reduction of workforce hours. Coverage for employees whose work hours and income have been reduced may no longer be affordable under the ACA. Should the affected employee(s) buy insurance through an exchange, it could set up a scenario for the employer incurring an IRS 226-J penalty notice.
Digging into the details
Adding to the confusion for employers is that “affordability” is calculated differently on the exchanges than it is at the employer level. Employers, following the rules set out for them under the ACA, can leverage safe harbors such as the FPL, rate of pay or W2 calculations to determine whether the coverage they offer each full-time employee is affordable.
These safe harbors were established because as the law is written, the ACA determines affordability based on a taxpayer’s total household income – information that employers frequently don’t have access to.
Exchanges, on the other hand, determine affordability on household size and household income – data they can collect directly from the individuals who are applying for coverage. So, there may be a larger subsidy-eligible population than an employer realizes within their workforce, especially for single earner households with larger families.
Advice for employers
With subsidies now available to a broader population, and the pandemic-induced workforce impact, employers must be even more diligent in their ACA data collection and recordkeeping in case they need to defend themselves against Penalty B charges from the IRS if the premium on their lowest cost plan offering exceeds affordability.
Our advice for employers is three-fold:
- Closely examine your anticipated future premium costs, make sure you are making affordable offers to eligible employees and fully understand your risk profile.
- Promptly respond to any 226-J Letter you receive – meet those response deadlines and fully cooperate with the IRS.
- Work with a trusted advisor who can help you navigate this changing – and confusing – landscape.
While this expansion of subsidy eligibility may increase Penalty B risk for employers, the COBRA changes included in the bill may decrease risk. Reimbursements for COBRA premiums to the employer will enable employers to provide affordable COBRA coverage to active employees with reduced work hours, reducing their B penalty risk. Watch for more from Health e(fx) on the implications of this paramount legislation.
Read more about how we can help you reduce your ACA risk here or email us at firstname.lastname@example.org to learn how Health e(fx) is serving our customers by transforming healthcare one solution, one dataset, and one life at a time.