New Medicaid expansion incentives can place employers at risk of incurring IRS fines

New Medicaid expansion incentives can place employers at risk of incurring IRS fines

To accomplish the Affordable Care Act’s (ACA) fundamental goal of minimizing the number of uninsured Americans, the now 10-year-old law expanded Medicaid coverage for most low-income adults to 138 percent of the federal poverty level (FPL). One by one, 38 states have adopted this expansion over the past decade (there is no deadline for state implementation).

Today, the American Rescue Plan, the pandemic relief package that President Biden signed into law last month, contains provisions designed to increase Medicaid coverage and expand benefits even further – and for those states taking on Medicaid expansion, employers are at a reduced risk for possible fines from the IRS for not offering affordable coverage.

Let’s examine the details:
In the 12 states that haven’t yet expanded Medicaid, individuals earning an income ≤100 percent FPL qualify for Medicaid. In ACA Medicaid expansion states, individuals with incomes ≤138 percent FPL are eligible for Medicaid. The American Rescue Plan provides an additional, temporary, fiscal incentive to encourage states that have not yet adopted the ACA Medicaid expansion to do so. See the State of Medicaid Expansion Decisions here.

These incentives are made up of the established 90 percent federal matching funds available under the ACA for Medicaid expansion, as well as a five percentage point increase in a state’s regular federal matching rate for two years after expansion takes effect. The increase in the regular matching rate is estimated to more than offset increased costs of expansion in these states for the first two years. The additional incentive applies whenever a state newly expands Medicaid that does not expire.

The American Rescue Plan incentive is available to the 12 states that have not yet adopted Medicaid expansion, as well as Missouri and Oklahoma, which are set to implement their Medicaid expansion in July 2021.

Here’s where employers need to take note: Individuals eligible for Medicaid are NOT eligible for a marketplace subsidy. This means employers in non-expansion states are at risk of incurring a fine from the IRS for each employee earning between 100-138 percent FPL (whereas employers in Medicaid-expansion states are not at risk for this population). So as new states choose to expand Medicaid given the new incentive, employers may reduce their risk for Penalty B for this specific population.  With this reduced risk, employers with a large number of these employees could benefit from Medicaid expansion in new states.

This is how it works:
Under the ACA, employers are deemed at risk of incurring a monetary fine (known as Penalty B) when they fail, for whatever reason, to offer affordable health coverage that meets minimum value requirements. Coverage is considered affordable if the employee’s contribution for employee-only (or single) coverage is less than or equal to 9.83 percent of their income. Failure to meet this requirement results in a $4,060 penalty per full-time employee who receives a subsidy when purchasing insurance through a public healthcare exchange.

When a full-time employee receives a marketplace subsidy, the IRS will send the employer a 226-J Letter with a notice of proposed Penalty B fines, listing each applicable employee identified. Employers that do not meet the offer requirements described above can face hundreds of thousands – even millions – of dollars in fines. Even for compliant employers, responding to a 226-J Letter can be timely and costly.

Advice for employers
With a broader population eligible for subsidies on healthcare exchanges in non-expansion states ( >100 percent of FPL vs. >138 percent of FPL), there is a increased risk that employers with workers in those states face proposed Penalty B fes from the IRS. If your company has staff who reside in these states, our advice is three-fold:

  1. Closely examine your anticipated premium costs to ensure you’re making affordable offers to eligible employees.
  2. If you receive a 226-J Letter, contact your ACA service provider for help and cooperate fully with the instructions outlined by the IRS.
  3. Work with a trusted advisor who can help you navigate this evolving state of affairs.

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