- The Affordable Care Act (ACA) established Health Insurance Marketplaces (also called Exchanges) where individuals can shop and enroll in health coverage. Individuals who meet certain criteria are eligible for premium subsidies and cost-sharing reductions for coverage on the Marketplace.
- For the first time, in 2016 some employers will receive a notice from a Marketplace indicating that one of their employees signed up for health coverage through the Marketplace and received advanced premium subsidies.
- Given the exposure for tax liability under the ACA to the employer and the employee, employers should review the Marketplace notice and their internal records and consider taking action.
The Affordable Care Act (ACA) established Health Insurance Marketplaces (also called Exchanges) where individuals can shop and enroll in health coverage. Individuals who meet certain criteria are eligible for premium subsidies and cost-sharing reductions for coverage on the Marketplace.
Some employers will receive a notice from a Marketplace indicating that one of their employees signed up for health coverage through the Marketplace and received advanced premium subsidies for that coverage. Many employers are asking what these notices mean and what actions they should take if they receive one.
Premium subsidies and cost-sharing reductions are designed to expand healthcare coverage by making insurance, and its utilization, more affordable. Premium subsidies, more accurately referred to as a premium tax credit, are claimed on an individual's income tax return at the end of the year. What is unique about this tax credit is that an individual can choose to have the expected premium tax credit advanced throughout the year, in which case the government makes payments directly to the health insurer on the individual's behalf. Importantly, individuals who have access to health coverage through an employer that is affordable and meets minimum value are not eligible to receive the premium tax credit or advances of the premium tax credit for their coverage.
In contraposition to these new premium tax credits for individuals, the ACA generally requires that applicable large employers – generally employers with 50 or more full-time employees, including full-time equivalents – offer health coverage that is affordable and of minimum value to their full-time employees (and their dependents) or face an Internal Revenue Service (IRS) tax. This is often referred to as the employer "pay or play" or employer mandate provision. Tax liability under this employer provision is triggered if one of the employer's full-time employees receives a premium tax credit and the amount of the tax liability is determined by the number of full-time employees who received the premium tax credit. (The tax for applicable large employers who do not offer health coverage is also triggered if one of the employer's full-time employees receives a premium tax credit, but the amount of the tax is determined by the total number of its full-time employees, regardless of whether they received a premium tax credit.)
During the Marketplace application process, individuals are asked a host of questions, including questions about access to health coverage through an employer. If the Marketplace determines that the individual does not have access through an employer to coverage that is affordable and meets the required minimum value, and assuming the individual meets other eligibility criteria, advance payments of the premium tax credit can begin.
In such an instance, the Marketplace is required to send the employer a Marketplace notice. This will be the first year the Federally Facilitated Marketplace (FFM), which operates in more than 25 states, is sending out these notices. It is worth noting that there is not a commitment to send a notice to all employers, and the FFM has said it can send a notice only if the individual provides a complete employer address. Consequently, some employers expecting Marketplace notices may not receive them and notices may not be mailed to the preferred employer address.
Potential Tax Liabilities
The Marketplace notices will give employers advance warning that they may have potential tax liability under the employer mandate of the ACA. However, there are reasons that receiving a notice does not necessarily mean the IRS will be in hot pursuit, including:
- The Marketplace cannot distinguish whether the employer is large enough to be subject to the employer mandate. That is, the Marketplace will be sending out notices to smaller employers that are not subject to the tax. An employer receiving a Marketplace notice may want to confirm whether it is an applicable large employer subject to the employer mandate.
- Even if the employer is an applicable large employer, the individual identified in the notice may not be a full-time employee. Determining whether a particular employee is a full-time employee, as defined by the law and related regulations, is not always easy. An employer receiving a Marketplace notice may want to confirm whether the individual identified in the notice is an employee and whether, in fact, the employee was, or is, a full-time employee.
In addition to considering its potential tax liability under the employer mandate, an employer should also be mindful of its employees' potential tax liability. As noted above, an individual with access through an employer to health coverage that is affordable and meets minimum value is not eligible for a premium tax credit. Consequently, any advance payments of the premium tax credit made on that individual's behalf throughout the year will be subject to repayment when the individual files their income tax return. This will be an unwanted and unexpected surprise to many individuals.
Sample Notice Clarifications
The FFM recently posted a sample of its 2016 notice. The sample notice contains language that requires clarification:
- First, it states, "Certain employers ... might have to pay an employer shared responsibility payment for any month that at least one full-time employee enrolled in Marketplace coverage and receives APTC [advanced payments of the premium tax credit] or CSRs [cost sharing reductions]." Whether or not there is tax due to the IRS is dependent on whether a full-time employee receives a premium tax credit – not, as the notice suggests, advance payment of the premium tax credit and cost-sharing reductions. There could be several reasons why an individual is determined eligible for advance payments of the premium tax credit by a Marketplace but is not eligible for the premium tax credit. This might happen for example, if the individual had higher-than-expected income.
- Second, the notice states, "Filing an appeal could also eliminate reports from the Marketplace to the IRS that your employee received APTC or CSRs following an appeal decision in your favor." Although the IRS receives reports from Marketplaces during the year indicating how much in advance payments were made on an individual's behalf, the notice is misleading to the extent that it implies the IRS will be notified of an employer appeal or the outcome of such an appeal.
- Finally, the notice suggests that employers should call the IRS for more information. While the IRS has an abundance of general information on its website, IRS telephone assistors will be unable to provide information on the Marketplace process, including the appeals process, and will be unable to tell an employer whether they owe a tax under the employer mandate.
Considerations for Employers
An employer who receives a Marketplace notice may want to appeal the decision that the individual was not offered employer coverage that was affordable and of minimum value. An employer has 90 days from the date of the notice to file an appeal, which is made directly to the Marketplace. Importantly, the IRS will independently determine whether an employer has a tax liability, and the employer will have the opportunity to dispute any proposed liability with the IRS. Similarly, an individual will have the opportunity to challenge an IRS denial of premium tax credit eligibility. Any contact by the IRS, however, will occur late in the game after the year’s tax liabilities have already been incurred. Therefore, although an appeal is not required, it may be advisable.
Regardless of whether an employer pursues an appeal, an employer, particularly one that offers affordable, minimum value health coverage, should communicate to its employees about its offering. Although an applicable large employer is required to furnish IRS Form 1095-C to full-time employees detailing the employer's offer, a better option is providing employees with information before they enroll in Marketplace coverage. One way to provide this information to employees is to use the Employer Coverage Tool, a form developed by the FFM. This form assists individuals filling out Marketplace applications to correctly report what is being offered by their employers.
In summary, the Marketplace notice serves as an advance warning that either the employer or the employee may have a tax liability. Given this exposure, employers should review Marketplace notices and their internal records and consider taking action.