While employers sometimes view the Affordable Care Act’s employer shared responsibility (or “pay-or-play”) rules in isolation, they don’t operate that way. Instead, they exist side-by-side with other provisions of the Act. In particular, the Act’s rules providing premium tax subsidies to low- and moderate-income individuals correlate with an employer’s liability for assessable payments. Of interest to employers is that, generally, where there are no individual subsidies, there are no employer penalties.
In a recently issued revenue procedure (Rev. Proc. 2014-37), the Treasury Department announced adjustments to parameters that impact premium tax subsidies. One of the adjustments made changes to a table used to calculate an individual’s premium tax credit. While the adjustments addressed premium tax credits under the Act, it was not immediately apparent what impact, if any, the change would have on employers. As it turns out, the answer is, none.
Generally, U.S. citizens and green card holders are eligible for premium tax credits to assist with the purchase of coverage under a “qualified heath plan” purchased through a public insurance exchange if their household income is between 100 percent and 400 percent of the federal poverty level (“FPL”) and they don’t have other coverage (e.g. from an employer, unless certain requirements discussed below are satisfied, or under a Government program such as Medicare or Medicaid). (In states that have accepted the Act’s expansion of Medicaid, the range is 138 percent and 400 percent of the FPL, since those under 138 percent of the FPL are covered under Medicaid.) To be eligible for premium tax credits, an individual (or “applicable taxpayer”) must file a tax return (a joint return if married) and not be claimed as a dependent on another taxpayer’s return. The tax credits are “refundable” and “advanceable,” i.e., they are paid directly to the qualified health plan.
The Act’s provisions relating to premium tax credits are set out in Internal Revenue Code § 36B, under which a taxpayer’s premium tax credit is the lesser of two amounts:
- The premiums for the plan or plans in which the taxpayer or one or more members of the taxpayer’s family enroll; or
- The excess of the premiums for the applicable second lowest cost silver plan covering the taxpayer’s family (i.e., the “benchmark plan”) over the “taxpayer’s contribution amount.”
A taxpayer’s contribution amount is the product of the taxpayer’s household income and an “applicable percentage” that increases as the taxpayer’s household income increases. An eligible individual will qualify for a premium tax credit in an amount equal to the difference between (i) the amount calculated by applying the applicable percentage to household income and (ii) the cost of the monthly premium of the benchmark plan. For 2014, the applicable percentage ranges from 2 percent for taxpayers with income below 133 percent of the FPL and increases incrementally to 9.5 percent for taxpayers with incomes of up to 400 percent of the FPL. An individual with a household income that is between 300 percent and 400 percent of the FPL will qualify for a subsidy in 2014 if the cost of coverage exceeds 9.5 percent of his or her household income.
For tax years after 2014, Congress directed that applicable percentages be adjusted to reflect the excess of the rate of premium growth over the rate of income growth for the preceding calendar year. In Rev. Proc. 2014-37, the Treasury Department and the IRS adjusted the applicable percentages. For tax years beginning after 2014, for example, the 9.5 percent figure cited above is increased to 9.56 percent.
It is here where the confusion creeps in. An individual who has an offer of minimum essential coverage from their employer that is both affordable and sufficiently generous is not eligible for premium subsidies. Colloquially, he or she is said to be “firewalled,” i.e., prevented from qualifying, by virtue of the employer’s offer of coverage. Final regulations implementing the Act’s employer mandate furnish employers with a series of safe harbors governing “affordability” for purposes of determining an employer’s exposure for assessable payments under the Act’s employer mandate. The affordability safe harbors include W-2 wages, rate-of-pay, and lowest FPL, each of which specifies 9.5 percent as the multiplier. There is no provision in the final regulations requiring adjustment to the affordability safe harbor multiplier. (The final regulations are available here, and a useful set of Q&As issued by the IRS explaining the final regulations are available here.)
The adjustment to a maximum of 9.56 percent in the context of premium subsidy determinations means that an individual with marginally higher income can continue to qualify for a subsidy. It results from an express recognition by Congress, as reflected in the statute, that the rate of medical inflation routinely exceeds the rate of growth in real wages. The affordability safe harbor under the employer shared responsibility rules, on the other hand, is a mere regulatory device. Its purpose is to make it easier for employers to make affordability determinations without knowing each employee’s household income.
As a result of the adoption of affordability safe harbors for employer shared responsibility purposes, there is no longer perfect symmetry between these rules and the rules governing premium tax subsidies. An employee who is provided with an offer of affordable employer-provided coverage based on his or her W-2 income may nevertheless qualify for a premium subsidy (e.g., because his or her spouse is self-employed and has a net operating loss) without exposing the employer to an assessable payment. In 2015, this same result could occur where an employee’s household income and W-2 wages are the same, but the cost of affordable coverage through a public exchange is between 9.5 and 9.56 percent of household income. In this latter case, an employer’s contribution is affordable at 9.5 percent of W-2 wages, but the employee will still qualify for a premium subsidy.