Over the course of several blog posts, we’ve looked ahead to 2014 to consider how individual mandates, government subsidies and employer mandates and penalties will interact. Our earlier blog posts, which are linked below, have the details of these provisions, but today we want to apply the details of those rules in an illustration.

For this illustration, assume the following facts:

  • The Joneses are a family of four with one parent, Chris, working full-time at ABC Corp.
  • The Jones’ annual family income is $55,875 (250% of the federal poverty level for a family of four in 2011).
  • ABC Corp offers health plan coverage to its 100 full-time employees.
  • The employee share of the premium for self-only health plan coverage is $5,400 per year ($450 per month). This is greater than $5,308, or 9.5% of the Jones’ annual household income of $55,875.
  • Employees pay 45% of the total costs of the plan through cost-sharing (deductibles, copayments, etc.)
  • Based on this information, ABC Corp’s health plan coverage is considered both unaffordable and low-value.
  • Although the Joneses are eligible for ABC Corp’s coverage, they choose to enroll in the Exchange’s silver plan.

Who will pay for the Jones’ health care coverage?

Individual Mandate – Not Applicable to the Jones Family

The Jones family is not subject to the individual mandate because the premium for the lowest cost self-only coverage is more than $4,470 per year ($372 per month) (8% of $55,875). The Jones family could decide to forego health care coverage altogether without penalty.

Government Subsidies – Jones Family Eligible for 2 Subsidies

While it is clear that an employee cannot have both a voucher and government subsidies, it is not clear how a choice is made between the two when an employee qualifies for both. Assuming that a voucher could be waived by an employee, then the Jones’ income meets the threshold for government subsidies. (250% is between 100% and 400% of federal poverty level.) The Jones family is eligible for the premium tax credit because they are eligible for ABC Corp’s coverage, which is both unaffordable and low-value. Based on their income level (and the current statutory language, without further guidance), it appears that the maximum premium that the Jones family will be required to pay will be 8.05% of their household income, or $4,498 per year ($375 per month) (8.05% of $55,875). If the Jones family pays more than $4,498, they will receive a premium tax credit. (Note that this percentage is based on annual household income and increases gradually as income levels increase.)

In addition, the Jones family is eligible for reduced cost-sharing. The annual out-of-pocket maximum (based on 2011 numbers) will be $5,950 (50% of $11,900 – the family out-of-pocket maximum for high deductible health plans). (50% is based on the Jones’ income being between 200% and 300% of federal poverty level.) In addition, the Jones’ share of total allowable costs under the plan (considering the actuarial value of all cost-sharing), will be limited to 27% (based on the Jones’ income being between 200% and 250% of federal poverty level). This means that the insurer offering the Exchange silver plan will need to absorb any costs that exceed 27% of the total costs of the plan.

Employer Mandate – Unaffordable Coverage Penalty Applies

The good news is that since full-time employees, like Chris Jones, are eligible for ABC Corp’s coverage, ABC Corp is not subject to the No Coverage penalty of $2,000 per year, per full-time employee. The bad news is that ABC Corp IS subject to the Unaffordable Coverage penalty because its coverage is unaffordable and low-value, and the Jones family has enrolled in the Exchange and has qualified for government subsidies.

ABC Corp’s Unaffordable Coverage penalty will be $3,000 per year, per full-time employee who enrolls in the Exchange and is eligible for government subsidies, up to a maximum. If Chris Jones is the only ABC Corp employee who enrolls in the Exchange and receives a government subsidy, ABC Corp must pay $3,000 per year to the IRS. This is a non-deductible expense.

Variation: ABC Corp could avoid the employer penalty (at least with respect to Chris Jones) if it reduced the employee share of the self-only premium below $5,308 per year ($422 per month) (9.5% of $55,875) and provided at least 60% of the total costs of the plan. However, doing so would also exclude the Jones family from any government subsidies. In this situation, the Jones family would go from a premium of $4,498 per year ($375 per month) for Exchange coverage, to $5,308 per year ($442 per month) for ABC Corp coverage, and from cost-sharing value of 27% of total costs for Exchange coverage, to 40% of total costs for ABC Corp coverage. Arguably, the Jones family would be better off obtaining government subsidized coverage through the Exchange. Of course, this analysis would change if ABC Corp were able to subsidize coverage beyond the minimum necessary to avoid the Unaffordable Coverage penalty: an employee premium less than 9.5% of household income and employee cost-sharing less than 40% of total plan costs. Also, this analysis will vary greatly by employee, depending on annual household income levels.

Voucher Alternative – Jones Family Eligible for Voucher

As we said earlier, the ability of employers and employees to choose vouchers or other options needs clarity. If an employee could choose a voucher instead of government subsidies, a voucher would be an option for the Jones, based on their income and their premium costs. The Jones’ income is only 250% of federal poverty level and the Jones’ premium is between $4,470 per year and $5,476 per year (8% and 9.8% of $55,875, respectively). Therefore, ABC Corp could give a voucher to the Exchange and to Chris Jones rather than pay the $3,000 penalty to the IRS. The voucher amount would be ABC Corp’s share of the highest subsidized benefit for the coverage level (self-only or family) elected by the Jones family in the Exchange. The voucher is deductible to ABC Corp and the Jones family. However, giving a voucher would exclude the Jones family from any government subsidies otherwise available to them for Exchange coverage. Further, ABC Corp would not pay any Unaffordable Coverage penalty for Chris Jones.

This is one, simplified illustration, but it may help employers understand how their plan design may affect the options available for their employee population in 2014.