Mechanics of the ACA: Will My Employee Receive a Premium Tax Credit?

162707157Many employers are aware of the A Penalty and B Penalty which are possibly triggered when an employee receives a subsidy from the public exchange. What they may not be aware of is how the employee’s eligibility for a subsidy works and how this can help in developing a solid plan in your own Pay or Play ACA strategy.

To help employers understand this issue, I will highlight the perspective of an employee in seeking a subsidy from the exchange. This particular ACA issue involves actions from both the employer and the employee, and employers need to understand how employee actions affect the company. So you will need to see that there are definitely two perspectives to consider when planning for ACA risk mitigation in regards to A & B Penalties.

Subsidies and safe harbors are much the same. They are affected by common factors, but they are not directly related to each other and are in fact mutually exclusive in some cases. For example there are cases where an employee may receive a subsidy and the employer is still safe harbored from penalty. There are also cases when an employee is refused a subsidy even when the employer was clearly not safe harbored. One does not determine the other’s fate.

First, from the perspective of the employee trying to seek a subsidy: The first question is, “Are they enrolled in coverage with their employer?”

  • Many do not know this, but by simply enrolling in a health plan at work, employees locked themselves out of receiving a subsidy at the exchange. If the employer’s plan provides at least minimum essential coverage (MEC), the employee will not be eligible to receive a subsidy. They may later drop coverage at work (if paid for after tax or due to a life event), but for the months they were enrolled in an employer sponsored health plan, there will be no subsidy available to them from the public exchange. Plans that are not minimum value (MV) may be offered by employers as a means to avoid the A Penalty through offering this plan to at least 70% of their full-time employees in 2015. These plans do not offer the defined Essential Health Benefits but will still qualify as MEC and satisfy both the employer’s requirement to offer a health plan and the employee’s individual requirement to be insured. So for cost-conscious parties, this is a solution to consider, but not without further penalty risks to the employer and personal financial risks to the employee..
  • If the employee decides to waive coverage at work, the next question would be, “Is the plan minimum value and affordable?” The minimum value part is easy to know, the plan administrator can answer that one, and in fact they are required to notify the employee as such. The affordable question is not easy and as the employer you will not, in most cases, know for sure. The employer has no way to know if the plan is affordable because they do not know the entire financial situation in the employee’s home. They only know what the employee earns in their job which is not enough information to determine affordability to the employee and his dependents.
    • If the plan they waived is not MV, affordability does not matter. The employee may apply at the exchange and if eligible based on their own financial profile may receive a subsidy. (They waived so they are not on insurance at work.)
    • If the plan they waived is MV, affordability does matter. The only reason the employee can waive coverage at work and still seek a subsidy at the exchange is if the MV plan offered at work is not affordable based on the employee’s household finances , not his wages at this one employer. If the employer’s plan is not affordable, then the employee may receive a subsidy if he is also financially qualified to do so. This does not answer the question of if the employer will get a penalty, the employee may get a subsidy and the employer may still be safe harbored.
    • If the plan they waived is MV and it is affordable based on the employee’s own financial profile, not directly because of what the employer pays the employee, then the employee would not be eligible for a premium subsidy. Because they were offered an affordable plan at work, they are not subsidy eligible.

So from the perspective of the employee:

  • If you enroll in your employer’s plan you will be locked out of potential subsidies no matter how good or bad the insurance is. Be very careful if it is pretaxed, you may not be able to drop it until next open enrollment.
  • If your employer offers you a plan that is MV you will need to determine if it is affordable to you based on your household finances before you waive it. If you waive an affordable MV plan at work you will be locked out of the exchange subsidies and if you missed the opportunity to enroll at work, then you will be without insurance in both cases.

This is complicated and when you read the regulations you always have to put yourself in the place of either the employer or the employee. Words like ‘affordable’ relate to the employee’s ability to afford the insurance offered; only the employee knows all the information needed to determine this fact. Words like ‘safe harbor’ relate to the employers ability to avoid a penalty. This is based on the cost of insurance versus the employee’s payroll earnings within your company. They can both happen at the same time. The employee can receive a subsidy and the employer can be safe harbored as well. Or, the employee may not receive a subsidy even when the employer is not safe harbored. The two are independent of each other but still closely related.

When you are planning your ACA Strategy keep in mind you are working from the employer’s perspective but you should also be mindful of the employee’s perspective. Your goal is to mitigate the risks associated with the Pay or Play mandate that has been presented to you by the IRS; as well as maintain an attractive benefit program to attract and retain your best talent. Part of this is seeing how this all plays out from the employee’s perspective.

My next post will address how to safe harbor your company to avoid a penalty even when the employee is subsidy eligible.

Stephen Schram

Stephen Schram
Stephen Schram is principal and CTO with ACA Compliance Services Inc., author of Trax Compliance Software for Employers and frequent contributor to staffing industry discussions and blogs. He can be reached at stephen.schram (at) trax-aca (dot) com.

Stephen Schram

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