The Affordable Care Act regulations preclude individuals and families from receiving tax credits to lower health insurance premiums bought through an exchange if they are offered employer sponsored health insurance that is deemed to be affordable and meets minimum value. This rule is actually denying some families access to affordable health insurance and is set to penalize other families with a huge IRS tax bill in 2015.
9.5% employer sponsored health insurance rule
The fatal flaw in the rule is that it only recognizes the employee’s contribution to his or her group health insurance relative to the total household income. For the group insurance to be unaffordable the employee’s share must be more than 9.5% of the household income. While the employee’s portion of the insurance may be affordable, especially if the employer contributes 50% to 100% of the premium, the employer is under no obligation to make a contribution to the spouse, partner or dependents.
(v) Affordable coverage—(A) In
general—(1) Affordability for employee.
Except as provided in paragraph
(c)(3)(v)(A)(3) of this section, an eligible
employer-sponsored plan is affordable
for an employee if the portion of the
annual premium the employee must
pay, whether by salary reduction or
otherwise (required contribution), for
self-only coverage does not exceed the
required contribution percentage (as
defined in paragraph (c)(3)(v)(C) of this
section) of the applicable taxpayer’s
household income for the taxable year.
(C) Required contribution percentage.
The required contribution percentage is
9.5 percent. The percentage may be
adjusted in published guidance, see
§ 601.601(d)(2) of this chapter, for
taxable years beginning after December
31, 2014, to reflect rates of premium
growth relative to growth in income
and, for taxable years beginning after
December 31, 2018, to reflect rates of
premium growth relative to growth in
the consumer price index. – IRS Final Regulations
Employer sponsored health plans can exclude premium assistance
Consequently, the dependent portion of the group health can be quite unaffordable. If the employer picks up 100% of the employee’s health insurance, it is impossible for the health insurance to ever exceed 9.5% of the household income thereby making the family eligible for the exchange premium assistance. A moderate to low income family wage earner may have to contribute upwards of 25% of his or her monthly income to health insurance for his spouse and children. Even if children are enrolled in Medicaid, some families still can’t afford health insurance for the spouse.
No employer contribution for dependents
In the following example we have an employee that participates in the employer group health plan. The employer contributes 50% to the employee’s health insurance premium for a Platinum plan with no deductible, $20 office copays and an annual maximum out of pocket limit of $4,000. The employee and spouse are each 40 years old and they have two children under 18 years of age. The employer makes no contribution toward the dependents health insurance premium. With an employee contribution of $190.59 per month this household must make less than $2,006.16 for the employee contribution to be greater than 9.5% of household income and thereby make the total family eligible for premium assistance through an ACA exchange.
|Premium Combinations||Rates*||With 50% Contribution to Employee Only||Percent Household Income|
|Employee + Spouse||$762||$571.42||28%|
|Employee + Children||$759||$568.42||28%|
|Employee + Family||$1,140||$949.42||47%|
With no contribution from the employer and a monthly income of $2006.16 per month, the health insurance premiums for the employees dependents easily exceeds 10% of the household income even if the children are on Medicaid (Employee + Spouse).
Are dependents really excluded from premium assistance?
Upon reading the final regulations issued by the IRS (26 CFR Parts1 and 602) Health Insurance Premium Tax Credit (available for download at end of post), I can find no mention within the topic of employer sponsored health insurance that family members are excluded from applying and receiving premium assistance through either a state or federal exchange. However, when ever I called Covered California for clarification I was repeatedly informed that if the employee only premium contribution was below 9.5% of the household income, the entire family was barred from receiving any tax credits to lower the monthly health insurance premium.
Employees may have few health plan options
Affordability is determined by calculating the second least expensive Silver Plan in the family’s area and generating a tax credit to make sure that Silver plan is affordable for an individual or family. An employee may not always have an option that is as inexpensive and comparable to a Silver plan within the choices of the group plans. If the employer selects the Gold or Platinum level metal tiers to offer in the group plan the employees are stuck with the expensive option and that may leave their families out in the cold.
Premium assistance for the whole family
In this example, the same two parent and two child family purchases a similar individual and family Platinum plan through Covered California, from the same carrier as the group plan, located in Sacramento, CA. The premium assistance is calculated on the household income of $63,000 per year or the amount where their children would not be automatically placed in Medi-Cal, but have the same health plan as the parents. This family would receive $558 in premium assistance to lower their monthly rate .
|Household||Household Member Rates|
|Adult = 40 yo||$517|
|Adult = 40 yo||$517|
|Child < 18 yo||$257|
|Child < 18 yo||$257|
The $990 monthly premium equates to 19% of the household income ($990/[$63,000/12]). But the family could choose a lower metal tier plan and increase the health insurance affordability.
|Household Rate||Total less $559 Tax Credit||$5250 Monthly Income|
Additionally, the family could select the second least costly Silver metal tier plan and they would see their monthly health insurance premium drop below 10% of household income. This particular carrier is not the least expensive in the Sacramento market but I decided to use the same carrier for consistency and for comparative purposes.
Premium tax credit pay back
As clear as the 9.5% rule may be to those of us who have studied it, most families see spending 25% of their household income on health insurance as unaffordable. So when the online or paper application asks a family whether they have been offered affordable health insurance they answer “No”. These families have set themselves up for a huge tax bill if the exchange doesn’t catch their error. They will be awarded an advance tax credit to lower their monthly premium for which they are not eligible according to the rules.
Another IRS tax revolt
I’ve seen numerous families enroll in ACA plans with premium assistance even though they have been offered employer sponsored health insurance that is below the 9.5% threshold. If this situation is left untouched, these families will rack up thousands of dollars in tax credits that IRS will make them payback in 2015. If you thought the Tea Party was mad as heck over taxes, it will be a whole new level of anger in 2015.
Immigrant families put at risk
The truly unfortunately point is that it is families for whom English is a second language are most vulnerable to making the mistake of applying for premium assistance when they are not eligible. It takes some serious thought and research to fully grasp the semantics of the 9.5% rule. It is unacceptable that our government institutions have created enrollment websites that allow families to create such a potentially huge federal tax liability.
Group health plan open enrollment
In addition to the language barrier, it is completely reasonable to assume that a family would also select the premium assistance path based on open enrollment. At the time of the exchange’s individual and family plan enrollment period (October – March) the employer’s group open enrollment period may have ended. If the dependents of an employee can’t sign up for the employer group plan then it is logical to surmise that they aren’t offered affordable insurance. Unfortunately, under the ACA rule, the family is expected to have known they should have enrolled in the employer plan because ACA open enrollment was still months away. That makes perfect sense, Right?
(iii) Eligibility for months during a
plan year—(A) Failure to enroll in plan.
An employee or related individual may
be eligible for minimum essential
coverage under an eligible employer sponsored
plan for a month during a
plan year if the employee or related
individual could have enrolled in the
plan for that month during an open or
special enrollment period. – IRS Final Regulations
Please prove me wrong
My hope is that the guidance that has been provided to me and countless other families that they are ineligible for premium assistance because of “affordable” employer sponsored health insurance is wrong. If the guidance is correct then congress needs to amend the ACA to allow families to participate in both the employer sponsored health plan and receive assistance for family members whose participation in the group plan would be unaffordable.