This month, the U.S. Department of Health and Human Services (HHS) and the Treasury Department issued guidelines to states on how to implement the new health insurance exchanges and expansions of affordable options for insurance coverage. The proposed rules build on prior proposed regulations that provide a framework for states to establish exchanges. The three most recent rules address: 1) enrollment of people in private, qualified heath plans sold through the exchanges as well as "insurance affordability programs," including premium tax credits and a substantially expanded Medicaid program; 2) eligibility criteria for the premium tax credits; and 3) new eligibility standards for Medicaid. Together, the rules envision a seamless, coordinated system of health insurance that will provide coverage to at least 34 million uninsured people by 2020. The rules also emphasize the preservation of employer-based coverage, which now covers 60 percent of Americans under age 65.
In this blog, I review the Treasury Department's proposed rule on eligibility for premium tax credits. The Congressional Budget Office estimates that by 2020, 20 million people in the U.S. will receive premium tax credits to help offset the costs of their insurance, with an average credit of $6,740.1 This will substantially reduce premium costs for people who are uninsured and must buy coverage on their own or pay the full premium for COBRA coverage if they lose their job. I highlight the following:
Who Is Eligible for Premium Tax Credits?
Starting in 2014, people with household incomes between 100 percent and 400 percent of poverty ($22,350 to $89,400 for a family of four) who lack access to affordable insurance will be eligible for a tax credit to offset the cost of premiums for private health plans purchased through the insurance exchanges. The exchanges will be organized markets in which individuals and small businesses can purchase health insurance plans, starting in 2014. When someone applies for coverage, the exchange will make a determination of their eligibility for the premium tax credits as well as for Medicaid, the Children's Health Insurance Program (CHIP), and the Basic Health Plan, if available. (Under the reform law, states have the option of creating Basic Health Plans for those in households with incomes between 133 percent and 200 percent of poverty who lack affordable employer coverage.)
In addition, to be eligible for the tax credits someone cannot be eligible for "minimum essential coverage" through an employer or other insurance program and must be enrolled in a qualified health plan offered through the exchange. Minimum essential coverage is health insurance that is considered affordable and provides a minimum level of cost protection.
Are Employees with Employer Health Benefits Eligible for the Tax Credits?
Those whose employers offer minimum essential coverage that meets affordability and benefit standards are generally ineligible for the tax credits. Workers and their dependents who have an opportunity to enroll in their employers' health plans during an open enrollment period but fail to do so are not eligible. Conversely, someone who is laid off or leaves their job and becomes eligible for COBRA continuation coverage would be ineligible for premium tax credits only if he or she actually enrolled in COBRA.
Workers with unaffordable premiums or poor coverage. There is one notable exception to the exclusion of those with access to employer coverage: when an employer plan does not meet the criteria for minimum essential coverage. That is, the plan offered would require employees to spend more than 9.5 percent of household income on premium contributions, or would provide less than a minimum level of cost protection (with minimum level defined as at least 60 percent of an individual's total medical costs on average for the year). In either case, a worker could become eligible for premium tax credits if her income was between 100 percent and 400 percent of poverty, unless she had already enrolled in the employer plan.
Under the law, if an employer has 50 or more workers and one of their employees becomes eligible for a tax credit, the employer would have to pay a penalty to the Treasury. The penalty would be the lesser of $3,000 for each full-time worker who receives a premium tax credit or $2,000 for each full-time worker, excluding the first 30 workers.
Criteria for determining affordability of an employer plan. The rule provides guidance to employers on how to determine whether an employee's premium contribution is affordable, but Treasury defers guidance on the minimum level of cost protection to a future regulation. Treasury notes that forthcoming guidance will provide flexibility to employers to meet the minimum standard. Regardless of whether an employee has a family plan or "self-only coverage," their employer coverage is considered unaffordable if the required contribution for self-only coverage exceeds 9.5 percent of their household income. Someone may thus have a family plan for which he pays more than 9.5 percent of his household income, but if the contribution for self-only coverage is less than 9.5 percent of his income, he would be defined as having affordable coverage.
This definition clearly benefits employers, but may leave many employees with unaffordable health plans, as Tim Jost points out in his Health Affairs blog post on the rule.2 Employers who offer family coverage that is unaffordable to some of its workforce would not have to pay penalties for those employees who would have become eligible for tax credits as a result, as long as self-only coverage is determined to be affordable for those employees. And those employees would be denied the benefit of a premium tax credit that might have reduced their costs of coverage.
Employer safe-harbor regarding penalties. In another simplification for employers, Treasury notes that in future guidance it will likely allow employers to determine whether coverage they offer to employees is affordable for an employee based on their wages, rather than their household income. This is because employers cannot easily determine their employees' household incomes. So for purposes of the penalty, if a worker became eligible for a premium tax credit because his contribution for self-only coverage exceeds 9.5 percent of his household income, the employer would not be assessed a penalty if the contribution is less than 9.5 percent of their employee's wages.
What Will Be the Amount of the Premium Tax Credit?
Under the law, taxpayers eligible for tax credits are required to make contributions to their premiums as a share of their income from 2 percent to 9.5 percent (Exhibit 1). Eligible taxpayers will have a choice of private, qualified health plans sold through the exchanges that offer a comprehensive set of benefits, also known as the essential benefit package, which is to be defined in regulations due out this fall. Insurers will offer these plans at four levels of cost-sharing: bronze plans (covering on average 60% of someone's annual medical costs), silver (70% of costs), gold (80% of costs), and platinum (90% of costs). However, for people with low incomes, the average costs covered by the silver plan will be increased to 94 percent (for those with incomes up to 149% FPL), 87 percent (150%–199% FPL), and 73 percent (200%–249% FPL).
Amount of the credit is based on the benchmark plan. The amount of the tax credit will be equal to the difference between someone's required premium contribution and the premium of the "benchmark" health plan—the second-lowest cost "silver" plan offered through the exchange. This means that someone may choose a plan that is not the benchmark plan, but the amount of the tax credit would be determined based on the premium for the benchmark plan, not the plan they enroll in, which could be less or more than the benchmark. In addition, the tax credit amount cannot exceed the amount of the full premium.
To illustrate, a family of four with an income of $50,000 is at 224 percent of poverty (Exhibit 2). This means that their required premium contribution would be 7.1 percent of their income or $3,570. Treasury estimates that their premium for a benchmark plan would be about $9,000. Their tax credit would thus be equal to the benchmark premium minus their required contribution, or $5,430. A family with slightly older parents would be charged a higher premium in the exchange. But the tax credit would also be higher, since the premium contribution for the family is a fixed share of their income.
Advance credit payments vs. actual tax credits. When someone becomes eligible for a tax credit, Treasury will pay the credit in advance directly to the insurance company based on their most recent tax return. This means that recipients do not have to wait to get the tax credit as part of next year's tax return. But Treasury will reconcile the advance credit payments against the actual tax credit based on the tax return in the year in which the credit is applicable. In other words, if someone's income is different in the year in which the advance credits were paid to the insurer, the taxpayer will either: a) receive a refund on their return, if their income is lower and they were entitled to a larger tax credit, or b) owe a tax liability if their income is higher and they were actually entitled to a smaller credit. In the latter case, repayments are capped for people with incomes under 400 percent of poverty to no more than $600 for married couples ($300 for single) under 200 percent of poverty to $2,500 for married taxpayers ($1,250 for single) with incomes between 300 percent and 399 percent of poverty.
Combined with the substantial expansion in Medicaid eligibility and new insurance market reforms, the premium tax credits will greatly improve the affordability and accessibility of insurance—for the first time creating a health system in which nearly everyone will have coverage. The proposed rule also emphasizes the continued importance of employer-based benefits, proposing flexibility for employers to offer coverage that meets the minimum essential benefit standards in the law. But it will be important that workers who are covered by employer plans also benefit from the new standards for comprehensive and affordable health benefits brought about by health reform. Finally, rapid growth in U.S. health care costs will increase the cost of premiums and the tax credits over time. A Commonwealth Fund study found that employer premiums increased an average of 41 percent from 2003 to 2009. It will therefore be critical that state and federal policymakers fully implement the provisions in the law directly aimed at lowering the rate of growth in premiums, including premium rate review and medical loss ratio reporting, as well as the law's extensive set of delivery system reforms, such as the Independent Payment Advisory Board, that are designed to improve care as well as slow the growth in overall health spending.