Earlier this month, the U.S. Department of the Treasury delayed for one year the implementation of the Affordable Care Act’s requirement that employers with 50 or more full-time employees make a “shared responsibility payment” to the federal government if any of their full-time workers gain subsidized coverage through the new state insurance marketplaces. As a result, large and midsize employers whose employees gain subsidies in 2014 will not have to share in the cost of that coverage next year.1
While delay was interpreted as a bad omen by some, it’s unlikely to substantially affect existing or new coverage options. Rather, the delay will give employers and the federal government more time to work out the details of employers’ critical role in the emerging near-universal health insurance system.
The vast majority of companies with 50 or more employees already offer health insurance. There are, however, considerable disparities in the coverage of low-wage and high-wage employees. A recent Commonwealth Fund report found that in companies with 50 or more workers, less than half of employees earning less than $15 an hour had coverage though their jobs, whereas 80 percent of workers earning $15 an hour or more in those companies had job-based coverage. Moreover, most higher-wage workers who did not take up coverage had health insurance through another source, whereas one-third of low-wage workers in large firms were uninsured.
The good news for many of these low-wage workers is that they may well be eligible for subsidized private plans offered through new state insurance marketplaces or Medicaid next year. This blog post examines how the law and the recent set of federal regulations and guidance aim to knit employer-based health insurance into the fabric of a unified insurance system.
The Shared-Responsibility Payment. Despite the widespread use of the term “mandate,” the law does not require employers to offer health insurance but instead requires them to make a “shared-responsibility payment” to help cover the cost of premium tax credits, or subsidized coverage, for employees through the state insurance marketplaces.
Specifically, an employer would be required to make a payment if a worker with income under 400 percent of poverty (about $45,960 for a single person and $94,200 for a family of four) gains a premium tax credit for a plan sold through the insurance marketplace in their state either because his or her company did not offer coverage, or the coverage was determined to be unaffordable (costing the employee more than 9.5% of his or her household income for a self-only plan) or did not meet the minimum benefit standards in the law (covers less than 60 percent of average medical costs for a standard population of people). 2
But employers do not have to make a shared-responsibility payment for their lowest-income workers if those workers become eligible for the law’s Medicaid expansion.
Employer reporting requirements. The Affordable Care Act requires that employers of 50 or more employees report to the Treasury information such as whether the health insurance they offer meets the law’s minimum benefit standard, the monthly premium, the employer’s share of costs, and the months that employees have been covered.
If an employee is awarded a tax credit, the IRS uses this information to determine whether the employer should be assessed a payment. The employer will have an opportunity to respond before the payment is assessed. Treasury has not yet released the rule on this provision and has delayed its implementation, along with the shared-responsibility payment, to 2015.
Employer notices to employees about the Affordable Care Act. By October 1, 2013, virtually all employers, both large and small, must notify their employees about the coverage options under the law, and whether or not they offer health insurance. The Department of Labor has issued guidance on this provision and created model notices for employers describing the new insurance marketplaces and how employees might become eligible for subsidies. The notices also advise employees that if they purchase a health plan through the marketplaces, they would likely lose their employer premium contribution, if they had one.
Determination of eligibility for premium tax credits. Treasury’s one-year delay of both the employer shared-responsibility payments and reporting requirements will have no effect on the ability of eligible Americans to begin enrolling in health plans and receiving subsidies through the state marketplaces.
People who have an offer of employer coverage that meets minimum standards for affordability and value are generally ineligible for premium tax credits. People applying for subsidies will report information about their access to employer coverage on their application.
The state marketplaces are required to verify whether an applicant for tax credits is eligible for affordable employer coverage, using a set of electronic data sources approved by the Department of Health and Human Services. In the absence of available data, the marketplaces will conduct random sampling of employers for confirming information starting in 2015. But if a marketplace is unable to obtain the necessary verification, it will rely on the word of the applicant.
As Timothy Jost of the Washington and Lee University School of Law points out, there is unlikely to be widespread fraud in the application for tax credits. The IRS will report employee eligibility for tax credits to employers and those eventually found to be ineligible for the tax credits will have to pay them back when they file taxes. In addition, people are liable for substantial fines for misrepresenting eligibility.
Jost also notes the similarity to how the IRS determines the amount of taxes individuals and corporations owe each year. People file their returns, the IRS verifies that information with W-2s and 1099s, and then audits a sample of taxpayers. In 2006, the gap between actual income and income on which taxes were paid amounted to $385 billion. By contrast, the Congressional Budget Office estimates the total amount that the federal government will spend on premium tax credits will add up to less than $55 billion in 2015.
While some people may gain tax credits they are not eligible for, if anything enrollment problems will likely run in the opposite direction. As many as 13 million people may remain uninsured who are eligible for either Medicaid or subsidized private health plans.
Looking forward. The Affordable Care Act, and the federal regulations issued over the past three years, have strongly emphasized a shared responsibility for achieving near-universal coverage among federal and state governments, individuals, employers, insurance carriers, and the health care industry. This is driven by necessity: the law builds on the nation’s complex insurance system, which has evolved piecemeal over the past 70 years. A shared responsibility among stakeholders for financing and participating in coverage is essential if the system’s disparate parts are to be tied together into a unified whole.
Employers are at the heart of the U.S. health insurance system and their ongoing commitment to it will be critical to its success and viability over time. Despite the reprieve from some of the law’s provisions granted to employers, it is hoped that the business community remains committed to its role in the nation’s insurance system and implements the changes necessary under the law to ensure that all of its workers have access to coverage that is comprehensive and affordable.
1 See Timothy Jost’s thorough and insightful blog series on these and other Affordable Care Act federal rules and guidance at the Health Affairs blog.
2 Payments are equal to $2,000 per worker, excluding the first 30 employees, for companies that do not offer any coverage. For companies that offer inadequate coverage, the payment is $3,000 for each worker that becomes eligible for a tax credit, or $2,000 for each worker, excluding the first 30 employees.