Increased Obamacare Health Insurance Subsidies Provide Savings Opportunity for Small Employers
How the Federal Government Subsidizes Health Insurance
Since 2014, the Affordable Care Act (Obamacare) has provided government subsidies towards the cost of individual health insurance coverage purchased through the health insurance Marketplace (HealthCare.gov).
Subsidies are provided through a Premium Tax Credit (PTC) which caps what the insured individual/household pays for the coverage at a percentage of household income. For example, assume a family of four has monthly income of $4,000 and purchases health insurance through HealthCare.gov with monthly premiums of $2,500. If the family qualifies for subsidy the PTC would limit the family’s required contribution to $240 (6% of income) and the Federal government would pay the $2,260 difference (an annual subsidy of over $27,000).
Under PTC rules, lower income households are required to pay a lower percentage of income than higher income households. The PTC percentages increase on a sliding scale based on the ratio of household income to the Federal Poverty Line (FPL). Prior to the recent changes the required contribution percentages ranged from a low of 2.07% to a high of 9.83% and subsidies were completely phased out when household income exceeded 400% FPL.
Note that the actual premium amount is irrelevant to the insured household, the only relevant factor is what percentage of household income they’re required to contribute towards the premium.
Eligibility for Government Subsidies
To be eligible for government subsidies the individual or household:
- Must not be eligible for Medicaid or Medicare.
- Must not be eligible for “affordable” health insurance through their employer or their spouses’ employer. Whether the employer coverage is “affordable” is itself a somewhat complex issue beyond the scope of this alert.
Increased Subsidies under ARPA for 2021 and 2022
The American Rescue Plan Act (ARPA) signed by President Biden on March 11, 2021, substantially increases the amount and availability of the PTC subsidies for 2021 and 2022:
- The required contribution percentages of household income are substantially reduced for 2021 and 2022, starting at 0% and increasing to a maximum of 8.5%. The new 0% contribution rate means that eligible households with income up to 150% FPL can now get health insurance completely paid for by the government. Free coverage is available for single individuals with income up to $19,140, couples up to $25,860 and families of four up to $39,300.
- The 400% FPL cap on PTC availability has been removed, meaning anyone at any income level can potentially receive a government subsidy if premiums exceed 8.5% of income. For example a 60-year-old couple with $100,000 income (580% FPL) will now be eligible for over $12,000/year in subsidies (total premiums of $21,000 less $8,500 required contribution).
Only Small Employers Can Take Maximum Advantage of the Increased Subsidies
Through an excise tax penalty the ACA effectively requires “large” employers (50+ full-time and full-time-equivalent employees) to offer affordable group health insurance to their full-time employees, thereby disqualifying full-time employees from ACA subsidies. Large employers may, however, want to alert their part-time employees to the new opportunity to obtain heavily subsidized health insurance through the Marketplace.
Even though small employers (<50) are not required to offer health insurance benefits to any employees, many choose to do so through employer-sponsored group plans, resulting in significant costs to both the employer and employees. Small employers frequently overlook the opportunity for the considerable savings that could be realized by making some employees eligible for subsidized coverage through the Marketplace.
Action Steps for Small Employers
In light of the ARPA substantial increase in subsidies, all small employers should review their group health insurance strategy to see if they can save considerable amounts for themselves and their employees by making some employees eligible for Marketplace coverage. The Kaufman & Canoles chart of required contributions should help in determining potential savings.
If substantial savings are available, talk to your insurance agent/broker about the changes that need to be made to your existing plan to make the targeted employees eligible for subsidies. Of course the employees will need assistance in actually enrolling through HealthCare.gov. In order to accommodate the expected influx of new enrollees a special Marketplace enrollment window is now open and runs to August 15th. After review of your particular situation you may find that making changes in your plan are best delayed until 2022.