Twenty-fourteen is coming at us with lightening speed. The health insurance exchanges must be ready to begin enrollment in October 2013, only seven months away. It is clear that individuals without employer based coverage will be eligible to join a health plan through an exchange, but what about working individuals who could get a better deal with government subsidized coverage?
Through proposed regulation Obamacare defines what is affordable in terms of employer coverage. If coverage is affordable, the employee may not enroll in an exchange and the employer avoids fines. What is coming to light is the fact that some working people may pay more for health care coverage than their counterparts enrolled in an exchange.
Following is an analysis of the regulations, but here is what it means in practical terms. Let’s say a married employee earns $40,000 per year, his W-2 earnings. That means that the maximum contribution he can be required to make toward self only coverage and still meet the test for affordable coverage is $3,800 per year (9.5% of W-2 earnings).
Using the Kaiser Family Foundation projection tool for 2014 health care exchange subsidies, the medium region plan for a 40-year-old single person has a premium of $4,500 per year (this is age adjusted). This person receives a $750 subsidy because the most he can pay is $3,800 or 9.5% of pay.
Now let’s assume the same person has a family of four. In this case the total premium for the medium region plan is $12,130. Under the law this person is only required to pay $1,982 in premium (4.95% of income) the balance of $10,148 is a government subsidy tax credit.
Taking the same family, let’s apply the regulations. For this example we also use the medium regional premium of $12,130 for family coverage – employer-based family coverage may well exceed that amount however. A premium near $20,000 for family coverage in a good employer plan would be more realistic.
Under the regulations, the employee could be required to pay up to 9.5% of of his W-2 earnings toward the cost of single coverage or in this example up to $3,800 out of a total premium of $4,500 (85%) and the employer would still provide “affordable” coverage. The same as through the exchanges.
But let’s be more realistic, let’s say the employee must pay 30% of the cost of single coverage and 40% for the cost of family coverage. Thirty percent of the medium region single coverage is $1,350 … no problem, way less that the maximum $3,800 toward single coverage. However, forty percent of the family premium is $4,852.
So, this family receiving coverage through a Obamacare health insurance exchange would pay $1,982 in premium with $10,148 coming from the government in a tax credit. The same family with employer based coverage is not eligible for the exchange because the employer is offering affordable coverage, but will pay $4,852 in premium with the employer paying the balance.
Note: In the exchanges premium subsidies are available to families with incomes between 133% and 400% of the federal poverty. In addition, cost-sharing subsidies (co-pays and deductibles) are available to those with incomes up to 250% of the poverty level.
You see, if the rule is based on the cost of family coverage being affordable many more families would be eligible for the exchange tax credits thereby driving up the cost of Obamacare. On the other hand, these workers are no worse (that’s not exactly true because Obamacare has driven up the cost of group health insurance) and no better off than before Obamacare … I wonder if that is what workers anticipated?
So, have we set up a system with unintended consequences? Is there an incentive for some employers to not provide the coverage they currently provide? Are all workers better off with employer-based coverage? Will enrollment and hence costs for the exchanges be greater than anticipated once this inequity is understood?
Excerpt from a memo
An employer that offers minimum essential coverage must ensure that it provides affordable coverage to avoid liability for penalties under Code section 4980H. Generally, if the employee’s required contribution toward the cost of self-only coverage does not exceed 9.5% of the employee’s household income, the coverage is considered “affordable.” Because employers generally will not know an employee’s household income, a safe harbor is needed so that employers may design compliant plans. Treasury and the IRS previously described a Form W-2 safe harbor in Notice 2011-73. The proposed regulations adopt this Form W-2 safe harbor and expand the affordability safe harbor to include two alternative methods. Employers may use different safe harbors for different categories of employees, provided the categories are reasonable.
• Form W-2 Safe Harbor: The employer must offer minimum essential coverage to full-time employees (and their dependents) under an eligible employer-sponsored plan, and the required employee contribution for self-only coverage for the lowest cost option that provides minimum value must not exceed 9.5% of the employee’s Form W-2 wages for that calendar year. If an employee that was not a full-time employee for the entire calendar year, the Form W-2 wages are adjusted to reflect the period when the employee was offered coverage and the employee’s share of premium for that period. Note that this means that the safe harbor will apply on an employee-by-employee basis and that the employer will not know for certain if it has satisfied the requirements of the safe harbor until the end of the calendar year, unless the contribution toward coverage is set as a percentage of wages.
• Rate of pay Safe Harbor: The employer may take the hourly rate of pay for each hourly employee who is eligible, multiply that by 130 and determine affordability based on the monthly wage. Affordable coverage must require a contribution of no more than 9.5% percent of the monthly wage. This safe harbor will not apply if the employer reduces wages during the year.
• Federal Poverty Level (“FPL”) Safe Harbor: The employer may also rely on a design-based safe harbor that will be satisfied if the self-only cost of coverage does not exceed 9.5% of the most recently published federal poverty level for a single individual.
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