Affordability – For Employers and Employees

Affordability – How Employers and Employees Have Competing Interests
 
One aspect of Affordable Care Act that has been reported inaccurately is the availability of premium tax credits.  Media outlets are conveying to the public the premium tax credits will be available to anyone with a household income below 400 percent of the federal poverty line.  The law says otherwise.
 
An individual is only eligible for a premium tax credit if the individual is not eligible for minimum essential coverage under an eligible employer-sponsored plan that is both affordable and provides minimum value or through a government plan including, but not limited to Medicare, Medicaid, or TRICARE.  This is the critical fact the media is leaving out.  What I fear will happen is  people not eligible for premium tax credits will enroll for coverage through State Exchanges thinking they are eligible for premium tax credits.  This could leave them with a large monthly premium when they are subsequently denied a premium tax credit.  The new debt ceiling compromise specifically mentions additional procedures to ensure individuals are eligible for any premium tax credits they receive.  I was unable to see if there was a fool-safe tool on healthcare.gov to prevent such a result as, shockingly, the website was not functioning properly the multiple times I checked.
 
Regardless, the issue of eligibility for premium tax credits is an interesting aspect of the law.  On the one hand, employers are always interested in improving their bottom line.  If that means offering quality health insurance to attract talent, an employer has no problem spending money.  However, the vast majority of employers being affected by the Play or Pay Mandate are not interested in offering quality health insurance as that won’t improve their bottom line.  Instead, these employers are looking for the most cost effective way to navigate the Play or Pay Mandate.
 
While every employer’s situation will present a unique set of facts, a vast majority of employers will be in a better position by offering coverage instead of paying a penalty under the Play or Pay Mandate. Employers wishing to do the bare minimum to comply with the Play or Pay Mandate will offer bronze coverage that costs employees electing self-only coverage 9.5 percent (or slightly less) of their expected wages or salary.  Employers doing the bare minimum will not cover any of the premium costs for the employee’s children or spouse if covered.  If an employer chooses this route, the employees will be left with the options of accepting the employer’s bronze coverage or shopping on the individual Exchange without a premium tax credit.
 
On the other hand, employees will be shopping for coverage that best fits their needs and budgets.  If an individual has medical issues, enrolling in a gold or platinum plan may be the best option.  However, an employee’s household income and eligibility for premium tax credits will have a large impact on the type of coverage the employee can realistically expect to afford.  An employer offering an eligible employer-sponsored plan that is both affordable and provides minimum value to comply with the Play or Pay Mandate will make the employee and any related individual covered by the employer plan ineligible for premium tax credits.  The media is not adequately informing the public of this fact.  Consider two misleading examples provided by the NBC nightly news that convey these points. 
 
The first example provided by the NBC nightly news was that of a 27 year old woman with a household income of $25,000.  NBC reported that after premium tax credits the women could expect to pay a monthly premium for a silver plan of no more than $145 dollars.  Here is how NBC arrived at the number.  If the woman purchases the second lowest cost silver plan, the most the woman could pay annually in premiums is $1,733.  This would mean the cost of the monthly premium for the second lowest cost silver plan in the region would be $144 per month.  NBC had a slight rounding error.  The problem with the example is if the woman’s employer offers bronze coverage and does not make the woman pay more than $2,375 in premiums annually (which makes the coverage affordable), the woman will not be eligible for a premium tax credit.  Thus, if the employer offers coverage, the woman could be stuck with the options of purchasing the less valuable employer sponsored bronze coverage with monthly premiums as high as $197 or purchasing insurance on the individual Exchange without a premium tax credit.
 
The second example provided by the NBC nightly news was a family of four with a household income of $50,000.  NBC reported that after premium tax credits the family could expect to pay a premium for a silver plan of approximately $282 per month.  This number was arrived at by assuming the family purchases the second lowest cost silver plan that covers the entire family in which case the most the family could pay in annual premiums would be $3,360.  This would mean the cost of the monthly premium for the second lowest cost silver plan in the region will be $280 per month.  Again, NBC had a slight rounding error.  And, again, there is a huge problem with the example in that it assumes the family will be eligible for a premium tax credit.
 
There are two rules associated with affordability when determining eligibility for premium tax credits.  First, an employer’s coverage for an employee is considered affordable if the cost of the employee’s share of premiums for self-only coverage (that must be at least bronze coverage) does not exceed 9.5 percent of the employee’s household income.  For related individuals, a term that encompasses spouses and children if covered by the plan, an employer’s coverage for the related individuals of an employee is considered affordable if the cost of the employee’s share of premiums for self-only coverage (that must be at least bronze coverage) does not exceed 9.5 percent of the employee’s household income.  That is not a typo.  The affordability of the related individuals’ health coverage is tied to the cost of the employee’s self-only coverage, not the cost of the related individuals’ health coverage.
 
Thus, in one potential scenario for the family of four, the husband and the wife are each charged 9.5 percent for self-only coverage by their respective employers.  This would bring the premium cost to $9,500 annually or $791 per month just to cover the two parents.  So long as one of the plans offered coverage to the children (in 2015 employers will have to offer coverage to dependents, a term that includes children, to comply with the Play or Pay Mandate), the parents could have to pay the entire premium cost for the children.  Nobody in the family of four will be eligible for a premium tax credit so long as each member of the family of four is eligible for an employer sponsored plan that offers at least bronze coverage and complies with the affordability rules discussed above.
 
The scenario above is about as likely as the example used by the NBC nightly news.  Only in rare situations, such as spouses working at the same company, will employers be able to accurately estimate a family’s household income.  Even then, there could be other sources of income affecting the family’s household income.  The more probable scenario is the husband working one job and earning $25,000 and the wife working a different job making another $25,000. Each employer will only be privy to the household income they give the employee through wages.  So the husband’s employer could charge a monthly premium of $197 for a bronze plan and the wife’s employer could charge a monthly premium of $197 for a bronze plan.  This could leave the family with $394 in premiums before either child is even covered by insurance.  The employers could make the employee pay the entire premium amount to cover any child.  It is likely the entire family will not be eligible for a premium tax credit.
 
Both these examples show the harsh reality of the competing interests between employers and employees.  The math behind the Play or Pay Mandate makes it advantageous for employers to offer affordable, bronze coverage which will in most circumstances take away an employee’s eligibility for a premium tax credit.  This could leave millions of Americans choosing between expensive bad coverage or continuing to be uninsured. 
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