Employers Need to Understand Premium Tax Credits

Employers Need to Understand Premium Tax Credits
 
Recently, I was approached by a small business owner who was gloating over the fact he could finally offer his employees health coverage because of the creation of the State Exchanges.  I wanted to make sure he was making a sound business decision and placing his employees in the best position so I asked a series of questions about his business and about his vision on the health coverage he would offer his workforce.  The following are some of the questions I asked:
  1. How many employees does your business employ?
  2. What are the salary ranges of the employees?
  3. What are the demographics of the employees (age, marital status, etc.)?
  4. What portion of the premiums does the employer intend to pay for self-only coverage? for family coverage?
I learned the business owner ran a company with roughly 40 employees.  A vast majority of the employees made significantly less than 400 percent of the federal poverty line.  The workforce’s demographics varied, but most of the employees were in their 40s, married and had children.  The business owner planned to cover 70 to 80 percent of the premiums for self-only coverage, but a much lower percentage, if any, of the premiums associated with covering a spouse or children.  The business owner wished he could cover a larger portion of the family coverage, but given the profit margin of the business, that was unrealistic at the present time.
 
With this information I was able to inform the business owner he may be putting his employees in a worse position by offering coverage.  Although his intentions were in the right place, his failure to understand the premium tax credits made him unable to make an informed decision. 
 
A premium tax credit is only available to an individual or family with a household income of at least 100 percent, but not more than 400 percent of the federal poverty line.  In 2013 the federal poverty line for an individual living in the continental United States was $11,490. Therefore, if an individual’s household income is between $11,490 and $45,960, the individual could be eligible for a premium tax credit.  In 2013 the federal poverty line for a family of four living in the continental United States was $23,550. Therefore, if an individual’s household income is between $23,550 and $94,200, the family of four could be eligible for a premium tax credit. 
 
Additionally, an individual or family is only eligible for a premium tax credit if the individual is, among other things, not eligible for minimum essential coverage under an eligible employer-sponsored plan that is both affordable and provides minimum value.  For premium tax credit purposes, an employer-sponsored plan is considered affordable both for the employee and the related individuals (meaning the employee’s spouse if covered and the employee’s dependents) if the employee’s share of the premiums for self-only coverage does not exceed 9.5 percent of the employee’s household income.  A plan provides minimum value if the plan’s share of the total allowed costs of benefits provided under the plan are greater than or equal to 60 percent of the plan’s cost. 
 
If the coverage the business owner provides meets the affordability test, which it likely will if the employer is covering 70 to 80 percent of the premiums for self-only coverage, and provides minimum value, the business owner’s employees, their spouses, and their children will not be eligible for a premium tax credit.  However, if no coverage is offered by the business owner, the employees meeting the requirements discussed above for a premium tax credit will be able to shop for coverage on the individual Exchange with a premium tax credit.  The value of premium tax credit will be adjusted upward if the employee is eligible for family coverage.  Thus, the business owner should weigh the overall cost for an employee to cover his/her whole family under the business owner’s health coverage verses the employee’s cost to cover his/her whole family on the State Exchange with the assistance of a premium tax credit.
 
The business owner not offering coverage could be a win-win scenario for all parties involved.  The business owner will not have to provide costly health coverage to his employees and the employees will have access to a wider variety of less expensive (factoring in the premium tax credits) health coverage through the State Exchanges.
 
Each employer’s demographics will present a different scenario and needs to be explored independently.  However, before any employer offers coverage to its workforce in 2014, the employer should at least understand the value of the premium tax credits the employer is taking away from its employees.Legal Consent

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