Gov’t to Subsidize Employers’ Healthcare Expenses

Government Offering to Subsidize Employers’ Healthcare Expenses in 2014

On July 2, 2014 the government announced it was delaying the enforcement of the Play or Pay Mandate for employers until 2015.  However, the rest of the Affordable Care Act, including the premium tax credit program for individuals, will begin as scheduled on January 1, 2014.  These two events give employers the opportunity to capitalize on a planning opportunity in 2014.
 
Notice 2013-45 states employers will not have to pay a penalty if they choose the “pay” option associated with the Play or Pay Mandate in 2014.  Additionally, Notice 2013-45 does not require a good faith effort of compliance for 2014, but only encourages employers to maintain or expand health coverage.  With the timely January 2014 arrival of the premium tax credit program, the government is all but encouraging employers with the right workforce demographics to drop health coverage in 2014 and allow the government to pay the portion of the employees’ premiums the employer had assumed in the past.
 
A premium tax credit is available to an individual 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 approximately $11,490. Therefore, if an individual’s household income is between $11,490 and $45,960, the individual will be eligible for the premium tax credit.  For a family of four living in the continental United States the federal poverty line in 2013 was approximately $23,550.  Therefore, if a family of four has a household income between $23,550 and $94,200 the family will be eligible for the premium tax credit.
 
The amount of the premium tax credit depends on several factors including the cost of the monthly health insurance premiums purchased by an individual or household, the premium for the applicable second lowest cost silver plan in the individual’s State, and the household income of the individual compared to the federal poverty line.  An individual is entitled to a monthly premium tax credit of the lesser of:
  1. The cost of the monthly health insurance premiums to cover the individual’s household or
  2. The premium for the applicable second lowest cost silver plan in the individual’s State – [(1/12) x the individual’s household income x the individual’s applicable percentage]
An individual’s applicable percentage is determined by comparing an individual’s household income to the federal poverty line.  The applicable percentage works on a nonlinear sliding scale starting at 2 percent for individuals with a household income of 100 percent of the federal poverty line and ending at 9.5 percent for individuals with a household income of 400 percent of the federal poverty line.

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.

The planning opportunity available in 2014 involves the employer amending or terminating its health plan that covers its employees with a household income of 400 percent of the federal poverty line or less.  The Supreme Court has held that employers are free to amend or terminate welfare plans (a term that encompasses health plans) at any time so long as the proper plan procedures are followed.  See Curtiss-Wright Corporation v. Schoonejongen 514 U.S. 73 (1995).  The employees that lose coverage because of the amended or terminated health plan will be eligible for premium tax credits which should put a majority of the employees in the same or even a better position as the employees were prior to 2014.  Even if the employees are in a slightly worse position, the employer can use the money it saves by not offering health coverage to increase these employees’ salaries slightly and to assist these employees in applying for the premium tax credits through the Exchanges when the Exchanges open in October 2013. 
 
If implemented correctly, this strategy will not harm employees and will save an employer money in 2014.  An additional benefit is that the strategy will place the employer in a better position to implement a strategy of reducing certain employees’ hours of service to avoid the Play or Pay Mandate in 2015 while still complying with ERISA §510 (more to come on this issue at a later date). 
 
Employers with self-insured plans are unlikely to be able to administer the strategy as it will likely cause the employer to violate the nondiscrimination rules (see blog post bullet four which discusses how self-insured plans may still be able to utilize the strategy).  However, the nondiscrimination rules for insured plans have yet to be released and are highly unlikely to be effective in 2014.  Consequently, if necessary, an employer could implement a new insured plan that covers employees making more than 400 percent of the federal poverty line.  Admittedly, employers are unlikely to know the income of the other members of an employee’s household so a threshold lower than 400 percent of the federal poverty line may make more sense for some employers depending on the demographics of the employer’s workforce.  If an employer’s workforce demographics are right, this strategy could save an employer a significant amount of money in 2014.
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