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Exchange subsidies for spouses and children

August 29, 2013

By Scott Lyon, Senior Vice President

One question that our staff repeatedly receives from members and agents goes something like this:  If I offer coverage to my employees, will their spouses and children be eligible for subsidies at the Exchange/Marketplace?

The short answer is – it depends, but most likely they will not be eligible for the subsidy.

It is easy to miss a couple of rules published by the IRS earlier this year that help answer this question.  There rules are: here and here, and both uphold earlier proposals outlining what is considered affordable, employer-sponsored coverage.  Basically, whether an employees’ family will be eligible for health insurance premium subsidies in 2014 is based on the affordability of the employer-sponsored coverage. The IRS has clarified that affordability is based only on the cost of coverage for the individual employee, not on the cost of coverage for the family.

The rule defines affordability as an amount less than 9.5% of household income to cover just the employee’s share of premium, as opposed to what the employee must pay to cover his/her family.

Bottom-line:  If coverage is offered to the spouse and children and if the employee-only premium portion as defined by the IRS as affordable, federal subsidies will not be available to help purchase insurance for the family through the health insurance exchange /marketplace.  If coverage to the spouse is not offered, then subsidies may be available to the spouse.  {Those with access to SBAM’s Decision Point – click here for details on Employee/Individual Mandates and information on tax credits, subsidies and more}

To determine if the employer-sponsored plan is affordable follow these simple tests:

Question 1:  Is employer coverage available to spouses and children?  

  • If the answer is No, based on household income, subsidies may be available.
  • If the answer is Yes, move on to question 2.

Question 2:  Does the employer-sponsored health insurance plan that is available meet the minimum requirements to be a “Qualified Health Plan”? Said differently, is the plan paying at least 60% of claims on average?  Is the plan a “Bronze Level Plan” on the Exchange?

  • If the answer is No, subsidies may be available based on household size and income.
  • If the answer is Yes, move on to question 3.

Question 3: What is the employee-only portion of the premium – the cost to the employee of the lowest cost single/employee only plan? Once determined, divide this dollar amount by household income.

  • If the cost is more than 9.5% (but see next paragraph for 9.5% of what), subsidies, based on household size and income may be available.  Remember, subsidies must be obtained via the Exchange/Marketplace.
  • If the cost is 9.5% or lower, family members will not be eligible for premium subsidies at the Exchange/Marketplace.

For employers, there is one last thing to keep in mind.  Employer Safe Harbor for companies subject to the Shared Responsibility/Employer Mandate:  The IRS recognizes that most employers do not know, or want to know, what the household income is of their employees.  As a result, the IRS has crafted three safe harbors for employers.  This test defines affordability based on whether an employee’s premium contribution for the lowest-cost, self-only coverage that provides minimum value exceeds 9.5% of the employee’s wages as reported on Form W-2 Box 1 for the calendar year.  Alternatively, if that employee cost as determined above is less than 9.5% of the federal poverty level for a single member household, or is less than 9.5% of that employee’s average hourly rate of pay, coverage is also deemed to be affordable.

Keep in mind that while subsidy eligibility and the potential for an employer penalty are related, they are also separate.  If the cost of coverage charged for a qualified plan is less than 9.5% of employee wages (W-2, Box 1) for single/employee only coverage, and the plan is available to 95% or more of employees, the employer can enjoy the Form W-2 safe harbor. Again, to take advantage of this an employer must:

  1. Offer its full time employees (and their children) the opportunity to enroll in minimum essential coverage under an employer sponsored plan; and
  2. Ensure that the employee portion of the self-only premium for the employer’s lowest cost qualified coverage that provides minimum value does not exceed 9.5% of the employee’s W-2 Box 1 wages (or one of the other two safe harbors).

If the employer satisfies both of these requirements for an employee, the employer will not be subject to a penalty for providing unaffordable coverage with respect to that employee.

For full coverage of the ins and outs of the Affordable Care Act, visit SBAM’s Decision Point.

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