The Health Insurance Subsidy – Understanding its Importance

February 6, 2014|Terri Lillesand

On Monday, February 10, 2014, the IRS delayed implementation of the employer mandate for some taxpayers. View details of the final final regulations on the employer health insurance mandate.

In January 2014, we discussed the basics of the Premium Assistance Credit, the subsidy that is available to some taxpayers who purchase insurance through the individual insurance marketplace. It’s important for all of us—as individuals and as employers—to understand the subsidy. Here’s why.

Individuals need to understand whether they qualify for a subsidy so they can make informed decisions about health insurance coverage

While it is widely believed that having health insurance is prudent for a variety of reasons, there is a new reason to add to the list. Starting in 2014, unless exempt, individuals will incur a tax (penalty) for failing to have health insurance coverage for themselves and their dependents. While the penalty is a modest amount in 2014, by 2016 it is a much larger amount and may be more of an incentive to purchase insurance. The penalty is reported on and paid as part of a taxpayer’s income tax return.

Individuals that do not have employer-provided coverage are eligible for a subsidy if their income falls between 100% and 400% of the federal poverty level. Individuals who have employer-provided coverage offered to them need to understand the subsidy, because it is possible that insurance purchased through the marketplace could be less expensive than their employer-provided insurance.

As discussed last month, an individual that is offered employer-provided coverage will be eligible for a subsidy if purchasing insurance through the insurance marketplace only if their employer-provided insurance is unaffordable. An employee does not have to enroll in employer-provided coverage. They are free to decline it and purchase insurance elsewhere. They will only qualify for a subsidy if their employer- provided coverage is unaffordable, their income is within 100% to 400% of the federal poverty level and they purchase their insurance through the insurance marketplace.

Of course, the cost of the premium is only one consideration when purchasing insurance. There are many factors that need to be considered. Health insurance can be obtained in a variety of ways – through employer coverage, the insurance marketplace, an agent or an insurance company. The subsidy is only available through the insurance marketplace.

Small employers should consider why they offer health coverage, and decide if those reasons are still relevant today

Small employers, defined as those with fewer than 50 full-time and full-time equivalent employees (with full-time defined as 30 hours a week or more) are not subject to the employer mandate to provide insurance to their full-time employees. They are free to not offer insurance or to offer insurance and pay for as little or as much as they would like.

If a small employer offers insurance that is affordable to some or all of their employees, those employees are not eligible for a subsidy should the employees decide to purchase insurance through the marketplace. While employees are free to decline employer coverage and purchase their insurance through the marketplace, they are not eligible for a subsidy if they have affordable employer-provided coverage. If an employee is eligible for a subsidy it is possible that the premiums for policies purchased through the marketplace could be less than their share of the group insurance premium.

As a result, while small employers might think their employees will appreciate being offered group coverage, that may not be the case for those that are eligible for a subsidy. At some point down the road, small employers should evaluate the reasons why they offer group insurance and decide if anything has changed to make those reasons no longer relevant. An employer that offers affordable coverage to their employees may actually be causing their employees to pay more by making them ineligible for a subsidy.

Large employers should evaluate the possible penalties

A large employer (one that has at least 50 full-time and full-time equivalent employees) is subject to the employer mandate to offer affordable health insurance to their full-time employees starting January 1, 2015.

If a large employer does not offer any health insurance or does not offer affordable coverage, the employer may be subject to penalties. Penalties are only assessed if full-time employees purchase their insurance through the marketplace and are eligible for a subsidy. In other words, if no employee purchases insurance through the marketplace and qualifies for a subsidy, there will be no penalty.

Large employers that do not offer any group insurance will be assessed a penalty if one of their full-time employees purchases insurance through the marketplace and qualifies for a subsidy. And if one employee qualifies for the subsidy, there is a $2,000 penalty for every full-time employee of the organization (minus the first 30), regardless of how many have actually purchased insurance through the marketplace.

If an employer does not offer coverage, the employer has to assume that at least one of their employees will go the marketplace to purchase insurance and will qualify for a subsidy. One of the requirements of the subsidy is to have household income between 100% and 400% of the federal poverty level. So unless all employees have household income at 400% or more of the federal poverty level, a large employer that does not offer group health insurance has to assume they will be subject to a $2,000 penalty for each full-time employee, reduced by 30 full-time employees.

If a large employer does offer group insurance to its full-time employees, the employer avoids a penalty only if the insurance is affordable for the employees. If employees with unaffordable insurance decide to purchase insurance through the marketplace and qualify for a subsidy, the employer will be subject to a $3,000 penalty for only those employees that receive the subsidy. This is in stark contrast to a penalty on all full-time employees when the employer does not offer insurance.

A large employer that offers insurance will first need to determine which employees are offered unaffordable insurance. Second, based on what they know about the employee, the employer should try to determine if those employees could be eligible for a subsidy if they decide to purchase insurance through the marketplace.

A penalty may not be bad in all cases. When an employer who offers insurance incurs a $3,000 penalty for an employee it means the employee has declined employer coverage and purchased insurance through the marketplace and qualified for a subsidy. The employer is no longer paying premiums for that employee, which may be more than the $3,000 penalty. This may actually be a win for the employee and for the employer.

The large employer penalty is directly impacted by whether employees purchase insurance through the marketplace. Not every employee will purchase their insurance through the marketplace, for a number of reasons:

  1. They won’t purchase health insurance at all
  2. They lack knowledge about the marketplace and subsidy
  3. They won’t qualify for a subsidy
  4. They prefer to purchase their health insurance through their employer’s group insurance or other traditional means
  5. The perception or reality that the insurance through the marketplace is not as good as their employer-provided coverage or other coverage they can purchase
  6. They enroll in a spouse’s group insurance
  7. They are on Medicare/Medicaid

As you can see, understanding the subsidy is critical for us all. If you have questions, please feel free to contact Terri Lillesand at 800-236-2248. 


 Terri Lillesand, CPA, tax shareholder, is a member of Schenck’s Health Care Reform Act Advisory team. She provides tax compliance and planning for corporate, individual, partnership, non-profit and fiduciary taxpayers.