Using Employee Contribution Strategies to Minimize Employer Impact of PPACA

As employers start to assess how they will be impacted in 2014 once the coverage requirements of the Patient Protection and Affordable Care Act (PPACA) take effect, many groups are looking for ways to mitigate the impact of the expanded coverage requirements that are mandated under PPACA.  For many employers, the impact can be mitigated through the use of a different employee contribution strategy.  By adjusting the employer subsidy levels of the employees enrolled in non-single coverage, the employer can reduce plan enrollment and the associated plan costs.

The employer community recognizes that the general coverage rules of PPACA require that employers with more than 50 full time equivalent employees (FTE’s) must provide qualifying group medical insurance to all employees who work at least 30 hours per week.  In December 2012, the Department of the Treasury and the Internal Revenue Service (IRS) clarified the employer requirements with respect to the level that the employer must subsidize its group health plan.  The substance of the IRS regulations is that:

  • Employers must provide a minimum level of subsidy for “employee only” coverage, but employers do not need to provide subsidies for the dependents of employees. 
  • The employee contribution for “employee only” coverage should not exceed 9.5% of the employee’s W-2 wages in order for the plan to be deemed affordable under IRS safe harbor rules and avoid a potential $3,000 per employee penalty if the employee purchases subsidized coverage on a state exchange. 
  • There are no limits on the level of employee contributions for the dependents of the employee. 

Large employers that have a significant number of spouses and children covered under their group health plan can “encourage” them to leave the plan and purchase coverage on a state exchange.  If the applicable employee has a household income that is less than 400% of the federal poverty level (FPL), the spouse and children could purchase subsidized coverage on a state exchange.  Depending on the plan design and level of employee contributions on the employer’s plan, it’s possible that the dependents of the employee could purchase a more generous plan of insurance at a lower cost on the state exchange.

The point is that the dependents of the employees would not necessarily be hurt financially by migrating from the employer plan to an insurance policy purchased at a state exchange.  This strategy assumes that the employer would have an employee contribution for the “single tier” that passes the affordability safe harbor test; this would prevent the employees themselves from qualifying for subsidized coverage on the state exchange.  Thus the employer that utilizes such a strategy would see employees drop from non-single coverage to single coverage.  The cost savings can be significant.