Offering Group Health Insurance when Employees Receive Subsidies

Reimbursing Individual Health Insurance Premiums
February 11, 2021

Offering Group Health Insurance when Employees Receive Subsidies

Employee health benefits doesn’t always have to be standard group health INSURANCE!  Offering traditional group insurance is easier, but you as the employer must make decisions every year how to handle the price increases, which plan options make the most sense for employees in different health & financial situations, and then there’s all the burden work of offering the plans, explaining them, accounting for them, etc.  These are some things to consider BEFORE installing a group health plan, or in rethinking how they are offered.

Why Group Health Insurance?

Why even offer group health insurance?! Good question!  It’s part of our social contract that we want our employers to provide a reasonable life in exchange for effort & time.  The social contract is, “work for us, and you’ll be taken care of, and you’ll be able to live a solid life and retire.”  This might be an antiquated concept now, but that social contract is sewn into the fabric of our tax code.

“Benefits” that employers provide to employees have tax favored status!  For example, money that the employer AND employee pays towards health insurance does NOT get taxed!  This is HUGE: https://diversifiedhumansolutions.com/the-power-of-pre-tax-deductions/.  Retirement plans enjoy tax favored treatment as well as transportation / commuter benefits, education reimbursement programs (IRC 127), FSA , HRA, HSAs, disability & life insurance, etc; all things deemed by Congress / the IRS as important to upholding the employer-employee social contract.

Another reason is that some states have lower insurance premiums & better networks for group plans vs individual plans!  For those states (WA, MD, CO, TX, NC, PA, IL, to name a few), it’s a no brainer to offer group health insurance IF people are paying the high (non-subsidized) individual premiums. Even if the group & individual insurance are the same price, not paying any taxes on health insurance premiums is worth at least 20-50% in tax savings (FICA, federal income tax, usually state income tax)!

But Group Health Insurance is too expensive! Count on the Subsidies?

This is a great idea on paper, and sometimes the best course of action, but it gets very complicated and involves a LOT of personal personal info & tax status. The American Recovery Act removed the income ceiling for health insurance subsidies (until 2023, and it may become permanent).  No person / family will spend more than 8.5% of their income towards health insurance premiums!  You can just choose to pay people more, then provide a referral service to an insurance agent / financial advisor that can guide people through the individual marketplace / their own unique tax situation.  Here’s a helpful chart: ARA Subsidy Chart.

This idea does expose people to additional taxes but alleviates the burden of having to run a company health insurance program.  PLUS, sometimes the subsidies are SOOOOO large, that the company should not even try to compete with that pricing!

Typically, if the average W2 wages of an employee is less than $32,000 a year, those subsidies will be tough to beat, especially for anyone older than 30, and definitely for people older than 40.  But counting “income” can be difficult and everyone will be in a different unique situation. What a person makes via W2 wages is not the total “household income” which is the determining number for health insurance subsidies: https://www.healthcare.gov/income-and-household-information/income/

Think of it this way: compare the group insurance premiums to what the subsidized insurance will cost (for each and every person working at the company).  For a 40-year-old non-smoker, a GROUP silver plan around Philadelphia PA costs about $360 per month.  If that same 40-year-old has an annual federally taxable income of $32,000, then any subsidized silver plan cannot cost more than 8.5% of that taxable income, or about $226 per month! (NOTE: We are ASSUMING that W2 wages from ONLY this job is the only source of income in figuring out the subsidized health insurance rate).

However, let’s say the company offers the GROUP silver plan for $360 a month but contributes nothing towards the cost of insurance. Which is better for this 40 year-old non-smoker?  The PRE-TAX savings of the $360 per month plan, or the lower priced $226 per month non-tax advantaged plan?

It depends on the one’s individual tax rate / situation.  For someone making $32,000 a year, their effective tax savings will probably be around 20% (depending on how state income taxes are treated): consisting of 7.65% for FICA, an effective federal income tax rate of about 10%, and 3% for state income taxes (3% is for PA, state income taxes vary greatly!).  So that GROUP plan actually costs closer to $292 per month… BUT taxes are complex so these figures will change in reciprocal fashion… a change in one input will alter all the numbers.  Note: the company will also save 7.65% because the company will not match FICA tax for W2 income spent health insurance premiums.

Let’s sum this up by saying… is this tax burden work worth it?  Who bears that work? If you have 10 employees, who’s going to do the fine calculating of who would benefit in which scenario and who wouldn’t?  What about the company paying for 50% of the premiums?  What about if part of your workforce are NOT citizens and they aren’t eligible for subsidies? Who is going to figure out which employees benefit, and which do not?  Also consider that your employees probably don’t want to do this burden work either.  If you have a workforce that is not high financially literate in tax law & health premium subsidies, they probably won’t be well equipped to do these fine calculations.  Is all this “equitable” to everyone involved?

Unintended Consequences & Eliminating Subsidies

No individual person is eligible for a subsidy IF the group plan (including the HRA’s mentioned later in this article) is deemed to be “affordable”.  “Affordable” is defined as less than 9.83% of your HOUSEHOLD modified adjusted gross income (MAGI).  MAGI is basically everything that is subject to federal income tax: wages, investment & retirement income, self-employment income, rental income, and so on.  “Household” means ALL income coming into your legal “household/family unit”! That includes income from kids, siblings, parents, and others you claim as dependents on your tax return, as well as your legal spouse, and sometimes unmarried partner.

The premium tax credit is NOT available to anyone who has access to “affordable” coverage.  Let’s say that Drew works at your company, and Drew makes $2000 per month (i.e. $24,000) per year.  Drew would be eligible for premium subsidies and their monthly premium for health insurance would be about $30 per month!  PLUS, because Drew is lower income, the subsidies automatically lower their deductible & copays to nearly nothing.  Drew is essentially enrolled into a platinum level plan for $30 a month, an absolute bargain!

An “affordable plan” would be any group health plan that requires Drew to pay less than 9.83% of “household” income. For now, let’s assume that Drew lives by alone and has no dependents. So, “affordable” would be 9.83% his household income of $24,000, or $2359.20 per year… which is $196.60 per month.  There’s a devilish little twist here… “affordable” ONLY applies to the employee premium (i.e. the dollar amount Drew must pay to cover only themself).  Any additional premiums Drew must pay for dependents, is NOT considered at all.

Let’s say your company decides to OFFER a group plan with silver level health insurance for $360 per month and the company covers 50% of the premium.  Drew would pay $180 and the company would pay $180 in this scenario.  Of course, Drew says heck no, I have a platinum level plan for $30 a month.  Not so fast Drew!  Drew is now ineligible to receive premium tax subsidies because they were “offered” “affordable” insurance, i.e. something less than $196.60 per month (remember, Drew would pay $180 per month with the group plan. Because this is less than the $196.60 that is 9.83% of their household income, Drew is now ineligible for subsidies).

To add insult to injury in this scenario, let’s now say that Drew has a partner & 1 kid with no additional income coming from either.  Now Drew’s group health insurance premiums would be $930 to cover all of them vs the $30 a month with subsidies.  And the definition of “affordable” does not change depending on the household size.  So, the monthly group insurance premiums are $930 of which Drew pays half, or $465 per month (because the company pays for 50% of the premiums)… would be considered “affordable” because Drew’s personal premiums are less than $196.60 per month.  Here’s the breakdown of why that is the case:

  • Drew: $360 per month total, Drew pays $180 per month
  • Drew’s Spouse: $360 per month total, Drew pays $180 per month for their spouse
  • Drew’s Child: $210 per month total, Drew pays $105 per month for their child
  • Because Drew only pays $180 to insure Drew and only Drew, AND it is less than $196.60 per month, the coverage is considered “affordable”. The additional cost of covering Drew’s spouse & child does not matter… tough luck Drew!  This is called “The Family Glitch”.

However, the premium subsidies operate on the honor system and Drew could say that their employer does NOT offer affordable coverage (even though by the letter of the law, it is affordable) and enroll to get the subsidies.  The computers don’t know what the health insurance the company offers to Drew.  If Drew is ever audited, AND the IRS examiner finds out that their employer did offer “affordable” coverage, Drew would have to pay back ALL those subsidies… which will be a hefty tax bill.

By trying to do good and offer a group plan, the company has put Drew in a position where they must take a tax risk (i.e. audited & owe a huge tax bill) to receive his excellent subsidies, pay more for inferior coverage, or just take no coverage at all.

What About “Health Reimbursement Arrangements” (HRA)?

These allow the company to reimburse employees for health insurance premiums tax free… which is the same as paying for the premiums.  Note that “health insurance” is defined as “Minimum Essential Coverage”, so these do NOT include short term medical insurance and anything that isn’t considered “Minimum Essential Coverage” in the Affordable Care Act.  The problem with HRA’s is that they do NOT couple with health insurance subsidies.  Every dollar the employer provides through the HRA, reduces the government subsidy!  In those situations, installing an HRA when people are getting subsidies is a cost with no benefit to anyone.

One way “around” this dilemma would be to offer an “opt out provision”.  IF someone “opts out” of the HRA, they would receive some other “thing” of value.  You can be as creative as you’d like as to what that “thing” is.  It may be more wages to be applied to the 401K plan, employee discounts, fully paid dental & vision insurance, credits that can be applied to disability insurance or short-term medical insurance or something else.  Note: “Opting out” does NOT allow an employee to receive subsidies even if “affordable” coverage is available via the HRA.  The same math / processes apply to determine “affordable”, except you (or the employee) would have to research the price of ALL available individual marketplace plans to do this math… just like the above example with Drew.

You can also use this same “opt out” strategy with a traditional group plan, but the individual employee bears the burden of proving “affordability” was not met by the group plan to still get a subsidy (IF they get audited). This is a tough needle to thread for an entire population of employees all in different situations!

NOTE: if you are a greater than 2% owner of ANY entity type other than a C-Corp or LLC taxed as a C-Corp, you CANNOT participate in an HRA. You CAN still use traditional group coverage.

What Are Some Alternatives?  This is expensive!

You’ll need to “OFFER” a group health plan to use the following ideas. Companies can “offer” a group plan without the intention of anyone enrolling into it!  Typically, you’ll need at least one person to enroll into the group plan to maintain the existence of the plan. But once the plan “exists” … it allows you to add in 2 other vehicles, an Excepted Benefits HRA and a traditional HRA.  These 2 “HRA” vehicles are not considered health insurance, but an accessory that can be added to a legit “Group Health Plan” that is founded upon offering “Minimum Essential Coverage”.  Even if employees opt out of the group insurance, they can still be eligible for the excepted benefits HRA or traditional HRA.  NOTE: owners still can’t participate in the HRA (unless taxed as a C-Corp), but they can enroll into a traditional group health insurance plan if that is offered.

You can use an excepted benefits HRA to get access to quasi health insurance plans.  For example, short term medical plans are terrible for if you get really get sick (i.e. cancer or longer term illness), but can be something suitable for a random accident that requires some care.  The maximum that can be given thru an excepted benefits HRA is $1800 per employee per year (as of this writing).  $1800 a year towards a short-term medical plan, with an accident plan, possibly a telemedicine plan like Vitable, and maybe some hospital indemnity insurance. This might work for most situations that are not long term or pre-existing condition in nature (i.e. diabetes, cancer, heart disease, etc.).

Another idea is using a standalone “traditional” health reimbursement arrangement that pays for copays, deductibles, and money that is directly paid the doctors & medical suppliers.

The strategy to “have your cake & eat it too” (i.e. offer group plans & still get subsidies) would be:

  1. A normal group health plan is offered,
  2. most people who are subsidy eligible opt out (the group health plan must be “unaffordable” for them.  This MAY be impossible to do depending on people’s situations & premiums for your group / age demographic),
  3. then they opt into the traditional HRA. The traditional HRA can pay for medical expenses, directly to the doctors / urgent care facilities, pharmacy, etc… So, YOUR company itself can become a tiny insurance company, paying for employee health expenses directly.  The limits & amounts are only restricted by paying for “allowable medical expenses” as defined in IRS publication 502 (it’s very inclusive) and the creativity of whoever is crafting the arrangement.
    • Step 3 can also be “then they opt into the Excepted Benefits HRA”.

Conclusion

There are 4 broad directions you can go, with the possibility of mixing and match a little bit:

  • Offer a traditional group plan and have the company pay for all/most of the premiums as to overpower any negative unintended consequences of providing “affordable” coverage and ruining an employee’s eligibility for very large health insurance subsidies. If the group plan is “free”, it’s probably better than most subsidies. Plus, no one wants to do the work of calculating tax subsidies in hypothetical scenarios for each and every benefits eligible person, then dealing with the consequences of that knowledge. This absolves all parties from that burden work.
  • Craft your eligibility criteria to eliminate potential unintended consequences. For example, only offer insurance to full time salaried employees.  Current full time salaried employees who want to keep subsidies, can choose to become an hourly employee maintaining the same salary as before, but paid hourly.  For example, a $32000 a year salary is the same as someone working 40 hours per week at $15.33 per hour.
    • This idea requires you meet non-discrimination rules and do NOT favor owners / highly compensated employees. This is a gray area of “compliance” (i.e. exempt vs non-exempt). Is this added complexity worth it?  That’s up to you.
  • Offer a traditional plan that is so expensive, that no one accepts it, and then offer a excepted benefits HRA or traditional HRA that is used by everyone (minus owners of “pass through” entities like S corps, LLPs, & sole proprietors).
  • Don’t offer a health plan but just pay people more and possibly offer a 401K to offset any undesired wage increases (401K contributions reduce MAGI, i.e. the income used to determine subsidies).