Higher ACA Subsidies Expand Options for Small Employers and Retiree Plan Sponsors

Now that expanded federal subsidies are available for health care coverage through the Affordable Care Act (ACA) marketplace, small employers may want to help workers enroll in marketplace plans instead of providing group coverage.

In addition, higher subsidies may also make ACA plans a more appealing health care option for early retirees and for employers that provide retiree health benefits.

For people who buy health insurance on the ACA marketplace through Healthcare.gov or a state-run exchange, the recently enacted American Rescue Plan Act (ARPA) expanded access to federal subsidies through 2022 by eliminating the subsidy cutoff if a purchaser earned more than 400 percent of the federal poverty limit. For these purchasers, subsidies—technically advanceable tax credits—will gradually decrease as income rises, limiting the cost of ACA plan premium contributions for silver (midlevel) health plans to no more than 8.5 percent of an individual or family's income.

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Although the ACA subsidy changes are available only this year and next, many in Congress support making the subsidy expansion permanent. Advocates for doing so argue "the political pressure to extend the added ACA subsidies beyond 2022 will be immense."

An Option for Small Employers

"Small employers frequently overlook the opportunity for the considerable savings that could be realized by making some employees eligible for subsidized coverage through the [ACA] marketplace," wrote John M. Peterson, an attorney in the Norfolk, Va., office of law firm Kaufman & Canoles.

Small employers with fewer than 50 full-time or equivalent employees are not required to offer health insurance benefits to any employees, "but many choose to do so through employer-sponsored group plans, resulting in significant costs to both the employer and employees," Peterson noted.

In light of the ARPA's substantial increase in ACA plan subsidies, "all small employers should review their group health insurance strategy to see if they can save considerable amounts for themselves and their employees by making some employees eligible for marketplace coverage," advised Peterson, who has posted a chart of required contributions to help small employers determine potential savings by paying, in full or in part, for employees to purchase health insurance on the ACA marketplace rather than providing a traditional group health plan (on the linked page, click on the PDF tag at the upper right).

"If substantial savings are available, talk to your insurance agent/broker about the changes that need to be made to your existing plan to make the targeted employees eligible for subsidies," he suggested.

Although a special marketplace enrollment window is now open and runs to August 15, "after review of your particular situation, you may find that making changes in your plan are best delayed until 2022," Peterson said.

Another option for small employers to fund marketplace coverage is through a qualified small employer health reimbursement arrangement (QSEHRA), which allows small employers to use pretax dollars to reimburse employees who buy nongroup health coverage.

"QSEHRAs have a special rule that allow employees to qualify for both their employer's subsidy and the difference between that amount and any premium tax credit for which they're eligible," said John Barkett, director of policy affairs at consultancy Willis Towers Watson.

A COBRA Alternative

Until it expires at the end of September, the ARPA's 100 percent subsidy for COBRA premiums for eligible employees who lost their job is likely to keep terminated employees enrolled in their employer-sponsored plan, benefit specialists said. Beginning in October, however, those who have not exhausted available COBRA coverage may want to compare the cost of maintaining health insurance under COBRA with the cost of purchasing an ACA marketplace plan, especially if they calculate that they are eligible for enhanced subsidies.

Enhanced Subsidies and Early Retirees

Expanded ACA plan subsidies can also benefit those who choose to retire before becoming eligible for Medicare at age 65 and need to bridge the gap from employer-funded health insurance to Medicare, said Jon Andrews, Willis Towers Watson's managing director, individual marketplace. Because of the enhanced ACA plan subsidies, "nearly every early retiree who purchases health insurance through public exchanges will see their costs decline," he noted.

"Retirees who buy coverage for their whole family could see annual savings of tens of thousands of dollars," he said. 

Employers also should keep an eye on the retiree plans they offer former employees, Andrews advised, as some retirees may opt out of their former employer's plan to get similar coverage at lower costs through a public exchange.

Employers may consider transitioning to a defined contribution approach for early retiree health coverage, which would offer retirees a choice between an employer subsidy or premium tax credits while enrolling in individual coverage, he explained.

Another point to remember: Active employees who are offered insurance through work are not eligible for premium subsidies through the ACA marketplace if their employer-sponsored coverage is considered affordable and meets the ACA's minimum-value requirement.

Related SHRM Articles:

DOL Issues COBRA Subsidy Guidance and Model Notices, SHRM Online, April 2021

Level-Funded Health Plans: A Stepping Stone to Self-Funding, SHRM Online, April 2021

QSEHRAs Help Small Employers Solve the Health Care Coverage Puzzle, SHRM Online, May 2019