Affordable Care Act Decision: Employer Mandate Remains in Effect for States that did not directly establish Health Exchanges.

U.S. Supreme Court rules 6-3 on Subsidies in Affordable Care Act Decision: Employer Mandate Remains in Effect for States that did not directly establish Health Exchanges.

On June 2ACA5, the U.S. Supreme Court upheld the outlay of cost-sharing subsidies and premium tax credits to individuals enrolling in health coverage at the Federal Exchanges even where States had opted out of running their own Exchanges.  The Affordable Care Act provides that health insurances marketplaces, or “Exchanges”, will be established in each state.  If a state chooses not to establish its own Exchange, the Secretary of Health and Human Services must establish the Exchange.  The law also provides that an individual  who obtains health insurance on a state exchange  triggers a penalty for his or her employer if the individual obtains a tax credit or subsidy on the state exchange, because the employer did not offer affordable coverage as defined by the Affordable Care Act.

In King v. Burwell, the Petitioners challenged an IRS rule that made tax credits available to individuals enrolling in healthcare provided by Federally-run Exchanges.  Petitioners argued that the subsidies did not to apply to them, and that the availability of tax credit subsidies was limited to individuals residing in those states that opted to form health care insurance exchanges directly, and not to individuals residing in states that chose not to form exchanges.  Without the subsidies, the cost of their health insurance would have allowed them to opt out of the Affordable Care Act (ACA) without paying a penalty to the IRS for non-coverage.  Thirty-eight states opted out of forming their own exchange.  Had the Petitioners prevailed in this case, millions of individuals in those states would have been able to opt out of Obamacare and the associated penalties imposed by the IRS for failing to obtain health coverage.

Aside from the effect that receiving tax credits and subsidies has upon individuals purchasing health insurance plans in the marketplace, King v. Burwell sends an unequivocal message to employers with 50 or more employees (100 or more employees in 2015 due to an extension in the law given only to employers) that regardless of whether an employee who ought to be covered under an employer health plan seeks coverage on a state-created Exchange or, in the absence of a state-created Exchange seeks coverage on a Federal healthcare insurance Exchange, that individual’s receipt of a tax credit or subsidy will trigger a penalty for the Employer.

Under the ACA, an Employer with 100 or more Full Time Equivalent(FTE) employees is required to make affordable coverage available to 70% of its Full Time employees starting in 2015, and will have to cover 95% of its Full Time employees by 2016.  If one employee receives a premium tax credit or cost-sharing subsidy in the federal or state marketplace, the employer is flagged for penalties.

However, there is a safe harbor for 2015:  employers who must pay the penalties due to not offering coverage to its full time employees will be able to exclude the first 80 employees and not pay the penalty for those employees; in 2016 employers will only be able to deduct the first 30 employees.  The penalties are steep:  $2084 per year for each full time employee who is not offered affordable coverage which pays for at least 60% of the covered health care expenses for the “typical population.”  “Affordable” is defined by the ACA as a health plan which costs an individual less than nearly 10% of their income, unless some other safe harbor provision applies to that individual.

In light of this decision, employers with 50 or more FTE’s,  who have adopted a “wait and see” approach to their employee health plans under the ACA must act now to minimize the potential for penalties in 2016.  In addition to consulting with their insurance professionals, employers should also obtain a legal opinion as to whether they are subject to the ACA penalties and whether the health plans that employers have chosen meet the guidelines.  The attorneys at Pickrel Schaeffer & Ebeling are available to assist employers with planning and to answer any questions that you may have about the ACA as it applies to your business. Please email Matthew Stokely or Kristina Curry or call them at 937-223-1130 with questions.

AUTHOR: Matt Stokely