As a surprise to some, the Inflation Reduction Act extended the enhanced Affordable Care Act premium subsidies through 2025 — meaning that it's entirely possible that the new rules for claiming the premium tax credit could be made permanent.
While these subsidies are designed to ensure that millions of Americans have access to affordable health care, they can also create a headache in the form of increased penalties for employers that are subject to the employer mandate.
On the other hand, they may make ACA marketplace health plans an even more attractive option — prompting many employers to back away from traditional employer-sponsored health coverage in favor of funding newly available individual coverage health reimbursement arrangements (ICHRAs) going forward.
Premium Tax Credit Subsidy Expansion
As the Affordable Care Act is written, taxpayers qualified for premium tax credit assistance only if their income was less than 400% of the federal poverty guidelines. Last year's American Rescue Plan Act expanded the availability of premium tax credit subsidies by lifting that income cutoff so that taxpayers could be eligible if their required contribution to health insurance exceeded 8.5% of their household income. The 2022 Inflation Reduction Act extended these expanded subsidies through 2025.
For 2023, even more taxpayers may qualify for the premium tax credit because the IRS recently announced that the affordability threshold will decrease significantly, to 9.12% for 2023. This decrease means that many employers will be required to pay more for employee coverage in 2023 because employer-sponsored coverage will be deemed affordable only if the employee's required contribution for self-only coverage does not exceed 9.12% of the employee's household income.
Employers whose employees receive the premium tax credit because their employer-sponsored coverage is deemed unaffordable remain subject to steep penalties even after the individual mandate was eliminated. Because more taxpayers will be eligible for the premium tax credit, it's possible that more employers will also become subject to penalties for failure to provide affordable coverage.
The ICHRA Solution
Under prior law, employers could not reimburse employees for individual health insurance premiums via the tax-preferred HRA structure because HRAs were deemed to fail certain prohibitions imposed by the ACA. In 2019, however, the Departments of Labor, Health and Human Services (HHS), and Treasury changed course to develop a new set of rules that expanded employer options for providing coverage via ICHRAs starting in 2020.
The rules now allow employers to reimburse premiums for individual health insurance coverage through ICHRAs if the several specific conditions are satisfied.
