Employees Need to Beware Subsidy Farsightedness

People who are farsighted see things that are far away more clearly than they see something close to them. So it is with employees who have their eyes focused on the Affordable Care Act’s individual market subsidies.

A number of Compliance Corner questions are variations of: “If an employee has an offer of coverage through their employer that meets minimum value and is affordable can they enroll in an exchange marketplace plan and receive a subsidy?”

The short answer is “no.” An employee who is offered a health plan at work with a contribution for employee-only coverage that costs no more than 9.66% of the employee’s household income is not eligible for premium tax credits through the subsidy.

Employees who lament this fact may need to refocus their sight on the subsidy that’s right in front of them – the generous subsidies that they receive through their employer’s plan. The payments that an employer makes toward an employee’s health coverage are exempt from federal income and payroll taxes. And, if the employee’s state has a state income tax the premiums are excluded from the state income tax as well. This exemption of employer paid health premiums is generally referred to as “the employer exclusion.”

This tax exclusion amounts to a sizeable subsidy for many taxpayers. And, there is no guesswork about whether income will change during the year that would impact the employer exclusion as there is with the individual subsidy. H&R Block has just announced that returns they’ve processed so far for the 2015 tax year have 3 in 5 customers having to pay back some of their subsidies with the average repayment totaling $579.

In addition to this employer exclusion, most employers have implemented “premium only” plans that exclude any employee contributions toward health coverage from taxable income. The result is that the entire cost of health insurance is “tax-free” to the employee.

It would be even more short-sighted to focus entirely on the cost of a plan or the tax benefits of one. The plans available through employers often feature broader networks of medical providers and many have lower deductibles and out-of-pocket costs than those available in the individual market.

Subsidies for individual coverage help make health insurance coverage more affordable, of that there is no question. But, individuals who ignore the subsidies available to them through an employer’s plan may not be seeing clearly at all.